By Maurie Cashman
You believe you have chosen your successor and that you have your plan all set for the eventual transfer of ownership. How certain are you that your successor is on the same page as you? What would happen if they decided to leave? Are you making changes to your management style and your ownership structures to ensure that your successor is in lock-step with you and is increasing their influence in the company?
PIMCO has received intense media scrutiny in recent weeks, due to the unexpected departure of the firmâ€™s former CEO and co- CIO, Mohamed El- Erian. El-Erianâ€™s departure scrambles the picture at PIMCO at precisely at a time when it has already been under pressure for underperforming. Its founder, Bill Gross, is widely known and respected as one of the best investors around. However, he is sixty nine, and has a reputation for being a very top down and controlling manager. The question becomes, if not El-Erian as successor, then who? The companyâ€™s total succession plan has been designed around El-Erian taking control, and soon.
The departure of El-Erian raises several concerns beyond the simple succession issue that you should be thinking about in your business as well.
First, how do you replace the intellectual power that just walked out the door? This plan had been in place for years and El-Erian, who is only fifty five, was expected to take the reins. How will the balance of intellectual power change at PIMCO and who will fill the vacuum left behind? How will decision-making take place now that Gross does not have a strong second? By many accounts Gross has been a driver and even bullying force within the organization. How will organization transition to allow for more input and control by the remaining managers?
Second, could the departure of El-Erian trigger a chain reaction? It is dismaying to see a senior leader leave an organization. It would not be the first time that the departure of a senior and respected leader, who likely was mentoring many leaders within the firm, causes them to lose confidence and leave for more stable situations. This could de-stabilize the organization, again at a time when it is already battling industry issues.
Third, why was this a surprise? Gross states that he wishes Mohamed had spoken up sooner and doesnâ€™t understand why he didnâ€™t if he had issues. He has the qualifications, seemed to have the interest and he thought he knew him better. El-Erian has taken the position that he simply wanted to make some life changes. It seems obvious that there was a serious communication gap here. It seems to me that Gross had the ultimate responsibility to be certain that he understood the needs of his chosen successor. As head of the firm he put El-Erian into the successor position. If there were any concerns about management direction, lifestyle fit or commitment then Gross should have been aware that these were becoming issues if he were serious about handing over control.
Finally, should Gross have put so much of the company at risk on El-Erian? In the case of PIMCO, there is a deep bench and likely alternatives to which he can, and will now be forced, to turn to. In most middle market companies, this does not exist. For PIMCO, the sheer size of the organization may be too much for a lesser successor to handle.
What Does This Mean to You?
Last week we talked about having no seller regrets. The issue of choice of successor is critical to achieving this goal.
First of all, you likely do not have the luxury of having the massive firepower of a PIMCO in your management ranks. If you make a wrong decision as to your choice of a successor you could end up actively operating your company at sixty nine, just like Gross, but with no viable alternative plan. It is critical that you choose your successor carefully and with the help of your trusted advisors to prevent this from occurring.
Second, you must put a strong, written succession plan in place and be certain that your chosen successor has input and agrees to it. Then you must communicate both formally and informally on a very frequent basis to be sure that the plan is being executed and that it is still valid for both parties. It is quite likely that this plan will evolve over time and will need to change with changes in the circumstances of either or both parties. There should be no surprises other than those that simply happen in life.
Third, you must be willing to relinquish control. This may be the most difficult issue for an entrepreneurial owner. Gross started PIMCO in 1971 and likely has an ego the size of California. This is not an uncommon thing. However, if you are not willing to hand over decision making to your successor over time, then you are best off not trying to put an inside transition plan in place. You will likely be more satisfied with a third-party sale that will allow you to make a cleaner cut.
Finally, you should have a plan in place that provides a significant incentive for your successor in place. There are many ways to accomplish this, many of which you can find on our site. While you cannot absolutely prevent a key person whom you have tagged for succession from leaving, there should be mechanisms in place that makes them think seriously about their decision and hopefully bring them to you for a discussion, and resolution of, their concerns.
Choosing your successor is not something to be taken lightly. It can put you in an untenable position if not done properly. But always remember: you are not alone!
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