Plan for leadership succession so that exit means exit

As trusted advisers to family business founders and owners, accountants have long understood the importance of a solid succession plan. It’s a strategy borne out by the latest data, with statistics further underscoring the benefits of talent-focused due diligence in ensuring firms are transition-ready.

The value of being transition-ready

A well-planned leadership transition last year resulted in an $300 million boost to the market capitalisation of wealth management company Netwealth. The company – ASX-listed, but majority-owned by the Heine family – announced founder Michael Heine would step down to leave son Matt Heine as sole managing director. It’s a great example of the value of effective succession planning at a family business, but it’s only half the story.

Research shows an ongoing bottom-line benefit from being prepared for such events – not just in the lead-up to, and aftermath of, a planned leadership change. The latest family business survey from Grant Thornton, Family Business Australia and Family Business New Zealand, highlights the link between a family business being transition or succession-ready and its financial success. Surveying family firms in 2021, the report found that, despite 12 months of COVID-19-related disruption, only 27 per cent of transition-ready firms saw a decrease in revenue versus 39 per cent of those that were not ready.

Effective talent investigation is crucial

So, what does it mean to be transition-ready? And how can accountants help? For a family business, accountants need to be actively prepared in areas ranging from formal documentation and having contingencies for unplanned events to ensuring the owner can confidently select a successor from their candidate pool.

Succession planning is central, and it’s where talent investigation comes in – using a talent research firm to conduct a thorough market review to identify and benchmark suitable candidates and trends. Undertaking formalised, research-driven steps to provide visibility around what talent is available externally and internally, how candidate skill sets and role responsibilities compare, and what their motivations and expectations might be, helps provide surety around future leadership.

Talent due diligence and succession planning flexibility

There are multiple approaches to talent due diligence, from seeking new talent to benchmarking existing candidates. For example, if a founder plans to sell, they can engage a research firm to undertake succession planning for the directors and executive leadership. This gives buyers a roadmap for future leadership changes and confidence the firm is prepared.

It’s important for owners to understand succession planning and talent due diligence aren’t just about recruitment; they’re about getting visibility of options and trends. If they’re considering promoting the next generation into a leadership role, CEO for instance, taking stock of the external market and understanding what that looks like for the role lets them validate, benchmark and develop their candidate pool. This involves looking at the successor and other leadership figures and identifying any training and mentorship needed, along with the skills future senior hires will require.

This research can also extend to examining market standards for remuneration, looking at expectations across responsibilities and skill sets, and reviewing structures in place, including incentives.

The process can further help challenge assumptions around succession and talent plans, since a research firm with exposure to multiple networks and other clients will be across the rich variety of approaches, such as varied definitions of “being ready to succeed”.

Key considerations

Yellow Folder Research has undertaken a significant number of talent due diligence projects. From this experience, accountants advising on succession plans should recommend clients:

• Set up an ongoing process. This is critical as effective succession planning adds value outside the actual transition in leadership, while succession events can occur unexpectedly.
  
• Be less insular and look externally. Benchmark internal strengths and options versus the external options, even if a successor is already decided.

• Prepare a formal plan for communication. The Netwealth example showed a clearly planned succession is valued by stakeholders.
  
• Prepare values in written form. PwC’s Family Business Survey 2021 found family businesses that did so were better prepared for succession, with improved communication and transparency. Critically, these values inform and improve a talent investigation process.

• Ensure your talent research firm uses substantive research. From selecting comparable firms to assessing candidates and pay, there are dozens of variables and a lack of indicators.

• Match benchmarking to strategic plans and account for future changes. The recent KPMG report on Australian family businesses, Regenerative Family Enterprises, points to ongoing changes that will require an updated skill set for any successor, such as the building emphasis on business social performance (e.g. environmental impact).

• Use a talent investigation process to review and identify areas for improvement in leadership. Regenerative Family Enterprises found a male gender bias for CEOs of Australian family businesses – 94 per cent versus 81 per cent globally – and recommends gender balance on boards for diversity of thought.
  
• Plan that exit means exit. Netwealth’s Michael Heine acknowledged the importance of stepping back and letting the next generation lead, which is why he elected not to become chair of the company, but still offer support as an executive director.

The above highlights the key facets and value of talent due diligence-driven succession planning. It showcases the crucial role of accountants and how they can help position family businesses for ongoing success.

Julian Doherty is managing director of Yellow Folder Research.