1. MANAGEMENT SUCCESSION
PLANNING
Management succession planning is the process of preparing an organization for a transition in
leadership. Succession planning is helpful when a management change occurs due to
unforeseen circumstances, such as the sudden death of a corporation's chief executive officer
(CEO). But it is also important in ensuring a smooth transfer of power under normal
circumstances. "Management succession planning will allow an institution to keep moving
forward when the inevitable occurs," consultant Rhonda Cooke told America's Community
Banker. "Retirement, career mobility, ill health, termination, or death will require the
appointment of a new chief executive officer at some point."
One important aspect of management succession planning involves evaluating the skills of
people in the organization and identifying those employees who have the potential to ascend to
top management roles. In this way, succession planning encourages staff development and sends
a message to employees that the organization is serious about developing people. It may also
persuade talented employees to remain with the company rather than looking elsewhere for
growth opportunities. Grooming a successor from within the company can save the time and
expense of hiring a new leader from outside. It also aids in continuity, as an insider might be
more likely to follow through with current plans and strategies.
The key to management succession planning is preparing a written succession plan. This
document provides for the continued operation of a business in the event that the owner—or a
key member of the management team—leaves the company, is terminated, retires, or dies. It
details the changes that will take place as leadership is transferred from one generation to the
next. In the case of small businesses, succession plans are often known as continuity plans, since
without them the businesses may cease to exist. Succession plans can provide a number of
important benefits for companies that develop them. For example, a succession plan may help a
business retain key employees, reduce its tax burden, and maintain the value of its stock and
assets during a management or ownership transition. Succession plans may also prove valuable
in allowing a business owner to retire in comfort and continue to provide for family members
who may be involved with the company.
Despite the many benefits of having a succession plan in place, many companies neglect to
develop one. This oversight may occur because the CEO or business owner does not want to
confront his or her own mortality, is reluctant to choose a successor, or does not have many
interests beyond the business. Although fewer than one-third of family businesses survive the
transition from the first generation to the second—and only 13 percent remain in the family for
more than 60 years—just 45 to 50 percent of business owners establish a formal succession plan.
"Succession and the planning it entails is equivalent to planning one's own wake and funeral," as
Ernesto J. Poza, president of an Ohio-based family business consulting firm, remarked in
Industrial Distribution. "But the fact is that the transfer of power from the first to the second
generation seldom happens while the founder is alive and on the scene. The succession transition
is the most agonizing change I have ever seen CEOs and top management teams confront." Up to

2. 40 percent of American businesses may be facing the management succession issue at any given
time.
PREPARING FOR SUCCESSION
Experts claim that management succession planning should ideally begin when the CEO or
business owner is between the ages of 45 and 50 if he or she plans to retire at 65. Since
succession can be an emotionally charged issue, sometimes the assistance of outsider advisers
and mediators is required. Developing a succession plan can take more than two years, and
implementing it can take up to ten years. The plan must be carefully structured to fit the
company's specific situation and goals. When completed, the plan should be reviewed by the
company's lawyer, accountant, and bank.
"One of the main reasons business owners should take the time to create a successful continuity
plan is that they should want to get out of the business alive, with as much money as possible,"
Joanna R. Turpin noted in Air Conditioning, Heating, and Refrigeration News. To do this, the
business owner has three basic options: sell the company to employees, family members, or an
outsider; retain ownership of the company but hire new management; or liquidate the business.
An employee stock ownership plan (ESOP) can be a useful tool for the owner of a corporation
who is nearing retirement age. The owner can sell his or her stake in the company to the ESOP in
order to gain tax advantages and provide for the continuation of the business. If, after the stock
purchase, the ESOP holds over 30 percent of the company's shares, then the owner can defer
capital-gains taxes by investing the proceeds in a qualified replacement property (QRP). QRPs
can include stocks, bonds, and certain retirement accounts. The income stream generated by the
QRP can help provide the business owner with income during retirement.
FOUR STAGES OF SUCCESSION
In the Small Business Administration publication Transferring Management in the Family-
Owned Business, Nancy Bowman-Upton emphasizes that succession should be viewed as a
process rather than as an event. She describes four main stages in the management succession
planning process: initiation, selection, education, and transition. In the initiation phase, possible
successors learn about the business. It is important for the CEO or business owner to speak
openly about the business, in a positive but realistic manner, in order to transmit information
about the company's values, culture, and future direction to the next generation.
The selection phase involves actually designating a successor among the candidates for the job.
Because rivalry often develops between possible successors—who, in the case of a family
business, are likely to be siblings—this can be the most difficult stage of the process. For this
reason, many business owners either avoid the issue or make the selection on the basis of age,
gender, or other factors besides merit. Instead, Bowman-Upton recommends that the business
owners develop specific objectives and goals for the next generation of management, including a
detailed job description for the successor. Then a candidate can be chosen who best meets the
qualifications. This strategy helps remove the emotional aspect from the selection process and
also may help the business owners feel more comfortable with their selection. The decision about
when to announce the successor and the schedule for succession depends upon the business, but

