Succession Planning | Authentic Insights from the C-Suite

Francesca San Diego (00:31.778)

Absolutely, Joey. Thanks for having us again. It’s always fun to get together and just brainstorm about things that we talk about every day with our clients. And succession planning to me, it’s really fascinating when one brings up succession planning with clients or maybe we sit on a board and we talk about succession planning. It’s fascinating that people want to put it off.

And to me, succession planning is an ongoing conversation because we as leaders of an organization are stewards of that organization. It’s just kind of like being a parent, right? We have our kids for a certain amount of time and then we’re passing the torch to them. The same is true for business. We really are stewards of our business for a snapshot in time and that business will long exceed our impact. And so, the conversation of succession planning is how do we continue to move the legacy of the business forward in the best way possible.

Joey (01:43.13)

Yes, and Nicole, from an HR perspective, how do you think that’s usually done?

Nicole Devine (01:50.678)

Yes.

Joey (01:51.41)

with an HR standpoint.

Nicole Devine (01:53.876)

Yeah, so that’s such a layered approach, right? With respect to talent and the talent philosophy. And so, a lot of it really is, I think something that’s important to note with respect to succession planning is it’s really a business risk strategy, right? It’s about insulating the business from risk for mission critical components from a talent capability and capacity issue that might significantly impact the business.

And so, it’s very different than talent management or recruiting talent acquisition. It really is an integration from an investment perspective of how we are allocating investment correctly to design and develop the right resources so that they can be on deck. And when you’re in the small to midsize market, that’s much more challenging because of your talent density, meaning how many people from a bench strength perspective you can have on deck. You don’t have as many options, right? So that is, it’s about identifying mission critical roles, not people, but the role itself, having a firm understanding and aligned on definition of why those roles are mission critical, understanding the difference between readiness versus performance, right? So not that someone performs well in their current job, but how ready are they? From a capability and a capacity standpoint to take on the next role. And then just honestly, a transparent conversation at the leadership level, which is if we don’t have the internal talent, then how are we going to have multiple scenario plans to resource that particular job or role or whatever that might look like? What else can we do to insulate the business from risk?

Joey (03:47.613)

And Jennifer, from a finance perspective, what would you say are kind of the first things to consider when looking at succession planning?

Jennifer Rebis (03:57.214)

One of the first things that needs to be looked at is whether there is a budget in place to handle any additional resources that need to come on board for that succession planning. Another thing to really consider is how succession planning impacts a business’s value if they’re looking for an exit.

So, if they’re not properly planning for that and the owners decide they want to sell the business, it’s likely too late at that point. And so there may be a significant loss of value in the company because they don’t have that succession planning in place. And that’s the case when maybe the owners are a little bit older and they’re ready to retire, but they don’t have those people in place to take the reins.

Another thing that’s important to look at are the tax implications, because again, if they’re not planning properly, there may be a hefty tax burden at the time of exit. And again, without a plan in place, the business might have to be sold under unfavorable conditions. So, it’s important from a financial planning perspective to start the conversations early.

Joey (05:21.979)

Yeah, the tax perspective of it, I think that’s something most people don’t even consider. Fran, from the standpoint of timing, how early do you think people should be considering succession planning and how often?

Francesca San Diego (05:38.894)

Great question. And so, you know my philosophy on these sorts of things, particularly in the context of what both Jennifer and Nicole said. We are, as leaders of an organization, managing risk. We are driving enterprise value. We should be doing that every day as part of our, as our stewardship of the business. And so, to me, the succession planning conversations is kind of like strategic planning. We should be doing it often and pivoting and refining because what are we doing? We’re planning for continuity. So, it’s always good to have our cross training in place, our understanding of if something happens to some of our critical team members, how are we going to solve for that?

Additionally, we’re always driving enterprise value, whether that’s for us as the leaders of the organization or the key stakeholders of the organization, or we’re getting ready for an exit. So to me, succession planning almost becomes part of our continued commitment to our culture and governance to make sure that we’re appropriately supported the business to be the best that it can be.

