The failure of businesses, including brokerages and advisory firms, to plan for succession is an often known - but little talked about in public - topic that research shows can have a drastic effect on a company, especially in the current economy.

In fact, according to a survey of more than 1,000 senior managers and executives by the American Management Association, a majority (57%) believe their senior leadership team is not committed to succession.

"Research shows that most companies have little or no deliberate succession planning in place, and aren't fully aware of how much the lack of it can cost their organization," says Sandi Edwards, senior vice president, corporate and government solutions at New York-based AMA Enterprise, a division of AMA. "Managing the succession of talent is a vital strategic process that minimizes gaps in leadership and enables your best people to develop the skills necessary for possible future roles."

 

Why don't brokers plan?

It's emotional ties that keep family businesses from planning for future succession, says Andrew D. Keyt, executive director of the Loyola University Chicago Family Business Center.

Chief executives who become so emotionally connected with their company and believe 'feet first' is the only way out are also part of the problem, adds Jeffrey Cohn, managing partner of New York-based Bench Strength Advisors. That type of leader thus builds "a sense of immorality" and Cohn points out, "why should somebody who is confident or cocky think about [the] necessity to develop leaders?"

"You have to have the CEO in his or his or her own skin say, 'I'm going to make the conscious decision to develop talent and not be worried that people are going to vie for the position.' Once that happens, there are multiple positive effects throughout the whole organization," Cohn adds.

Another reason why companies fail to plan is, simply put, it's easier to go outside the organization to find a new leader, Edwards says. "There is a lot of good talk out there and a lot of good executives [who know] that our people are our most important aspect and there is a tremendous desire to promote from within because they know that's motivation," she says. "But when push comes to shove and there's a gap, they will go to the outside. . . . There's an ease of going outside and plugging the hole."

Jim Metzler, vice president, small firm interests, at Durham, N.C.-based American Institute of Certified Public Accountants agrees. He says that in a small business, the founder or chief executive can slow down versus fully retire and as a result they don't concentrate on succession planning, which sends the wrong message to the up-and-comers.

"Succession is thought of as retirement," he says. "We as humans tend to not think about things like death and disability and don't think about things like we should."

 

The effects of not planning

The company head is doing a disservice to not only himself, but also the entire company by failing to plan, Cohn says, as a proper succession takes four to five years. "You can't skip steps when grooming leaders," he says. "If you're the son of an incumbent CEO and you don't think you need to learn into becoming the CEO, I don't think I'd want to work at the company. I think I would run for the hills."

By not undergoing successful planning, there is also an added risk of low morale and anxiety. Keyt explains that if there is a 90 year old running a company with no clear succession plan, it may create anxiety that causes key executives to leave, since they see no path forward.

"So really it's about developing a structure or a process. . . . It's more than just who's going to be the next leader," Keyt, who is author of a book on succession planning that will be published this year, says. "How are you going to pass on the relationship with key employees, banks, senior advisers. How are you going to transfer all those relationships to a new leadership group?"

He adds that families need to look at succession in the broader context. "It's about building your leadership team and building a team of professionals who can run the company in absence of the CEO."

 

Those who do plan

Ryan Pinney of Pinney Insurance works with his father, brothers and sisters at their more than 80-employee brokerage in Roseville, Calif., outside Sacramento. The Pinney family isn't leaving anything to chance; the firm has a written document that spells out what will happen in the future.

"From a planning standpoint, you have to do it. . . . You have to do it early, especially because you have people counting on you," Pinney says. "Several of [my family members] are involved in the business. There has to be a kind of direction to take place and what will happen and what the goals of everybody involved are."

Pinney Insurance's plan involves Ryan Pinney and his siblings becoming part owners in the future, pending they stay in the business. The plan is also flexible; should one of his siblings want to leave, they can.

And, should the unthinkable happen, the plan has contingency clauses. "If we want to fly somewhere [as a family] and something bad happens, there's the entire succession plan taken out," Pinney says. "We have contingency plans in place and actual documentation if something happens to all [of us] involved in the business. . . . We've taken it to the next step because we understand the dynamic."

"As an industry, we all know about succession planning, and I think it's funny that even though we do that, a lot of insurance agencies that [sell] succession plans are the ones who plan the least," he adds. "We as agents don't always do what [we preach.]"

 

It's never too late

While successful succession planning typically requires a couple of years, it's never too late to start planning, as lost time can be made up - and it should, Edwards says.

"They should sit down . . . and make sure everybody knows that what they are doing now is contributing to the success of the company and what are the company's plans for growth and where do they all fit in."

Yet Metzler warns while it is never too late, the later you start, the chances for success diminish. "The later you start, the closer you are to pull-the-plug date," he says. "Relationships take time to build. Understanding leadership takes time to cull."

But in the end it is about keeping your clients happy and providing for the wellbeing of your family, Metzler and Keyt both conclude. Says Keyt: "If you want to perpetuate your family business, you must plan for succession. It's about insuring [your] success and legacy."

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