CEO Succession Planning an Overlooked Task

More than half of companies today cannot immediately name a successor to their CEO should the need arise, according to new research conducted by Heidrick & Struggles and Rock Center for Corporate Governance at Stanford University. The survey of more than 140 CEOs and board directors of North American public and private companies reveals critical lapses in CEO succession planning.

“The lack of succession planning at some of the biggest public companies poses a serious threat to corporate health – especially as companies struggle toward a recovery,” says Stephen A. Miles, Vice Chairman at leadership advisory firm Heidrick & Struggles and a global expert on succession planning. “Not having a truly operational succession plan can have devastating consequences for companies – from tanking stock prices to serious regulatory and reputational impact.”

Stanford Graduate School of Business Professor David Larcker adds, “We found that this governance lapse stems primarily from a lack of focus: boards of directors just aren’t spending the time that is required to adequately prepare for a succession scenario.” Professor Larcker is a senior faculty member of the Rock Center for Corporate Governance, a joint initiative of Stanford Law School and the Stanford Graduate School of Business.

The 2010 Survey on CEO Succession Planning, conducted this spring, surveyed CEOs and directors at large- and mid-cap public companies in the U.S. and Canada, with 10% of respondents also from large private firms. Key findings from the survey include:

A full 39% of respondents cited that they have “zero” viable internal candidates. “This points to a lack of talent management and not paying enough attention to your ‘bench,’” says Mr. Miles.

On average, boards spend only 2 hours a year on CEO succession planning. “The full boards of respondents’ companies meet, on average, five times a year. Succession planning is discussed at only two of these meetings, at one hour apiece,” says Professor Larcker. “The nominating and governance committee – who often take primary responsibility for succession planning – did not fare much better; respondents reported that only four hours of meeting time is typically devoted to this topic each year.”

To read the full article see here.

30 June 2010 Exit Planning Event

A group of New Hampshire business owners and their advisors were treated to an overview of John Leonetti’s approach to exit planning by the author himself today at the 100 Club in Portsmouth, NH.

Mr. Leonetti is the author of Exiting Your Business, Protecting Your Wealth: A Strategic Guide for Owners and Their Advisors. He covered his process for determining the mental and financial readiness of an owner contemplating an exit as well as what exit options are dictated by the readiness levels of the owner. Exit options included Strategic Sale, Recapitalization, ESOP, Management Buyout, and Gifting.

Please use the contact us page to forward any questions or to put yourself on the mailing list for the next presentation based on the process outlined by Mr. Leonetti.

Are You Making An Impact?

In the midst of a series on influencing others on the site, I pose the question, “are you making an impact”?

People and products that make an impact are exceptional and stand out. People and products that fail to make an impact are quickly forgotten.

If your product or service impresses, moves, or otherwise “wows” people, your challenge will be supplying enough. Apple computer has, for the most part, mastered the art of making an impact. Consider both the iPod and iPhone.

If your product or service does not make an impact, the product or you become a commodity–something that is useful but not indistinguishable from other similar products or services. Think of laundry detergent, “light beer” or your typical grocery store.

We see marketing campaigns aimed at differentiating products that are commodities all the time. For example, beer marketing campaigns tell us how a particular beer is different and better, while blind taste tests of beer fail to indicate much quality difference between brands.

Is your product or service a “commodity”? Look to the example of Apple or better still,, to learn ways of distinguishing your product or service from the competition.

When it comes to you as an individual, are you a “commodity”?

The fact is that most of us are commodities. Our efforts, even if competent and conscientious, fail to make an impact or if they do, the impact is short-lived.

Superstars in the worlds of sports or entertainment, make an impact with their performances and do so consistently. Superstars in the world of business do the same.

Look for ways to make an impact through the clarity of your thinking, the creativity of your ideas, the value of your “outside the box problem” solving and, perhaps most importantly, by adopting the priorities of your boss or customer while getting things done. Working hard and being competent are good but not enough alone to raise your value from commodity to stand out.

Ask yourself, “how do I make and impact”? Focus on being more than just competent and conscientious. Think about how you can make an impact!

Exit Planning Gap Calculator

Vital Growth Consulting Group is pleased to announce the publication of its Exit Planning Gap Calculator tool.

The Exit Gap Calculator is available on the Vital Growth Consulting Group website. It is intended to provide an estimate of the financial gap between the CURRENT VALUE OF A COMPANY and the VALUE NEEDED TO EXIT AND MAINTAIN  THE OWNER’S CURRENT LIFESTYLE.