Joey (07:09.976)

Nicole, from a confidentiality standpoint and just, know, who needs to know? Like, who do you think should be involved in these conversations?

Nicole Devine (07:19.168)

Well, I think the first part is who owns the program, right? So, we always start with who’s got ownership of that. And typically, that sits, if you have a board of directors or a CEO, a lot of the time, succession planning for mission critical, it’s really a governance issue for a lot of organizations. In terms of leadership and the cultivation of the leadership with respect to management, how do you organize those teams in a way that’s intentional, right, to develop?

Nicole Devine (07:47.373)

Pipelines, for example, usually those teams are included in the conversation around succession planning. But succession planning typically is actually most palatable to all levels of the organization when it’s transparent and part of the natural integration of the firm or the organization. And the reason for that is there’s so many emotions that come with succession when a founder leaves.

When a CEO leaves, when a mission critical position goes, there’s fear and emotion and what about me and my gosh, now what? And when the team is consistently and constantly talking about the transparency of the succession plan and what we’re doing and how we’re investing in leaders, then we reduce the fear of when that transition, we’ve already begun to socialize that concept. And it’s not one-time. Right? We fell off a cliff. Woo. We have got a new CEO. Thank goodness. Huh? Made it. It’s a constant conversation. And I think when you don’t integrate it operationally and to Jennifer’s point from a budget perspective as a, a cost of doing business to insulate from risk, then I think, you set yourself up to actually impact the change management component to it, which is I think highly underrated by most.

And they don’t realize that’s the largest lift in my opinion is when the transition moves, it’s managing all of the emotions and the trepidation and the fear. and it looks different in the next round and you there’s a lot of collateral damage to that sometimes. So, it’s just managing a lot of that. And the earlier you can start the better.

Joey (09:37.629)

But in terms of like, know, because everyone may not be on board. mean, you know, leaders of an organization could meet, and they could, you know, come up with a great plan, but are all the people involved in that plan on the same page and on board? And I just wonder how your kind of like go about assessing that and finding that out.

Nicole Devine (09:57.174)

Yeah, so I think that’s really the tone and tenor of each individual organization’s culture, right?

So, some people will say, be transparent, and this is not a democracy, right? We’re just going to let you know what we’ll be doing, etc. Other cultures that we work with within organizations, they want buy-in, they want feedback, they want multiple levels of leadership and input in that. And so, I think there’s no right or wrong way to do it. I think it’s a matter of what’s the fit and the right tone and tenor are for your culture. And the reality of it is not everybody is going to want to go in the next round. And that is a very, very difficult thing for people to process and to understand because reality is it looks different. When we add and subtract people from the teams, no matter who they are, there are cultural implications and contributions to that, right? It’s like dropping a pebble in the pond. There will be ripple and so we just must navigate that as a leadership team.

Joey (11:09.201)

Yeah, yeah, for sure. Jennifer, I wanted to go back and touch on something you mentioned earlier about the tax implications. Do you want to expand a little bit on that? Because I think that’s something that people would be really interested to kind of have more insight on.

Jennifer Rebis (11:25.169)

Yes. So this is something that really businesses should speak to their tax advisor about and start planning early to see what the potential tax impact is of selling their business. And the earlier they start on that, the better because there are sometimes there are sometimes things that need to be done several years before a company is sold. That will impact the tax liability. So, I encourage companies to have a tax advisor that is working with them on strategic tax planning to see what that looks like.

Joey (12:07.547)

Okay. Fran, if we had a client, PBO had a client that we were working with and they were interested in kind of, you know, starting to look at succession planning, what would be the first kind of things that you would, you know, want to go over with them and kind of, how would you kind of guide the beginning of that conversation?

