GO
Loading...

Biggest business risk you can’t ignore: Mortality

Six months is a long time to have a lame-duck CEO at the top of a major company. That's how long it took Microsoft to name its new CEO, Satya Nadella, an executive vice president who most recently had been running cloud and enterprise. In a way, the Microsoft succession took even longer.

Ed Lawler, director for the Center for Effective Organizations at the Marshall School at the University of Southern California, noted that it really took 10 years for Microsoft to find a CEO to take over from its original C-suite inner circle. After long-time Microsoft executive Steve Ballmer announced last August that he would be stepping down within a year, Microsoft shares had a huge one-day rally—a sign of how long investors were waiting for Microsoft to at least begin to make a move.

When even the world's largest and richest companies struggle for years to get succession right—even Warren Buffett, a master communicator, has struggled to effectively message his succession plans to the market—it's no surprise that successions are hard, and growing more difficult all the time for all business owners.

It's difficult to estimate the number of family-controlled businesses in the country, but only about a third transition into second-generation family control, estimated John Ward, clinical professor of family enterprises at Northwestern University's Kellogg School of Management.

Legacy Planning 101: Does your company have a formal success plan in place?

2006
2011
My organization has a formal plan 29% 23%
Organization has an informal plan 29% 38%
My organization intends to develop a plan 26% 22%
My organization does not intend to develop a plan 16% 17%
Source: Society of Human Resource Management (SHRM) *This 2011 survey includes responses from 426 human resources professionals representing companies in SHRM’s membership.

A 2011 survey by the Alexandria, Va.-based Society of Human Resource Management found a little more than half of organizations had an informal or formal succession plan, with larger organizations more likely to have the latter in place. Those numbers are likely rising now: Nobody can afford to be caught off guard when a top executive decamps for a better offer elsewhere.

"I tell people, plan early and plan often," said Jane Hilburt-Davis, president of Cambridge, Mass.-based consultancy Key Resources.

Time is on your side
Even if a company isn't worried about a departure, it can take a long time to groom a successor. While Microsoft may have taken its time, one common element for a successful succession strategy is time—Nadella joined Microsoft in 1992.

(Read more: Internet domain changes may hurt small businesses)

Joe Shamie, co-president of New York City–based Delta Children, a 200-employee children's furniture maker with $200 million in annual revenue, already has begun thinking about how he and his brother will move the company to the next generation. All of the nine children they have between them are under 30—two work in the company already; others are still in school. The question of which will end up in the business or develop their own careers is still up in the air.

He and his brother, Sam, 56 and 59, respectively, have decided to give the process time to play out. "We're going to be working longer and harder," he said.

But it will take some work on the Shamies' part to hand over the reigns successfully.

Family-owned businesses often have an even more difficult time with succession than public firms. The latter have the complication of the public eye and a board of directors; the former have the complications of family dynamics.

(Read more: Cash will never again be king for this business owner)

Here are some other successful practices for passing the reins:

Look outside
Insiders have a big advantage for top leadership slots because they have internalized the culture. But smart companies seek bigger pools of candidates based on culture and skill. Even Microsoft, known for its insularity, investigated outside candidates. "One of the changes that's taking place in the world is that a lot of companies are looking more and more at people outside," said Lawler. "They're saying, 'I just can't rely on internal development,' because the number of skills needed—in technology, for instance—is so great."

Shamie said he's committed to the values established by his father. The company funds a Safe Sleep Campaign that has given away $1 million worth of cribs and has many long-term employees. "Some employees have been with us since the beginningmany for over 30 years," he said.

But he's not close-minded, he said, to one day passing the reigns to an outsider who could grow the company better than someone from within the family. "We always want to be that better company," he said.

(Read more: Working for yourself? Don't forget retirement)

Develop a strategy both for expected and unexpected transitions
Transitions can cause dangerous business interruptions which can put a company's future in jeopardy and can include a retirement, or a departure with a reasonable runway. But what if the CEO gets hit by a bus?

Hilburt-Davis has executives start by creating two separate columns on a single sheet of paper for the two kinds of transitions. In the case of a disaster, you might need candidates able to move quickly, or more internal candidates who can step right into a position without much training. Many major companies also have key person insurance policies that pay out a benefit in the case of an unexpected death or incapacity of a senior executive.

Plan for conflict
Movement within top management ranks typically affects both top positions at that company and at competitors—that's referred to as the waterfall effect. Take Marissa Mayer's first year at Yahoo! Recruited from Google, she pulled other Google execs with her, including Henrique de Castro, who became COO. Just last month, Yahoo! revealed he had been fired after a little more than a year and was receiving an estimated $60 million in a severance package.

The higher up in an organization people climb, the more challenging the power dynamic becomes with top-level teams, management research shows. In general, executives thrown into a new dynamic may take a while to settle in and work out issues.

When Louis Shamie passed control of Delta Children on to his two sons in the 1990s, he gave each 49.5 percent of the company, and kept 1 percent for himself—he was prepared for his sons to disagree. A few years later, when they'd settled in, he gave them each the additional 0.5 percent.

Hilburt-Davis said it's important, especially in a family-owned business, to consider the process, not just the people. The question is not: which family member would make for a better leader; the question is, what kind of leader do you need? "I tell people, let's think of a fair, really effective, really efficient process."

The bottom line, Lawler said, is "You need to be able to say, we've got the following person ready to step in, with these backups."

By Elizabeth MacBride, Special to CNBC.com

Latest Special Reports

  • From main street to the C-suite, this global survey examines the role of corporations in society and the economy.

  • Alibaba Group headquarters in Hangzhou, China

    In-depth coverage on Alibaba's IPO, including roadshow coverage, expert analysis, and Alibaba's stock price.

  • With more than 1,600 ETFs now on the market, learn more about how advisors and investors are profiting from the ETF boom.

Business