The Exit Gap Calculator tool does not gather or record identifying information and may be used and reused to evaluate different assumptions (such as the mutiple of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).

How to sell your business – Step 3

In our first two blog posts in this series we discussed preparing a list of potential acquirers and a couple of strategies to contact them.  In this post we will discuss milestones and some of the typical documents you may encounter in the process.

The first sale milestone is arriving at a memo of understanding or MOU.  The MOU is a document describing a bilateral or multilateral agreement between parties.  In the sales process it usually indicates the desire to work out the preliminary purchase and sales issues to allow both parties to sign a letter of intent or LOI.

An MOU is often used in cases where parties do not yet want to imply a legal commitment.  In essence it is a more formal alternative to a gentlemen’s agreement.  The MOU process allows you to proceed with several companies at the same time, keeping more options open.
The next step is more formal, the signing of a letter of intent or LOI.  The LOI is a document that outlines the terms and conditions of an agreement between two parties before the agreement is finalized.  Such agreements may be Asset Purchase Agreements, Stock Purchase Agreements, Joint-Venture Agreements etc., basically any agreement which aims at closing a financial deal.
LOIs resemble written contracts, but are usually not binding on the parties in their entirety. Many LOIs, however, contain provisions that are binding, such as non-disclosure agreements, a covenant to negotiate in good faith, or a “no-shop” provision promising exclusive rights to negotiate. The purposes of an LOI are to 1) clarify the key points of a complex transaction for the convenience of the parties, 2) declare officially that the parties are currently negotiating, as in a merger, sale or JV, and 3) provide safeguards in case a deal collapses during negotiation.
Some time before the LOI is signed, the selling company should perform their own due diligence on their business with the help of a trusted advisor.  As the business owner, you should know where the potential issues are.  First, you should look to fix as many as possible.  Second, you should disclose the remainder to the potential buyer.  Buyers use due diligence issues to negotiate down the price of the business.  Disclosing them at the LOI level takes that card out of their hand.   Some owners feel that some issues will go undetected.  That, however, seldom happens with a savvy buyer.

The final steps in the process are the negotiations and closing.  There are books written on the negotiation process itself.  Suffice it to say that if the up front work is done well, uncovering the value your buyer perceives, the internal due diligence and negotiating the LOI, then the final negotiations should be much easier.   For more information and insights on selling your business, just complete the form of the right sidebar to download our e*book Exit Planning: The Guide for Business Owners.

Problem Employees?

Problem employees may be disruptive, unproductive, destructive, unhelpful, frequently absent, or just disconnected. It’s not uncommon for problem employees to emerge after the “honeymoon” period of just being hired or to even surprise everyone with bad behavior after a long track record of success. What’s important is to take a hard and objective look at problem employees and understand the reasons they become problems (or start as one).

Employees are liabilities instead of assets for one or more of the following four reasons:

  1. Lack of intellectual horsepower. Intellectual horsepower is a competency that is hard to change (per my experience and the experience of the folks behind Topgrading). Not having intellectual horsepower severely cripples effectiveness, especially as tasks become more complex and dynamic. It is not unusual for people’s roles and responsibilities to outgrow their intellectual horsepower. When someone applies him/herself to a job and no longer succeeds at it (because the job has changed), take an objective look at their intellectual horsepower. Also, don’t be surprised if the increased demands of a position leave the person feeling overwhelmed and fleeing, freezing, or fighting (the three reactions to being overwhelmed).
  2. Compromised character. The compromise usually starts to reveal itself in poor interpersonal interaction and lack of integrity. Lack of integrity has obvious pitfalls for any organization that extends trust to its employees, including everything from rule breaking to theft. Poor interpersonal interaction can have much more subtle effects on an organization and can include problems such as angry outbursts, being “two-faced”, being narcissistic, failing to develop subordinates, failing at being a team-player, etc. Basically, this heading includes all problems between people that remain unresolved and, therefore, left to fester.  You can tell if you have poor interpersonal interaction on your hands when teams stop working well, when people avoid particular individuals, and when getting people pulling in the same direction in your organization becomes a real challenge. Please note: Poor interpersonal action in someone who was functioning well can be a symptom of stress due to new responsibilities, personality conflicts with subordinates, or issues outside the workplace (problems at home, for example).
  3. Compromised mental or physical health. Mental and physical health problems cost employers billions of dollars each year and this accounting generally does not include the organizational disruption caused by these problems. On an individual level, chronic diseases are the most likely to compromise an employee and move them from being an asset to a liability. This includes conditions such as mood disorders, substance abuse, and chronic physical disorders such as diabetes and chronic pain. On occasion, an employee may become a problem when a loved one develops a chronic disease. They may be healthy but distracted by their caregiving responsibilities.
  4. Poor employee management. In these cases the problem is not the employee, the problem is his or her manager. In general, the problem employee is not given sufficient direction, is held accountable to unclear expectations, or is given weak feedback on performance. If this is the case, the manager can elevate the employee’s performance by setting clear goals, priorities, expectations, and providing meaningful feedback. A special case of poorly managed employees is when an employee is promoted to his or her level of incompetence: The so called “Peter Principle” in action. In general, this happens when the employee fails at a new position and becomes a problem for reason one or two above. Another special case of a poorly managed employees is when employee morale is low due to the dysfunction of the organization. When poor performance is the rule, rather than the exception, inevitably there is serious organizational dysfunction at work. A poor manager:
  • Promotes without merit
  • Avoids responsibility for problems
  • Does little work him or herself
  • Takes credit when it’s not due
  • Plays favorites