Francesca San Diego (12:26.99)

It’s a great question. It’s so client dependent. So, we work with a lot of nonprofits, as you know. So, with our nonprofits, we’re generally advising that a committee, a succession planning committee is formed and that the board creates that committee well in advance of any sort of changes. And so, it could be a subset even of the finance committee or the executive committee, but we advise on the nonprofit side that there’s a separate committee and that they’re really having those conversations in an ongoing way, in a way that serves their organization because they hold the responsibility for governance. On the for-profit side, now, every client is so different. And to Jennifer’s point and Nicole’s point, every…

Every client has their own culture, and they have their own business structure. So, for instance, you know, one client may really want to set up an ESOP, which is a completely different endeavor than a client who is maybe looking to sell their business to private equity or another client who has tapped some of their key leaders to be the succession plan in a privately held business. So, what I advise clients is let’s have an honest dialogue about where we are today and where do we envision this business will be in the short term, in the long term, and then we start to plan.

And in addition to incorporating that planning, that kind of that is plan A, plan B, plan C, so that we’re managing our risk and we’re also planning for driving enterprise value and we have lots of options. So, to me, succession planning, I know people often say, I don’t have to worry about that. That’s for tomorrow. But to me, it’s an ongoing conversation and we should all be thinking about it and having dialogue with our leadership team because things are often evolving in a business and so it’s good to continue to be in dialogue about that.

Joey (14:53.337)

Yeah, and Fran, like I think it was, you know, a good point that you mentioned options because there could be a plan that’s set-in place and it sounds great at the time. And then, you know, maybe a little time goes by, and circumstances change, life happens and those plans need to change. So, what would you recommend about having backup plans in place? And what are your thoughts on that?

Francesca San Diego (15:14.2)

So absolutely, you know, it’s part of our role as leaders to make sure we’re cross-trained and that we have, you know, some, to Nicole’s point, we’ve developed the talent to be able to step into the shoes of the folks that may be leaving the organization that are critical players. And so cross-training is critically important and having buy-in from the culture of the organization while also budgeting for that ongoing training and cross training.

Joey (15:52.552)

Yeah. Nicole, when there’s no obvious answer to the current options for succession planning, when do you start looking about going outside, not looking internal, but looking external?

Nicole Devine (16:08.828)

Yeah, so that is so tough. That’s such a tough conversation, to be honest, when you are especially transparent about investing right with succession planning, and then you decide, you know, maybe external market is a better option for us right to bring in from the outside in. And so, I think that is just part of the dialogue with respect to, you know, it is about internal mobility and capability, and what you are going to do, and there’s a time to market consideration, right? 

So, while succession planning is about integrating it and insulating from risk, you know, there are a lot of times where we have family offices, for example, and the kids don’t want to take that over, or there’s a trauma that happens and there needs to be an immediate deployment of talent and the teams aren’t ready, you know? And so part of that is we highly recommend to our clients when they have mission critical roles that they design what we call a success profile for that particular role so that we understand not just today, but in the future, what are we looking for with respect to a CEO or a CFO or whatever that might look like, right? Because successions about the future, not current state. And so

We design successful profiles for those roles. So, if for whatever reason we have to go to market, we’re ready to deploy the playbook that we need to find the right talent. So, I always work with clients to say, if you don’t have somebody in mind internally here, we need to begin to curate a list externally and begin to cultivate those relationships for potential pipeline external to market so that we have options. Right. Talent is very much a supply and demand market. And so, we must be mindful about how, and that plays into the mission critical question, which is how scarce is this resource from an external perspective? Cause that impacts the timeline. So that goes into all the scenario planning that goes into all of that. 

So, I would say tougher conversation truthfully if they’re going externally to market because depending on the client, of course, sometimes that’s not as impactful, but for a lot of the smaller clients and the mid-size market clients who have been together almost like a family for some time, it’s more challenging for sure.

Francesca San Diego (18:40.11)

And really, things change, right? So sometimes businesses have incredible opportunities in the marketplace that they can seize on. And so, the need for the business may change significantly and the existing team may not have the skill set needed for the business, that is the future of the business. know, to Nicole’s point, we must look to the future and what we think the future of the business looks like and what it needs. And so, if that needs that need requires us to go to market, then that’s the choice we must make for the continuity and the best legacy for the future of the business and the employees.

