Sonny Iqbal: Most family businesses could improve upon succession planning
Sonny Iqbal co-heads global executive search firm Egon Zehnder’s global family business advisory practice. He counsels family businesses on governance, founder and next-generation transition and family and non-family succession. He also coaches senior executives and members of family businesses.
In an interview, Iqbal explains why governance and succession planning have often not been a family business’ strongest suit and how businesses can set themselves up for perpetuity if they use good governance as a baseline. Edited excerpts:
Why do you think family-owned companies in India often grapple with corporate governance, mainly constitution of the board, transparency and disclosures?
Good governance is key to long-term success, especially in a family-owned business, where stakeholder relationships are often complex. There are a few enablers. At the core is the well-defined role of the family, the board and management. This clarity of roles forms a basis for converged views on values and culture; transparency; trust and communication that includes disclosure of relevant financial and operational information, internal processes of management oversight and control.
In order to establish good governance, we must first understand the nuances that define family business dynamics. One of the key characteristics of a family entity is what we call “family gravity”: the values and priorities that endure across generations. Family gravity affects everything from strategic direction to everyday operations, and therefore significantly contributes to what makes each family business unique.
The leadership crises in leading corporations, like the Tatas and Singhanias, has once again put the spotlight on the struggle with succession planning. Is the struggle more pronounced in family businesses?
If there is one area in which most family businesses could stand to improve, this is it. We found from one of our recent studies across 18 countries (including India) that nearly 30% of 50 families surveyed considered only a single candidate for their top-position succession, and about two-thirds did not follow a structured selection process.
Sometimes, the decision is made on the basis of knowing the person or recommendation of a trusted person.
How can companies prepare for smooth transitions?
First, is the present leadership truly prepared to hand over control? Second, is the outgoing leadership clear on their role once the transition has taken place? Lastly, is there a succession process?
The common refrain is: “We didn’t start planning until the chief executive officer (CEO) announced his intention to retire.”
For good CEO succession planning, we have identified six best practices that include: a) clear role specification for the CEO, b) assessment of the CEO on the basis of performance and potential, c) proactive development of internal leadership talent, d) external scans of potential CEO candidates from the market, e) a robust CEO integration process, and f) emergency planning to provide for a sudden or unexpected situation. Although there is broad agreement on these practices, only a minority fully apply them.
Companies generally tend to promote a successor from within. What are the merits and demerits of this?
Internal candidates, by virtue of knowing the organization, can hit the ground running. Moreover, internal promotions have a positive impact on morale. The disadvantage of an internal hire is choosing from a limited talent pool, and, sometimes, an important skill could be lacking.
The strongest merit of an external candidate is the diverse experience that the hire comes with. Sometimes this is what a company needs to bring in a fresh perspective and drive cultural change.
From our research, we can say that most companies follow a clear hierarchy when considering candidates, giving preference to family first, internal talent second and external executives third. Our survey of 53 global firms (across sectors including India) reveals that 38% of CEOs were family members. Of those who were not, 54% were internal appointees and 46% external.
What are the key elements of a structured and proactive approach to succession planning and development?
The best practices (mentioned above) form the key elements of a good succession plan. CEO succession planning is unequivocally the board’s responsibility. It should be driven by the independent chairman and not the CEO.
What are the pitfalls to avoid when doing so?
Family firms must ensure that new CEOs are given time to get to know the organization, its key players and family members. A thoughtful on-boarding process along with a fair selection system can help CEO succession unfold effectively. Mentoring the CEO, either formally or informally, by the board chair/independent directors, helps immensely. Our research shows that companies can prosper if they establish good governance as a baseline, preserve family gravity, identify and develop high-potential executives both within the family and outside it, and bring the right discipline to their CEO-succession processes.