Understanding the reason an employee is a problem starts the process of solving the problem. Solutions include development, re-assignment, and treatment of mental health and medical problems. Which reason or reasons best describes your problem employee?

High Performance Hiring

High performance hiring has the goal of having top performers at every level of your organization. It is based on the work of Brad Smart and his book: Topgrading: How Leading Companies Win by Hiring, Coaching, and Keeping the Best People.

High performance hiring assumes that everyone has unique talents and interests but that these talents and interests differ substantially from person to person.

High performance hiring further assumes that for every position in the organization there are individuals who are ideally suited to excel in the position, just as there are many individuals who are ill-suited for the position.

Leaders in any organization are in a pivotal position to work toward hiring top performers. It is arguable that no other process improvement or technological improvement comes close to returning as much on investment, than the time spent investing in the strategies of high performance hiring.

The Strategies:

  1. Always be on the lookout for top performers. Attributes such as intelligence, creativity, passion, integrity, and tenacity are difficult to develop. Attributes such as experience, presenting well, and level of education are comparatively easy to develop.
  2. Understand the competencies required to perform well in particular positions.
  3. Understand the economic value to the organization of each particular position and how to measure the contribution a given individual makes (the economic value contributed and what he/she is accountable for).
  4. Use screening interviews and assessment tools to reduce your candidate pool down to a manageable number of candidates to interview.
  5. Use interviews with candidates to focus on competencies, the candidate’s experience in areas he/she will be accountable for, performance patterns, and recent performance.
  6. Use interviews with current/former bosses and peers to assess performance as well as attributes such as how coachable the person is, how they contribute to team efforts, and how they get along with others.
  7. Prioritize the ongoing process of developing and retaining your top performers.
  8. Prioritize the ongoing process of realigning, redeploying, or releasing less than top performers.

The High Performance Hiring Steps:

  1. Analyze behavioral competencies of the position and define the tasks and results the position is accountable for.
  2. Develop a scorecard for the position that is a summary of the accountabilities and competencies required for the position.
  3. Develop a screening interview to filter out candidates based on the scorecard.
  4. Develop a screening assessment battery (on-line tests that include, for example, assessments of personality, motivation, and critical thinking ability and examine key competencies) to further narrow the candidate pool.
  5. Develop an in-depth interview process for candidates who have passed the screening steps. Probe for experience delivering on expected accountabilities and evidence of competencies. Use “hands-on” skill assessments if possible.
  6. Develop an in-depth interview process of past bosses and peers for candidates who have made it past step 5. Validate experience delivering on expected accountabilities and competencies.
  7. Use the results of the screening assessment battery, the interview, and reference checks to decide on which individual to select.

Additional High Performance Steps:

  1. Apply behavioral competencies and accountabilities analysis to all positions.
  2. Use the results of this position analysis to inform performance reviews.
  3. Develop, realign, redeploy, or release individuals based on performance reviews.
  4. Develop (coach) individuals, particularly high performing individuals in areas where development is indicated.

How to sell your business – Step 2

In our last post we discuss how to develop a target list of potential acquirers.  In this blog post we will discuss the next steps in the sales progression.

