This article was first published in the June 2013 International edition of Accounting and Business magazine.
Succession issues are a significant and growing challenge for companies and could be an opportunity for qualified accountants who may step up internally or be drafted in to even become the next CEO or CFO.
‘Many businesses spend very little time, if any, thinking through who will lead the various aspects of their business in the future,’ says Karen Young, a director for the senior finance section of global recruitment experts Hays.‘Employers of all sizes need to identify their most critical roles, such as finance director, and who could succeed the current job holders of these roles in the next 12 months, two years or five years,’ she urges. ‘Otherwise organisations risk losing great leaders along the way to someone who will give them better career opportunities, or they may find themselves with gaps in their organisation, which could stifle their growth plans.’
For much of the world, family-owned businesses passed down the generations are the traditional and most widespread model. Often, the CEO is the elder statesman of the family while sons, daughters, uncles, aunts, cousins and spouses occupy key positions.
This model is changing fast, though, through increasing complexity and globalisation in the commercial world. More companies feel bound to look outside the family for the superior and advanced managerial and financial skills that they need to compete. On the other hand, the younger generation may want to spread its wings in other occupations, professions and locations.
In 2011, for example, Knowledge@Wharton, a commentary published online by the Wharton School at the University of Pennsylvania in the US, referred to a poll of private companies by the Guangdong Federation of Industry and Commerce. It showed that while 62% of respondents hoped family members would take over running the business, 51% feared it would be unlikely.
This fear is also a reality throughout much of Europe. The French newspaper Le Monde reported in March that uncertainty over the next generation of management in France’s family businesses threatens 330,000 jobs per year because of the risk that firms not passed on will instead wind up.
Jesús Casado, secretary general of the Brussels-based policy and lobbying association European Family Businesses, told Le Monde that in Europe, a family business has a very small likelihood of existing in the same form two generations later; and only 15% of these firms remain when it comes to the third generation.
For context, CampdenFB, a London-based magazine about family business, reported this year that 80% of French businesses are family controlled; 48% of them do not have succession plans; and fewer than 10% are passed on to the next generation, even though 58% of owners would like this to happen.
While differences in attitudes towards, and provision for, succession planning may exist between countries, experts say that the key differentiators come down to more prosaic but critical factors.
‘The quality of succession planning differs a great deal from company to company but we would say this has less to do with the particular geographies or cultures and much more to do with the focus, time and attention that top leaders give this topic,’ says Arvinder Dhesi, director of the UK talent management practice of Towers Watson, the global HR consultants.
‘Too often, we observe that HR professionals become the custodians of a rather soulless bureaucracy – managing names and boxes – rather than facilitating a really meaningful dialogue about the sustainable future of the organisation and the forthcoming challenges it will need to address,’ he adds.
Where succession planning is done really well, organisations focus more attention on the future demand for talent – particular skillsets in particular geographies – and less on current supply, he says. ‘This future-first approach provides a richer and more robust assessment of potential successors. We support clients to think of succession planning in terms of decisions and risk. For example, risk of unforeseen vacancies, risk of appointing people before they’re ready, risk of deploying “more of the same” with a backward view of what kind of skills, knowledge and experience might be required in the role,’ Dhesi says.
Large companies, particularly in the listed sector where stock prices can be rattled or buoyed by investor and analyst perceptions of the weakness or strength of CFOs, CEOs and other key personnel, as well as uncertainty over change in these positions, are acutely aware of succession issues. Shining examples are to be found worldwide. These include Indian organisations that have invested significantly in building leadership-bench strength, says Mira Gajraj Mohan, Towers Watson’s Singapore-based director of talent management and organisational alignment, Asia Pacific.
‘Companies like Infosys and Wipro – both of them IT consultants – are frequently named as some of the best companies for leadership planning and have a history of growing talent from within,’ she says.
According to Dhesi, good succession planning is even more important to smaller companies: ‘They often have less capacity to deal with critical positions being left vacant,’ he says.
Economic downturn is adding to this capacity issue. The 2008–09 recession persuaded many ‘baby-boomer’ entrepreneurs in Canada to postpone retirement, according to a 2012 survey by the Canadian Federation of Independent Business (CFIB).
‘Some small businesses decided to hold onto their business until its value returned to pre-recession values,’ says the CFIB’s vice president of research, Doug Bruce.
Exit not ahead
In the CFIB survey, 23% of Canadian business owners said they had delayed their exit dates by between one and four years, while only 5% said the downturn had accelerated their retirement. All of this points to a wave of retirements between now and 2022, a transfer of small business assets of ‘possibly more than a trillion [Canadian] dollars’, according to CFIB estimates. Almost half of the small and medium-sized enterprises surveyed had a succession plan in place.
The retirement of baby boomers is a worldwide phenomenon and is just one factor driving concern over succession planning. Birth rates lower than the level needed to counterbalance mortality rates in many mature economies are reducing the stock of young people potentially available to step into the shoes of older executives. This effect is compounded in many rural areas that are depopulating and seeing their demographics skew towards older-age cohorts as young people are drawn to cities and towns.
In a 2012 report on the Småland-Blekinge region of southern Sweden, the Paris-based Organisation for Economic Cooperation and Development (OECD) warned that these demographic factors may result in ‘unparalleled shortfalls of business owners and employees’ in many of the OECD’s member states.
Alarmed by what it was seeing in Scandinavia, Finland’s Lahti University of Applied Sciences and FINPIN (Finnish Entrepreneurship and Innovation Network for Higher Education) founded a Business Succession School (BSS) in 2005 to promote knowledge and innovation-based entrepreneurship in Finnish higher education institutions. At the time, it was believed that 60,000 to 70,000 firms out of the 240,000 in Finland in 2004 would close their doors by 2014 due to succession uncertainties.
The flipside of these considerations is that the world really is an oyster for qualified accountants whose skills match an acute and growing need for advanced financial skills in roles including CEO and CFO. Consider this: 55% of UK finance directors admit to having no succession plan in place for their roles, according to new research from Robert Half UK, the largest specialised financial recruitment consultancy for UK finance jobs, accountancy jobs and banking jobs.
Of the respondents, 39% cited a ‘lack of existing internal talent’ as the primary reason for not identifying a successor, and this rose to 55% for publicly listed companies.
When asked how they would foresee a successor being identified for their role, FDs cited external permanent hire (40%), local internal promotion (26%), international transfer/internal promotion (23%) and interim professional until permanent hire is selected (11%). So, looking outside the firm is far and away the most popular strategy.
‘With a raft of high-profile senior resignations over the past year, it is surprising to see such a large proportion of FDs without a chosen successor, or indeed the pool to choose from,’ says Phil Sheridan, managing director of Robert Half UK.
Robert Stokes, journalist