Who are your future leaders?

Report

Identifying and nurturing your next MD

More than 1.4 million business owners plan to retire in the next decade. Who will take their place? It’s an important consideration for every business owner today – whether you plan to retire in five, 10 or 20 years time.

For Belinda Farrell, Human Resources Director with Macquarie Banking and Financial Services Group, this is about planning for a future when you’re no longer in the picture. But it’s also an important strategy for motivating and retaining your current talented staff.

“It’s easier to define your legacy when you’re still at the top of your enterprise. You need to consider, what will the next phase of business look like without you?”

Many research studies have highlighted a lack of preparation for succession across all types of business structures. The 2015 KPMG Family Business Survey found that the majority of family-operated businesses (which comprise up to 87 per cent of all Australian businesses) say they expect to replace their CEO (76 per cent) and transfer ownership of the business (72 per cent) in the next five years. However, just 14 per cent had prepared and trained a successor before succession.

Even large corporations struggle with developing future leaders. PwC’s 19th Global CEO Survey found nearly half of all CEOs are making changes to how they develop their leadership pipeline.

So how do you find and develop your future successors from within?

More than 1.4 million business owners plan to retire in the next decade.


Asking the right questions

“There are three key things you need to understand about a potential future leader, and we ask a lot of questions to uncover the ideal prospects,” explains Farrell.

First, you need to assess what their future contribution might be. “This is about their future value to the business. Think about how likely they are to win and keep your clients’ confidence and trust,” she explains. “Ask them about their current role and performance, and how they perceive their relationships – and ask your clients as well. You can’t just rely on your internal vantage point.”

Next, consider their potential impact as a leader. “How do they motivate people during tough times, provide feedback or stretch junior staff?” suggests Farrell. “Do they demonstrate the right behaviours, and respect the opinions and interests of others? And can they influence a broader agenda than their own?”

Finally, an essential characteristic future leaders will need in our fast-moving markets: ‘learning agility’. “Are they curious, highly committed and driven?” questions Farrell. “You may have three people reporting to you, but only one can find more discretionary effort during a challenge. Only one can come to you with a creative solution, because they are always thinking about it – they already act like an owner.”

Other ways to think about this include:

  • Conscientious and competitive - how self-motivated are they?
  • Resilience - how do they react to stress and intense pressure?
  • Open-minded – do they like new methods and ideas?
  • Steadfast – can they confront and resolve difficult situations?
  • Inclusive – will they seek out more information and listen to dissenting opinions?

Your business may not require all these traits in its future leader – it depends on your business strategy, culture and vision. “For example, if long term profitability is the focus, this requires constructive leadership that generates sustainable results,” explains Farrell.

It’s rare to find a future leader with (all) the ideal performance history and behavioural traits… these are skills that need to be proactively developed through experience.


Nurturing the right abilities

It’s rare to find a future leader with the ideal performance history and behavioural traits, fully formed. These are skills that need to be proactively developed through experience.

“In reality, people develop leadership and management skills when they see it happen every day, when it is brought to life through conversations and action,” explains Farrell. “It’s not something that sits stale on a performance review document, and it’s not magic – you can't just read a book and suddenly have business leadership potential.”

She says this needs to happen through access to role models, setting the right expectations and regular conversations – as well as more formal checkpoints. This is an important element in making sure your most talented staff feel valued so they stay.

“People come to work for more than a paycheque, it is important to understand the value of intrinsic rewards such as personal growth and the opportunity to innovate” explains Farrell. “For some, they also want to feel part of the business strategy. Involving them in decision making appeals to a natural instinct to see it through.”

What if your ideal future successor needs development in one or two critical areas? Bringing in a trained external coach or mentor can help. “They can be a valuable mirror for the things you’re not noticing, or have come to accept over time,” she comments. “They can define just how ready that person is to step up – and identify what needs to be done to ramp up that ability quickly.”


Funding in your successor

Family businesses may choose to pass on the reins as part of an inheritance. But for some business leaders, realising some value through the transition is vital for funding their own retirement plans.

“There is a difference between sharing the financial success of the business and giving someone a stake in it,” notes Farrell. “In both cases, it encourages people to act like the owner, because they know profitability matters. But there is an administrative burden that comes with having a share in the business, and you need advice to understand all the considerations.”

If you need to finance your succession plan, consider which equity plan is right for your business.  While providing successors with an equity stake can encourage them to think like an owner, being prepared to buy into a business from their remuneration package can also be effective.  Ability to invest will depend on individual circumstances, and can provide a view on an individual’s readiness to have their own financial success linked to the future success of your business.

Sharing leadership responsibilities is important not only for developing the skills of the next management team – it provides greater diversity for strategic decisions. Current business leaders bring their experience and network to the table, but the next generation may provide a new perspective on technology, opportunities and innovation. This balance is the key to creating an entrepreneurial enterprise.

And ultimately, that may be the difference between whether your business just survives, or adapts and thrives in decades to come.

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This material has been prepared by Macquarie Bank Limited ABN 46 008 583 542 AFSL & Australian Credit Licence 237502 ("Macquarie") for general discussion purposes only, without taking into account your personal objectives, financial situation or needs. Before acting on this general information, you must consider its appropriateness having regard to your own objectives, financial situation and needs. The information provided is not intended to replace or serve as a substitute for any accounting, tax or other professional advice, consultation or service.