3. an early announcement can help reassure employees and customers and enable other key
employees to make alternative career plans as needed.
Once a potential successor has been selected, the company then enters the training phase.
Ideally, a program is developed through which the successor can meet goals and gradually
increase his or her level of responsibility. The owner or CEO may want to take a number of
planned absences so that the successor has a chance to actually run the business for limited
periods. The training phase also provides the business owner or board of directors with an
opportunity to evaluate the successor's decision-making processes, leadership abilities,
interpersonal skills, and performance under pressure. It is also important for the successor to be
introduced to the business owner or CEO's outside network during this time, including
customers, bankers, and business associates.
The final stage in the process occurs when the business owner or CEO retires and the successor
formally makes the transition to his or her new leadership role. Bowman-Upton stresses that the
business owner can make the transition smoother for the company by publicly committing to the
succession plan, leaving in a timely manner, and eliminating his or her involvement in the
company's daily activities completely. In order to make the transition as painless as possible for
himself or herself, the business owner should also be sure to have a sound financial plan for
retirement and to engage in relationships and activities outside of the business.
ALTERNATIVE SUCCESSION MODELS
In their book Family Business Succession: The Final Test of Greatness, Craig E. Aronoff and
John L. Ward outline a number of steps companies should follow in preparing for succession.
These steps include:
Establishing a formal policy regarding family participation in the business.
Providing solid work experience for all employees, to ensure that succession is based on
performance rather than heredity.
Creating a family mission statement based on the members' beliefs and goals for the business.
Designing a leadership development plan with specific job requirements for the successor.
Developing a strategic plan for the business.
Making plans for the preceding generation's financial security.
Identifying a successor or determining the selection process.
Setting up a succession transition team to keep decision makers informed about their role in the
changes.
Completing the transfer of ownership and control.
Throughout all these stages of preparation, Aronoff and Ward note, communication is key.
Turpin described several steps involved in developing a written succession document. These
steps include:
Gathering information, on both the personnel involved and the company itself.
Choosing advisers, including continuity specialists and people who will be involved internally.

4. Deciding upon the company's objectives, including financial and personal goals, as well as those
related to ownership and control.
Laying out the components of the plan.
Preparing the formal documents and obtaining funding as needed.
Reviewing the plan every one to three years or whenever the company's personnel or structure
changes.
A final consideration in succession planning is for the owner or CEO to decide what he or she
will do after concluding involvement in the business. This step, which is something like a
personal succession plan, is important in helping the business leader make a successful
transition. "It's so much easier to let go of something when you have a new direction in which to
move," psychiatrist Barrie Greiff explained in Industrial Distribution.
SUMMARY
Although management succession planning can be problematic and even painful, it is vital to
ensuring the continuity—and perhaps even the continued existence—of businesses following the
departure of the owner or CEO. Many business leaders are reluctant to plan for what will happen
when they are no longer with the company, usually because they find it unpleasant to confront
their retirement or mortality. It may be helpful to consider succession planning as an extension of
employee development programs. "Succession planning," William T. Marshall wrote in
America's Community Banker, "should reach deeply into an institution's management ranks to
prepare managers at all levels for career advancement, perhaps to the very top."
SEE ALSO : Employee Stock Options and Ownership ; Family-Owned Businesses
[ Laurie Collier Hillstrom ]
FURTHER READING:
Aronoff, Craig E., and John L. Ward. Family Business Succession: The Final Test of Greatness.
Business Owner Resources, 1992.
Bowman-Upton, Nancy. Transferring Management in the Family Owned Business. Washington:
U.S. Small Business Administration, 1991.
Drury, James J. "Looking beyond the CEO for Management Succession." Corporate Board 17,
no. 101 (November/December 1996): 6 + .
Dutton, Gail. "Future Shock: Who Will Run the Company?" Management Review 85, no. 8
(August 1996): 19 + .
Frieswick, Kris. "Successful Succession." Industrial Distribution 85, no. 4 (April 1996): 61 +.
Lea, James W. "Dad May Not Know Best When Planning Succession." Washington Business
Journal, 27 March 1998,53.

5. Leibman, Michael. "Succession Management: The Next Generation of Succession Planning." HR
Planning 19, no. 3 (September 1996): 16 + .
Marshall, William T. "How to Succeed with Management Succession Planning." America's
Community Banker 6, no. 6 (June 1997): 20 + .
Rothwell, William J. Effective Succession Planning. New York: AMACOM, 1995.
Shanney-Saborsky, Regina. "Why It Pays to Use an ESOP in a Business Succession Plan."
Practical Accountant 29, no. 9 (September 1996): 73 + .
Turpin, Joanna R. "Succession Planning Requires Long-Term Strategy, Implementation." Air
Conditioning, Heating, and Refrigeration News, 28 April 1997, 8 + .
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