Joey (19:31.1)

Yeah. And I would think that, you know, just because some of these decisions are so personal and, you know, they really, you know, are things that people really like very like, very important to them. And they may have already had something in mind for a long time. And it is kind of hard to like to change your way of things, if life happens and things change. But I think it’s good to get an outside perspective on some of this stuff, which is something, you know, PBL provides just to make sure that, you know, you’re not letting your personal opinions get in the way of what’s best for the organization. And to wrap things up, I actually kind of just wanted to go to each one of you and kind of get your opinion on what’s the most important thing to kind of consider when looking at this and also just some last minute things to consider to think about that we didn’t get a chance to go over yet. So, I’ll start with you, Jennifer.

Jennifer Rebis (20:30.787)

I think that businesses should really look at succession planning as an investment in the company and not just an expense. Yeah, but then on the other hand, it is important that when doing financial planning and budgeting, there is enough in that budget for leadership development. If you’re looking at internal employees for that succession plan, or if you may need to look outside of the company, you need to make sure you’re budgeting for any type of potential sign-on bonuses or increased salaries. How Nicole mentioned that sometimes it could be scarce, maybe resources may be scarce for that role. So maybe the salaries are going to increase if you need to bring someone in from the outside and additionally potential interim roles that may need to be budgeted for.

Joey (21:29.627)

Yeah, that’s something we didn’t even get a chance to talk about too much, but interim roles can be key as well. Nicole, I’ll come to you next. And just anything, any thoughts that you’d like to mention before we wrap up today?

Nicole Devine (21:42.209)

Yeah, I appreciate that, Joey. So, I would say there are just a couple of key takeaways with respect to guiding principles for those that are talking about succession planning, right? Which is, it really is business led, not HR led. And I know that sounds counterintuitive, but really, it’s the business leaders and those who are looking at the risk and the governance that should lead and drive those succession plan conversations. And HR is the enablement arm, right? That helps pull that together programmatically and put that together.

So, the other part is, on the role first, not the people, is very important. That’s very challenging for a lot of our clients to do. So, a good guardrail to that is if you’re a client or you’re in the leadership team and you start talking about roles and then you start speaking about specific names, you know you’re starting to blur a line, right? So, we need to stay with just the role. And you know, just… being future oriented, not what do we have in place today? 

That’s only part of the conversation. It’s tough to say, hey, this is what it looks like today. Can this team get us into the next round? And the answer to that might be no. And the other part I would just say is to make sure it’s evidence-based for performance versus readiness. What we really don’t want to do is put people in the next round in a different role that they’re not ready for or suited for. So, the goal is to retain top talent. And sometimes we need to be objective about how we move things. 

So, to your point earlier, that’s why a firm like PBO does well with clients, because we’re objective about what it takes in the next round. And we can remove the emotion, right, of the connection with those leadership teams and just be pragmatic about the approach to just get the third-party objective perspective. So those are some of the things I would focus on.

Joey (23:32.305)

Yeah, I think removing the names from decisions like this and just looking at the positions and the job titles and what the organizational structure is, important. And then Fran, just to you, anything that you would like to kind of mention before we wrap up today, best practices or things to consider with succession planning?

Francesca San Diego (23:51.79)

Yes, absolutely. I think the key takeaway is that succession planning is a journey. And it starts with having a vision of what does the organization needs to become and what are the skills and resources we need to get there and cultivate those skills and resources. I think if we’re in an ongoing dialogue about that with our leadership teams and our organization, then the change management of our evolution is seamless.

Joey (24:31.453)

Yeah, I think that there’s so much to consider. We could probably go on for another hour. But it was really, I appreciated you all, you know, getting a chance to talk about this with you all today. Thank you for the great conversation, Fran, Jennifer and Nicole. And to learn more about PBO Advisory Group, please visit our website at pboadvisory.com or follow us on LinkedIn and we’ll see you next time on the PBO Podcast.