Small and medium-sized enterprises (SMEs) are the backbone of economies worldwide, with family businesses constituting 75% of these enterprises. In the United States, they contribute to 50% of the gross national product, while in the United Kingdom and Europe, they represent 99% of all businesses and contribute over 50% to the European Union's gross domestic product. These enterprises employ a significant portion of the workforce, accounting for 75% in the UK and 85% in the EU. However, the rate of successful founder succession and business continuity in SMEs remains low. Only 30% of businesses make it to the second generation, and a mere 5-15% survive to the third generation. The failure of succession is a global issue that affects all industries and countries. Factors contributing to this failure include challenging regulatory environments, taxation, and a lack of awareness and access to training.
40% of Fortune 500 Companies report not having a single internal candidate for CEO succession
Even in Fortune 500 companies, succession planning poses a challenge. Only 54% actively develop CEO successors, and 40% report not having a single internal candidate. Maintaining a talent pipeline is particularly problematic, with 74% of public sector and 52% of private sector organizations finding it challenging. Unplanned CEO successions can be expensive, resulting in a loss of market value amounting to $112 billion for the largest 2500 companies in 2014.
Given the significant impact of a founder's departure on an organization and the potential costs of mishandling the handover process, it is crucial to understand why organizations do not prioritize this aspect or why it is challenging to execute successful transitions. What factors contribute to successful succession from a psychological and emotional perspective? And how can coaching support this process? In this blog series, I will share the insights I gained from my MSc research in 2021, addressing these questions.
For me, successful succession involved the transfer of both ownership and leadership, including the relinquishment of power and the source role. It was only deemed successful when the founder emotionally let go of their power and role as the driving force behind the project, allowing them to focus their energy elsewhere.
The source role refers to the individual who takes the first vulnerable step in realizing their idea. They have a unique relationship with the vision of their initiative and are responsible for stewarding its realization. While a company may have multiple co-founders, there is always only one source role. This role can be passed on to another individual through a voluntary and memorable succession process, but only if the outgoing source fully lets go and transfers the role.
In my research, I found that the complex and emotional aspects of succession held the key to understanding and overcoming traditional failures in this process.
I identified six important factors:
1. Founder's willingness and readiness: This is the most critical factor. If founders are unwilling or unready, succession cannot occur.
2. Natural flow of exchange: Love, in an energetic sense, becomes central to successful transitions. It is the mutually fulfilling and enriching relationship between the founder and successor, characterized by voluntary transfer of the initiative.
3. Values alignment. Founders and successors must share similar values and needs for successful transitions to take place. Founders look for these shared values/needs in their successors, mirroring their own when they started.
4. Successor willingness and motivation. Trust and a flow of exchange are developed
5. Founder’s relationship. The founder's relationship with the initiative greatly influences their ability to let go. When they see themselves as separate from the project, it is easier to relinquish control. Emotional and social intelligence, as well as reflective practice, can mitigate challenges in letting go.
6. Successor selection. The choice of a successor plays a crucial role in the success of a transition. When a successor is not chosen, the selection is not obvious, or someone other than the founder makes the decision, succession becomes challenging. On the other hand, when the founder identifies an obvious and emerging candidate as the successor, the handover process tends to proceed more smoothly.
These six factors collectively contribute to the success of succession in organizations. Understanding and addressing the psychological and emotional aspects of the transition can lead to better outcomes. Considering the complex and emotional nature of succession, HR and Talent professionals play a vital role in encouraging open communication and dialogue between founders and potential successors, fostering a mutual understanding of values, aspirations, and readiness for the handover. In my next blog post, I will delve deeper into each factor, exploring how coaching can support the succession planning process and where HR can ensure a seamless transfer of leadership.
Stay tuned for more insights on navigating successful transitions in organizations.