Planning for a successful transition of leadership

Building a successful business is difficult. Walking away can be even harder. That’s why setting up a succession plan is critical, and it’s not something that can be thrown together a few months before retiring.

“It’s important to have a succession plan in place that sets the brand up for a long period of time,” says Benefit Advisors Network Executive Director Perry Braun. “Lack of planning results in the leadership at that agency having limited options.”

The same logic applies for all business, Braun says, whether they’re public or private, small, mid-size or large — the outgoing leadership group must be replaced by a group that can sustain the business and keep it moving forward. Most business owners are fiercely protective of what they’ve built, he says, and just as loyal to their employees. “It’s a very familial environment,” Braun says. That’s why designing a plan that will ensure a lasting, thriving and sustainable business is crucial.

Whether it’s a family member, promoting from within or recruiting someone outside of the company, whoever takes over needs to have the right training and development prior to taking on their new role, Braun says. If promoting from within the company, the departing executive and/or owner needs to think about how to incentivize their successor to ensure they take the job, says Bob Gellman, managing director at CBIZ. That could mean giving cash or equity, he says.

The entire process, from recruiting to training to transitioning can take between three and five years, Braun says. That’s why business owners need a succession plan in place. “Succession is more time-consuming, riskier and more expensive when carried out following a departure rather than in advance,” according to the 2014 Report on Senior Executive Succession Planning and Talent Development, a collaboration between the Institute of Executive Development and Stanford University.

Gellman says succession planning should start the day a business opens its doors. That’s also the first of seven steps he says are important for a successful exit. Those include: begin with the end in mind; evaluate your personal goals; understand your company’s valuation; evaluate your exit strategy; integrate your business plan; protect your assets; and develop your team.

Tips for a successful transition 

Stanford professor David Larcker and Scott Saslow, CEO and founder of the IED, who co-wrote the report, also offer seven tips for succession:

1)      Map the future skills required of each executive and compare executives to those skills. “Executives should be evaluated not only in terms of their ability to achieve the requirements of their current role, but also in terms of their potential to assume different or larger roles in the organization. When holes or deficiencies are identified, plans should be put in place to rectify them.”

2)      Cast a wide net. “Executive talent should be evaluated in terms of its ability to meet future — not just past or current — needs. The board and senior management should look broadly through the ranks of the organization to ensure they are fostering a diverse set of talents and skills to take the organization forward.”

3)      Be comprehensive and continuous. “Succession is not episodic. It should be treated as a continuous practice whereby management and the board prepare for transitions at any time and at multiple levels throughout the organization.”

4)      Assign ownership and roles. “An independent chairman or experienced outside director should have primary responsibility. Other board members, the CEO, senior executives and support staff should be assigned specific roles and held accountable for measurable results.”

5)      Connect CEO and senior executive succession plans with coaching and internal talent development. “The only way to have a robust and reliable succession plan is to map succession to the pipeline of internal executive talent, identify deficiencies in internal talent and design and implement development plans to overcome these.”

6)      Assign coaches and mentors. “Professional third-party coaches bring an outside perspective and degree of objectivity to the development process. They also allow for executives to grow outside of the chain-of-command of the company’s formal reporting structure.”

7)      Get strategic assistance when necessary. “It is always a good idea to obtain data on how your processes and executives compare to those at other firms. Each company’s succession plan will be customized to take into account its specific competitive situation, depth of talent and future strategy.”

A pivotal time for the insurance industry

Due to the average age of independent insurance brokers, it’s a pivotal time for the industry, Braun says, and the search to find successors needs to start now. The average agency owner is in their 50s and the average producer is in their late 40s, according to a Reagan Consulting study. What the Atlanta-based management consulting firm found isn’t new, says Reagan’s Executive Vice President Tom Doran. “Attracting young people to this industry is challenging,” he says. “It’s been that way for a while.”

Still, the discoveries Reagan found about brokers hiring practices were shocking, says Doran, 54, who been in the industry for 22 years. Over the past five years, just 35% of new hires came from outside the industry — and just 6% were recent college graduates, Doran says.

“That’s a staggering statistic,” he says, and it’s a practice that can’t continue. “We’re cannibalizing,” Doran says. “It does not seem to be a long-term sustainable model.” Exacerbating the situation, the study says, is a majority of new hires were “free agents,” or experienced brokers who move from agency to agency, which accounted for 55% of hires over the past five years. 

Reagan Consulting President Kevin Stipe called the industry’s recent hiring practices troubling. “Is there another professional services industry that hires so few from outside the industry or from college?” he says. “In light of the fact that our industry is aging and that nearly half of a typical agency’s business is handled by producers age 50 or over, this is alarming. Is the industry facing a perpetuation crisis?”

Targeting younger employees

Penn Mutual Life Insurance Company is addressing the situation by targeting younger employees, says Bill Stevens, vice president of career distribution. About half of Penn Mutual’s workforce has experience and the other half are inexperienced, he says. Just a few years ago, it was a 70-30 split in favor of those with experience, Stevens says.

The benefit is twofold: senior advisers have several clients but a limited amount of time, Stevens says, whereas junior advisers don’t have clients but have plenty of time. Partnering them helps the senior adviser touch more clients more often and helps junior advisers learn the business, he says. “Millennials tend to love being on teams,” Stevens says.

Along with college grads, Penn Mutual is also targeting employees in their mid-to-late twenties who are looking to make an early career change. “Those are the people that seem to do really well,” Stevens says.

Reagan’s study — which gathered baseline data from 4,641 brokers from 562 firms and conducted a follow-up survey with 112 firms that hired 1,505 new employees over the past five years — found that 55-60% of firms aren’t hiring enough new employees. The success rate of new hires could account for a firm’s under hiring, Doran says.

The study found a 56% success rate for new brokers, however, there’s a wide discrepancy among firms. The top 25% of firms had a success rate of 84% compared to a 22% success rate for the bottom 25% of firms. A firm needs to understand how many brokers it needs to replace retirees and keep up with growth, Doran says. “You’ve got to know who you are and what you can do and what you can’t do,” he says.

Along with recruiting younger talent, Doran says the industry needs to do a better job representing itself. “This is still a great industry,” he says.