The Comprehensive Guide to Succession Planning
How high-growth companies and private equity portfolio companies can ensure the right leadership team is in place at all times along the investment journey.
By: Leadership Dynamics team
Welcome to the Leadership Dynamics guide to succession planning. Much of this guide will be relevant for any high-growth business, but it is designed especially for those going through a private equity investment journey. If you are an investment director in a private equity firm, the CEO, chair or HR director of a portfolio company, this succession planning guide is for you.
This guide will take you through the full scope of succession planning. Throughout the article, there are links to more in-depth articles on each topic. But we've also compiled them all up here as well.
Succession planning resources
What is succession planning and why is it important?
While most articles will define succession planning as the process of replacing leaders who have left, a good succession plan will be proactive, aligning totally with the progress of the value creation plan (VCP). A leadership team needs to be assessed continually to make sure it has individuals with the skills, experience and behaviours required at each point along the VCP. The team that got the business to where it is now may not be the right team to take it further, and the same should be asked of future teams as the plan progresses.
Both investors and the company should identify which skills, experience and behaviours will be required to do the job at each stage of the value creation plan, and then manoeuvre potential leaders into position so they are ready to take the reins.
Why is it important? The answer lies in the importance of having a high performing leadership team. These individuals are arguably the most impactful part of the business and the most consequential of all value creation levers, as it is the leaders who enable the others, such as internationalisation, digitisation, operational efficiency and M&A.
Succession planning is critical to the stability and sustainability of the leadership team. What investors are buying when they purchase a business, is the group of individuals at the top. They are the agents that execute on the corporate strategy, and more importantly, the levers that create the value.
The costs of ignoring succession planning can be punitive. In fact, an unplanned CEO exit will on average add 18 months to an investment journey. Any drop in performance due to the disruption is exacerbated by the time it takes to identify a new leader and settle them in. With a succession plan in place, that time is truncated and the process of getting back on track with the VCP is made smoother.
Read the full article: Succession Planning in Private Equity Explained
Succession planning and ESG
Environmental, social and governance factors are now recognised as creating a responsible as well as high-performing organisation. But it's the G in ESG that is arguably its most important element. Good governance enables a company to not just implement environmental and socially responsible conduct, but also make sure that the leadership, and therefore the organisation, remains sustainable and effective.
A business is effectively a function of its senior management team. Succession planning is a pillar of good governance because it ensures the continued performance and resilience of the leadership team, and therefore of the entire organisation.
For private equity investors buying an organisation; while the E and the S are important, the G is a better indicator of a good purchase because sustainable leadership ensures adherence to a value creation plan and therefore a return on investment.
Read the full article: Why Private Equity Succession Planning is Good Governance
The succession planning process in 7 Steps
Succession planning in private equity is different. Timelines are restricted to the length of the investment period, which means that any leadership change has to be made without straying from the performance targets of the VCP.
This is a short summary of our step-by step guide to the succession planning process in any high-growth company, expanded upon in our how-to guide.
Be clear on your value creation plan
Identify gaps within a leadership team
Identify high-potential talent within the business
Model the impact of leadership change before it’s taken
Map out the timeline
Build development plans
Monitor & ensure the long-term sustainability of your leadership team
Read the full article: How to Manage Succession Planning in Private Equity
Best practices for succession planning
Here are our top tips when identifying gaps in the leadership team, searching for potential leaders and hiring externally or promoting them from within.
Exhaust the possibilities before looking externally
Assess the balance
Compare with industry peers
Prioritise effectiveness over agreeableness
Engineer the culture of the company
Use data to overcome emotion
Read the full article: How to Manage Succession Planning in Private Equity
Sectors with a different kind of succession planning
While there is a general profile of leader that can predict performance, there are slight differences in some sectors where regulations and restrictions create the conditions for a certain type of leader to thrive better than others.
The purpose of a healthcare company's leaders is to make sure the quality of service is the best it can be. The consequences of poor service can be deadly, and cause irreparable damage to reputation. In the healthcare business, reputation is everything; no one wants to buy a healthcare provider with poor service and dwindling customers.
So, while achieving a return on investment is still foremost in the VCP, value creation is a slow and steady process focussed more on M&A and operational efficiency rather than ambitious transformations.
This all means that leaders in healthcare tend to be operations-focused so they can ensure a high-quality of service at all times. They also tend to have a high domain experience – i.e. hired from within the healthcare sector – as they need to understand the risk framework and have a high degree of empathy with the healthcare service they are providing.
Ensuring a resilient and high performing leadership team is paramount here, making good succession planning very important – especially when you have regulatory pressure from the Care Quality Commission. Its ratings can be the difference between a successful exit and a negative return.
Read the full article: The Importance of Succession Planning in Healthcare
Similar to healthcare, the life sciences sector – including pharmaceuticals, drug development, clinical research, medical equipment manufacturers and biotechnology – requires leaders with high domain experience.
However, since this is a knowledge-based sector, each vertical within the sector requires specialised skills and experience. Unlike healthcare, leaders are less likely to be able to transfer from one vertical to another, which makes the pool of available talent even smaller and more competitive.
This makes proactive succession planning critical. Identifying internal high-potential employees and then developing their skills and behaviours for a leadership position as early as possible will give a company a more immediate ability to replace unplanned leadership exits, as well as stay in adherence to the VCP.
Read the full article: How to Manage Succession Planning in Life Sciences
In private equity, a primary investment will usually mean a PE house going into partnership with a founder. Growing a company from 0 to 200 people is not the same as growing from 200 to 500 people. What's required for the company to develop is the transition of a power structure from a single charismatic leader managing it all, to a professionalised system with a competent and balanced leadership team.
What's unique about founder succession is that everything hinges on the personality of a single person, which is why honest and open conversations are important.
The founder needs to be able to identify the parts of the business that they don't enjoy or are not as proficient at running – usually detail oriented areas like finance and operations – and let go of some parts of the business leadership into a syndicated structure in which there are strong functional leaders across different parts of the business. They can lead and drive success in their departments with the founder-CEO orchestrating one step removed, rather than managing it all.
The ease and effectiveness of founder succession often depends on the personality of the founder themselves. Change can be emotional, which is why investment directors and chairs look to data to make their case.
Best practices for founder succession
Build a diverse team around the founder
Involve data-led people analytics
Assess behaviours as much as functional experience
Assess internal employees first
Read the full article: How High-Growth Companies Manage Founder Succession Planning
Family business succession planning
How can a family ensure the longevity of its business? While the assumption is that it should stay within the family, a direct handover of power from one generation to the next is not always the right choice. Sometimes the age gap means incumbent family members are too young and inexperienced, or they don't have the behaviours suited for a CEO role.
Due to the intertwined fates of family and business, the cost of placing the wrong person in a leadership role can be damaging to both. Going through an objective succession planning process can help families understand how to place their children within the business so they can thrive and develop in roles that suit them, maintaining family harmony and business performance.
Required strategies for succession planning in family businesses include:
Change the paradigm
Nurture talent within the family
Ensure diversity and balance in the management team
Families are inherently political and emotional, which causes bottlenecks to change. These obstacles have to be overcome before succession planning can work.
Letting go of the paradigm that the children must succeed in the top job allows the conversation to start. Bringing in a third party with data-backed people analytics tools can help remove emotion from the debate entirely, and show each individual their path to success.