The two foremost ways to proceed with sales process are the direct and indirect methods.  In the direct method the seller and trusted advisor put together a prospectus on the company.  This document will discuss the selling company’s market, the overall health of that market and it’s growth prospects, where the selling company adds value to customers, its technology/services.  There will be charts on market and company growth, broad narrative on opportunities, high level financials and the general location of the company, i.e. New England or Northeast.

Potential buyers are contacted by the trusted advisor to see if they would have an interest in looking at this generic type opportunity as the company is not mentioned at this point.  If so, they are sent a copy of the prospectus.

The indirect method involves contacting the same group to see if there are areas both your company and theirs can collaborate profitably.  This can be on a particular project, to private labeling each others products, to forming a joint venture.   These discussions give you the opportunity to get to know the other players in the industry better and assess the value that can be created from a sale.

The three main upsides of the indirect approach are 1) you get to know the other players in the industry on a more personal basis, 2) you get a better view of what is going on in your industry, and 3) the word, or rumor, about your company being for sale doesn’t get out into the marketplace.

If there is a downside with this indirect approach, it is that it takes much more of the owner’s time and personal involvement.

In our final post on the process of selling your business we will discuss some of the documents and milestones you will encounter.

More Cost of Mis-Hires

In a previous post, I relayed that the cost of a mis-hire has been estimated to range between 6 and 27 times base salary, depending on assumptions. None of these assumptions considers the emotional disruption that a mis-hire creates if he or she has a difficult personality. In other words, no value is assigned to the emotional disruption created by a interpersonally difficult mis-hire. Omitting this cost of a mis-hire was my oversight.

A recent conversation with a CEO brought the oversight to my attention. In the case we spoke about, the mis-hire created bad feelings with both customers and employees as well as other members of senior management. Some of these bad feelings were just that–bad feelings. It is difficult to calculate the cost of someone being put off or upset. Other bad feelings have a cost that is relatively easy to calculate. For example, in the case the CEO mentioned, orders increased when the individual left the company because distributors had not wanted to deal with the mis-hire.

Other costs associated with emotional disruption can include the cost of replacing subordinates who leave because of the culture created by an emotionally abusive mis-hire or the loss of productivity associated with employees avoiding an abusive mis-hire.

Granted, not all mis-hires cause emotional disruption. Certainly there are individuals who are mis-hires and beloved despite their poor performance. But, more often, the obvious financial costs of a mis-hire tell only part of the story. Please comment or send questions using the contact page.

How to sell your business – 1st Step

We will assume that you have completed the preliminary steps and thoroughly prepared your business for sale.  Your balance sheet is in good shape, your market share and profits are growing, and your team is solid and firing on all cylinders.  It’s now time to consider the selling process.

After the vital preliminaries above, the first step is to prepare a list of potential buyers.  These can include companies in and around your industry.  They can also include family members or the management team.  The majority of sales are to third parties, so that will be the focus of the remainder of this blog.  The other avenues follow similar paths.

When preparing the list, do so without judgment.  List all the competitors you can think of including the indirect customers with complementary products.  List all of your big vendors and customers then look for the newer ones that are growing or have a special niche.  In this part of the process we are looking to be as thorough as possible to avoid leaving any potentially good prospects off the list.

Once you’ve gone through this process, divide your list into A, B and C players.  Companies in the A group would be the most likely buyers because of what you know about them.  Companies in the B group are less likely, but potentials, while the C group are the long shots.

Now the heavy lifting begins.  You and your advisors review the companies in the A group and analyze for 1) financial strength, 2) management team capabilities, 3) market and product trends and 4) reputation.  Next you record where your company would bring value to the business.  Uncovering this value is what drives the sales process.

Often times the owner has difficulty being objective about the value their company brings to potential buyers.  It is critical that value is accurate, neither significantly under or overstated.  Both the B and C companies are kept on the radar screen for major changes in their status, i.e. a B company starts buying up some of your smaller competitors, etc.

At this point some sellers go through the process of calculating what value their company would bring to each “A” company.  This step includes assumptions on additional channels and market share, geography coverage, cross selling opportunities, economies of scale, complementary technology and/or services, etc.  This gives the seller some idea who the best targets will be and how to position their company in the sales process.  However, it can not calculate some important intangibles such as desire, risk tolerance and ego.

The seller needs to prepare a credible forecast for the next several years that shows reasonable growth rates.  It will be important to hit the near term part of the forecast as that will be under scrutiny during the LOI and negotiation process up to closing.  Shortfalls in that period will readily translate into reductions in price.

In our next blog post we will discuss the two main avenues to take in contacting potential acquirers for your business.