Will Nash and Caroline Philipps: The Benefits of Succession Planning

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timeAfter 26 seasons as manager of Manchester United, Sir Alex Ferguson has retired and David Moyes is stepping into the Old Trafford dugout. Although it emerged that Ferguson made his decision at Christmas, and United no doubt spent the following months planning for life after The Boss, Moyes announced that he was only approached in the week that he was appointed. Football is regularly described as a bubble, not adhering to any normal rules of business or planning. However, the stepping down of a man who, for most fans, was Manchester United – at a similar time to Paul Walsh leaving Diageo after nearly 13 years as CEO – has prompted consideration as to how companies in general can properly plan succession.

Allow sufficient time for succession planning. It is never too early to address succession plans for senior people and many large companies seek to deal with these issues years in advance. However, it is easy to let succession planning slip down the list of priorities when there is no obvious opening on the horizon, or for example if a new director has just been appointed to a role. Yet in the UK, the average CEO tenure has shortened by 18 months in the past decade to around the 5 year mark for listed companies.

The process can take a long time. Whilst in football, managers regularly leave one club and pop up at a rival the next week, things tend to be a bit slower in the real world. The process of selecting the right person can take months, longer in the regulated industries. The company may have to deal with a long notice period and restrictions.

Succession planning should be an ongoing process. Even if there is no immediate plan to reorganise the business or change senior personnel, it is crucial to keep succession planning under review and to identify high performers with strong leadership skills in the business, as those individuals could be leading the organisation in the future.

Get internal structures in place. Changes in the market can be sudden and an organisation’s ability to adapt to the market will help keep it competitive. The UK Corporate Governance Code contains useful guidance on best practice for UK listed companies. The Code recommends that every listed company have a nomination committee to lead the process for appointments to the board. However, it is advisable for all businesses to have a committee or at least to delegate authority to deal with the selection process to certain individuals.

Nominate people qualified to succession plan. Having a number of people involved in the process should minimise potential scrutiny over conflicts of interest or undue influence. The individuals involved in the recruitment process should have a solid understanding of the business’s needs and the skills and knowledge required of the new candidate. A job specification should be prepared once the necessary areas of expertise and skills requirements have been indentified. If the pool of potential internal candidates to take on senior roles is small, or lacking in talent, companies should give thought to providing structured training so that there are suitable candidates available as and when opportunities arise.

Be as transparent as possible in your succession planning. Employees should be informed about the nomination committee’s role, if relevant, and the recruitment process. This will help employees understand the process and the ultimate decision as to why a particular candidate has been chosen to replace the outgoing member of the business. It is particularly important to remember the scope of interested parties in succession planning. Shareholders and investors, as well as employees, are likely to attribute great significance to succession planning and it goes without saying that their approval for key appointments will be necessary. Poor succession planning may mean a business is perceived in its industry or in the press as ill managed and experiencing problems.

Beware of Age Discrimination. Although those involved in succession planning need to be as well informed as possible about potential changes in the organisation’s structure, employers should always be cautious in respect of age discrimination. Since 6 April 2011 compulsorily retiring an employee constitutes direct age discrimination, unless the employer can objectively justify what they consider to be the appropriate retirement age for the business.

As a result, employers face an extremely difficult task in seeking to move senior employees out of the business if there is no agreement from them to retire. Since the change in law, businesses are realising that achieving the balance between allowing more junior workers to progress their careers, and respecting the rights of older employees, can be almost impossible at times. Employers should consult the Acas guidance “Working without the default retirement age”, which gives recommendations when planning a discussion about an employee’s future.

However, it is the culture of the business that will make this process easier – listening to employees, having clear guidance and policies in place, being transparent about the business’s goals, and communicating what has been agreed to the workforce. Ultimately – having a succession plan in place, and sticking to it.

Will Nash is a Senior Associate and Caroline Philipps is a Trainee Solicitor at Charles Russell LLP

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