01 December 2008, by Martin Goh, Echelon Risk Consulting Asia Pte Ltd
The Risk & Their Implications
Succession risk is perhaps more salient for companies in today's economy, with the need for sound leadership and business continuity taking on increasing importance.
Mukesh and Anil Ambani's public battle over succession to India's Reliance Group provides a glimpse into the implications of not properly managing succession risks. In contrast, McDonald's appointment of Charles Bell as CEO within hours of news of James Cantalupo's passing in 2004 bears testimony to well-managed succession risk.
Lara Dodo, vice-president, Robert Half Legal, states that legal firms with no succession plans run a tremendous risk of business failure.' Dodo is also clear that succession risks apply to large firms and smaller companies with sole founders' - Partners or people can leave at any age/time, with potentially devastating consequences without a well-developed and executed succession plan.
Managing Risks in the Real World
In order to provide a perspective on effective management of succession risks, it is perhaps apt to begin with a working illustration of some of the concepts presented below.
Berkshire Hathaway provides us with such an example. The following is an excerpt of Warren Buffet's 2007 letter to Berkshire Shareholders:
“As I have told you before, we have for some time been well-prepared for CEO succession... We have three outstanding internal candidates. The board knows exactly whom it would pick if I were to become unavailable, either because of death or diminishing abilities. And that would still leave the board with two backups.
Last year I told you that we would also promptly complete a succession plan for the investment job at Berkshire, and we have indeed now identified four candidates who could succeed me in managing investments. All manage substantial sums currently, and all have indicated a strong interest in coming to Berkshire if called. The board knows the strengths of the four and would expect to hire one or more if the need arises. The candidates are young to middle-aged, well-to-do to rich, and all wish to work for Berkshire for reasons that go beyond compensation.”
As you approach your own plan, it might be worth keeping in mind the following lessons that can be drawn from Berkshire Hathaway's approach to succession risk management:
● User-friendly succession systems that are non-bureaucratic, consistent and objective.
● Succession strategies/plans that are developmentally oriented rather than replacement oriented.
● Active engagement and involvement of top management within the organisation.
Guidelines for Managing Succession Risks
The AS/NZS 4360 Australian Risk Management Standard presents a risk management process that you might consider using as a guide to managing your succession risk:
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AS/NZS 4360 |
Suggested Considerations/Applications |
1) Establish Context
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What are the significant challenges your firm is likely to face over the next few years?
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What are the implications of succession failure to your firm in light of these challenges?
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2) Identify Key Risks
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What are the key positions/functions in your firm?
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This might not just be a partner or senior executive. It could also include critical functions such as a finance manager, a key administrative staff or IT manager.
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3) Assess Risks
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What would be the potential impact if there is a succession failure at each of the identified key positions?
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4) Evaluate Risks
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Evaluate against internally set criteria and set appropriate priorities – e.g which functions are most critical and require immediate attention in terms of succession planning?
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5) Treat Risks
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This would involve determining the skills that are required for each key function and developing appropriate succession solutions.
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Examples include proactive development of internal executives, identifying potential external candidates and developing well-defined transition plans.
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6) Monitor Developments
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Continuous development and refinement to keep succession plans current and relevant
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Concluding Thoughts
Like many disciplines within the broad remit of risk management, managing succession risks should form part of sound business process and strategic planning. Don't let succession failure be a hindrance to the success of your firm.