From the October 2011 issue of Investment Advisor • Subscribe!

October 1, 2011

Succession Fears: Working Past the Cult of Personality

Transformation of businesses to the next generation means reducing its culture of personality

Current events in the news illustrate the difficulty of effective succession planning. Warren Buffett’s succession plan blew up when his heir apparent, David Sokol, was caught self-dealing in a potential acquisition. The IMF was caught in a compromising position when their leader Dominique Strauss-Kahn was forced to resign. We try to guess the next ruler of North Korea by what kind of hat Kim Jong-il’s son is wearing and where he is sitting, while the sane world waits on pins and needles. Mubarek, Gaddafi, Ali Saleh and virtually every other leader of an Arab nation strive to keep it all in the family over the violent objections of their constituencies. The Crystal Cathedral, home of one of television’s most successful evangelical ministries, experienced a falling out between Dr. Robert Shuller and his son during their transition—yet they still hope to protect our moral balance sheet as they file for financial bankruptcy. Now the failing health of creative genius Steve Jobs necessitates a transition of Apple’s leadership to their COO, leaving many to wonder if Tim Cook is up for the job of growing the company through the next generation.

While owners of smaller organizations may find some consolation in these public struggles with succession management, they should dig deeper for answers to their own challenges. What lessons can be learned for your own firm? Planning for the future is critical. Where will your business go with a different leader at the helm? Succession is daunting, even more so without an obvious leader waiting in the wings.

In each of the well-known cases cited previously, the successful entity produced a cult of personality. A strong personality is a great quality when beginning or rebuilding a company—but inevitably, a leader’s firm grasp of key issues becomes a grip of death for the business. Enterprises that are overly dependent on a single strong leader can rarely survive the end of that person’s tenure unless a proper transition plan is implemented early, communicated loudly and executed effectively. Look at how GE, Chrysler and Microsoft drifted when Jack Welch, Lee Iacocca and Bill Gates left.

A friend of mine once shared the challenge of replacing a charismatic Baptist minister who had presided over his church for 30 years. The recruiter hired to find a successor told the church board, “Your next leader won’t last much more than a year because everybody will be comparing him to the last guy. So assume this hire will be a transitional minister and hope that your church can survive until you bring in somebody who will look better than the founder’s replacement.”

Financial advisors, broker-dealers and custodians have much to learn from observing the fate of other companies after their founders ride into the sunset. Business continuity issues are not solved by finding a buyer for the business, but rather by building a culture of courage, passion, accountability and confidence that allows others to step up when you ultimately step down.

If a liquidity event is your goal, then a well-run enterprise that no longer needs you to grow—let alone survive—will be worth more in the market. Regardless of the goal, do not confuse succession planning with sale planning. If you go directly to market without addressing the fundamental issue of leadership continuity you are only selling a book of business, not a real enterprise. Also take note: In each of the examples cited previously, fate or health or bad choices drove the succession plan. Such uncontrollable events make an orderly transition nearly impossible. Wise leaders must prepare for the unexpected.

Cult of Personality

The New York Times printed Joe Nocera’s account of the time he spent with Jobs after he was kicked out of Apple at the age of 31 and then brought back as its savior (which as it turns out, he was). Nocera wrote, “The businessman I met 25 years ago violated every rule of management. He was not a consensus builder but a dictator who listened mainly to his own intuition. He was a maniacal micromanager. He could be absolutely brutal in meetings. The Steve Jobs I watched that week was arrogant, thoughtful, learned, paranoid and insanely charismatic.”

Hmmm … sounds strangely familiar to those of us in financial services.

The point being, though, that what may be a catalyst for growth in one case is not necessarily transferable. Succession experts observe that few companies make it through the second generation and even fewer through the third. Traits that enable an organization to survive and thrive in its most desperate moments may not work so well in more normal times, far from the company’s dynamic inception. That certain esprit de corps that emerges during a firestorm lacks relevance for those who did not experience the good old days when it was “us against the world.”

Many financial advisors who started their own businesses have an unremitting drive to generate new business, manage every key relationship and touch every process. What they often fail to realize, as we learn when studying Maslow’s Hierarchy of Needs, is that while most advisors close to retirement are farther along in self-actualization, long past fulfilling basic life needs, they still behave as if the firm will go to hell in a handbasket the moment they relinquish the reins. Know that this behavior is potentially self-fulfilling. You must start to consider the future of your business long before you leave.

When advisory firm owners realize that real growth, high client satisfaction and excellence in advice come from firms with multiple people accountable for its success, they can break through the cult of personality that has controlled the business since its beginning. But this breakthrough requires a conscious plan and the discipline to leave well enough alone if the transition is working.

The first question the current leader must ask is: What are the leadership qualities that the business needs to advance from here?

The second question is: Does my current team have the potential to develop these qualities? If so, how will they transition into the desired roles? If not, how do I search for that talent and bring it to the firm?

After identifying potential successors, examine deeper questions to help guide an effective plan. When and how should the transition occur? What milestones do I need to put in place to move the process forward? How can I ensure that we are on pace for a successful succession, whether it occurs voluntarily or involuntarily?

Generally, it is wise to have multiple choices for potential successors. You may find that as your business grows, management roles become more specialized. You may also find that certain people are more proficient at projects or task management than true strategic leadership, yet both skills are required. Be aware that some of your potential successors may not have what it takes to do the job well, or may not have the patience or desire to see you slowly transition responsibility and accountability to them.

Create a timetable for your succession plan and have a clear idea of what success will look like when you arrive—but take care not to rush the journey. Effective succession planning allows its leaders and staff to evaluate how people perform under pressure, improve upon the culture, accept their roles without alienating the rest of the people and continue to drive the business forward.

The prominent succession stories mentioned herein can teach us many things, not the least of which is that a failure to have multiple options—along with a method for assessing each potential successor’s ethics, vision and competence—will jeopardize not only the transition plan, but perhaps the entire organization itself.      

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