SME and succession planning

Not a day goes by without newspapers carrying reports on the succession plan — or absence of such a plan — in some corporate or the other. Recent news in this context has been about the Tatas and Larsen & Toubro. There has been speculation on who is expected to succeed the legendary Mr Warren Buffett!

One may wonder if this hype about succession is warranted. The more appropriate question is, is the requirement restricted to large listed corporates or should it be applicable to lesser mortals in the SME sector too!

Just to drive home a point — there was the case during the middle of last year of a young promoter and CEO of a private equity fund being killed in a freak accident. Within months of the death, we were reading reports of active proposals to sell the AMC that manages the fund.

SMEs – stakes are higher

The need for a well-defined succession planning process is equally critical, if not more, in the context of SMEs. The reason — the organisation is relatively flat and the personal stakes of the entrepreneur significantly more; not so much in absolute terms but relative to the total wealth of the family.

This could additionally be compounded by the fact that invariably the promoter would have extended personal guarantees in respect of corporate borrowings.

Succession planning is not to be equated to a will. It is not restricted only to the context of a death or retirement but needs to be made in the context of any emergency — temporary unavailability to permanent vacancy, for whatever reason. A well-defined succession plan will boost confidence levels for all stakeholders and be an enormous source of reassurance.

Insider or outsider?

A well-orchestrated succession plan should exhibit a lot of thought, planning, and, like all good ideas, execution. There are definitive principles enunciated for the process. Foremost is establishing the basis for identifying the attributes of the successor. The manner and medium of communication of the successor should be well-strategised. A company could potentially risk losing key employees if the same is not articulated properly.

Even large organisations run this risk but they have a reasonable pool of second-rung leaders who could be elevated!

A discussion on succession is definitely bound to evoke passionate debate on whether the successor needs to be an insider or a lateral selection from outside.

An insider would definitely be the choice if the organisation is already on the growth path and just requires good management. On the other hand, if the organisation requires a transformation or a dramatic shift in strategy, an outsider would be a more appropriate choice.

Mentoring the successor

An effective succession plan would necessarily have to address the need for grooming the identified successor.

Mentoring can be one of the most effective means to bridge the current and future. It does not always require outside facilitators or trainers as it builds on internal strengths.

It gives a new sense of purpose to the older generation, as it lets them know that they are valued. As far as the successor goes, it gives him a great opportunity to use an old horse as a sounding board and take decisions under controlled conditions.

Periodical reviews

Succession planning is a dynamic process. The plan should be reviewed periodically to reflect the current business requirements and the team.

It should also address issues such as identification of other potential internal candidates and, above all, an interim transition plan, particularly where there is no clear internal successor, and a separate emergency crisis management plan. The responsibilities of the team should be defined with appropriate accountability.

Family-run organisations sometime need it more as the seniors find it hard to cut the proverbial umbilical cord.

Viewed in the context of these requirements, many succession plans are driven by adhocism, crisis management of the poorest quality driven by events that could have easily been identified and addressed with great ease.

There have been cases of capable successors unable to step into their new shoes for want of clarity — and the damage done before decisions are taken. Succession planning can be ignored only if one is willing to risk the peril of postponing the inevitable.

(The author is Director, Value Added Corporate Services P Ltd.)