The link between human-capital practices and succession

Firms should be recruiting, retaining and developing the best candidates not just for ownership, but for a wide range of management competencies.
FEB 28, 2013
By  Kcruz
Study data from the InvestmentNews Succession Planning study confirm the close link between succession planning and a firm's human capital practices. The first step in succession is a transition of management responsibility, as owners seek to exit day-to-day operations. Then it proceeds to ownership transition, for which the key successor criteria are cultural, not operational. Given that management responsibility is the first transition point for owners, qualification and performance criteria need to be documented and built into the human capital plan up front. Firms should be recruiting, retaining and developing the best candidates not just for ownership, but for a wide range of management competencies — hence the close link to human capital planning. In addition, the same criteria need to be built into the compensation and incentive plan. Firms need to be rewarding their desired qualities and behaviors in order to attract and retain the most suitable ownership candidates. Achieving the industry's top strategic goal of internal succession requires years of planning and employee development. So, forward-thinking management of human capital — with an eye toward ownership eligibility and transition — is essential to building a solid succession plan. Study respondents in all groups were much more likely to transfer out of management and operations responsibilities first, and then transition out of ownership second. Firms are about 30% more likely to exit their management/operations responsibilities during the next six years, compared to exiting out of ownership. The disparity between management/operations exit, versus ownership exit, gets even larger as the timeline shortens to three years: In this timeframe, firms in the “executed a plan” group are about 50% more likely to exit management/operations than exit ownership (compared to a 30% differential at the six-year time horizon). In fact, 27% of firms in the “executed a plan” group report that owners have no plan to fully exit their ownership stake, the highest response rate of any respondent group. These results indicate that firms are looking at “succession” as a phased exit, not a one-time event. And here one can see the importance of recruiting and employee development: Managerial and executive skills should be on the short list of qualifications, so that owners have capable people to whom they can transition those responsibilities in the near term. Most firms, however, lack a plan for developing successors. A third of the firms that have executed or are ready to implement a plan lack a documented plan for developing successors. Given that the industry's top priority is internal succession, developing these candidates should also be a top priority. Firms need to be more deliberate about guiding ownership candidates toward greater levels of responsibility. My work with advisory firms has found that expanding ownership is not right for every firm, and it has to be carefully managed, with a rigorous process and a specific strategic goal in mind. That said, however, I believe that the industry could potentially benefit from broadening its approach to offering ownership opportunities. We highlight this finding because the 2010 InvestmentNews/Moss Adams Financial Performance Study demonstrated that broad ownership correlates to higher financial performance. That study suggested that broadening ownership increases the firm's focus on enterprise value — creating an “ownership mentality” that drives productivity, profitability and growth. Firms in the succession study that have executed or are ready to implement a plan were two to four times more likely to offer ownership opportunities. But a majority of all firms still do not offer ownership, even among those firms that have executed or are ready to implement a plan In practice, there are many facets to the issue of “ownership.” It can have many meanings and applications — e.g., creating opportunities for equity and profit participation, versus expanding the management team, versus creating liquidity for current owners. Given that succession is most commonly approached as a phased exit from the firm, building equity participation and management decision making into the “ownership” transition framework can help firms better structure a workable long-term transition plan. Expanded ownership can have other benefits as well, including creating value for the firm, and recruiting opportunities to attract and retain key talent which can be a competitive differentiator in the recruiting process for a firm. When considered outside the narrow confines of retirement planning for advisers, ownership transition can be seen for the complex strategic challenge that it is. With this strategic challenge in mind, I suggest that enlarging the potential ownership pool can benefit your firm, your clients and your employees.

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