A founder’s departure is a crucial phase in an organisation’s life and doing it badly could have significant monetary and emotional effects on everyone involved. Not to mention the risk of the organisation closing down entirely. Why then do organisations not pay enough attention to succession? Or if they do, why is it so difficult to hand over well? What are the factors that could make it successful from a psychological and emotional perspective? And what might the role of a coach be in supporting this process? These were the questions I wanted to find answers to when I started my MSc research in 2021. I started by looking at the numbers.
Founder succession in SMEs
Small and medium-sized enterprises (SMEs) contribute significantly to the world’s economies, with family businesses constituting 75% of these enterprises. In the United States, they contribute to 50% of the gross national product. These SMEs represent almost all, 99%, of UK and Europe’s businesses, creating more than 50% of gross domestic product in the European Union alone. In terms of workforce, they employ 75% of all staff in the UK and 85% in EU. So why then, is long term continuity for these companies so hard to come by?
Sadly, many of these companies fail to pay enough attention to their leadership pipelines and succession practices, leading to catastrophic turnover at the top in the worst cases – a destruction of values and threats to the existence of the organisation itself. The rate of successful founder succession, and therefore business continuity, is so low that only 30% of businesses make it to the second generation and only 5-15% to the third.
Founder succession in fortune 500 companies
And it’s not just SMEs, succession is also a challenge in Fortune 500 companies, where “only 54% are actively developing CEO successors, while 40% report not having a single internal candidate”. Among those having a plan, maintaining a talent pipeline seems to be “the most challenging aspect of CEO succession planning” reported by both public (74%) and private (52%) sectors. And although failure of a CEO succession might not mean going out of business, like it does for SMEs, unplanned CEO succession is expensive: it cost US$112 billion of lost market value compared to planned succession in 2014 to the largest 2500 companies.
It became clear that failure of succession is a global issue that touches all industries and all countries to which numerous factors contribute including a challenging regulatory environment, taxation, lack of awareness and access to training. I decided to get to the bottom of the issue, understanding why founder succession so often doesn’t work out and defining factors that could make it successful.
Defining a successful succession
In my research, I defined successful succession as:
“the transfer of both ownership and leadership of an initiative or organisation, including the transfer of power and the ‘source role’.”
In other words, I considered it a successful succession only when the founder had emotionally let go of their power and their role as source, and had moved away from managing their original project, so their energy was available to focus elsewhere.
Who plays the source role?
According to Peter Koenig, the source is a role in an initiative. It is taken up by the person who “takes the first vulnerable step” to realise their idea. It is vulnerable because there is some risk involved (e.g. shame, failure, disappointment, or rejection) as a result of taking that step (e.g. asking someone to join a project). The source role, therefore, only belongs to one individual who has the intuition to sense what is needed next in their project. They have a special relationship with the vision of their initiative and their job is to “steward the process of realising it”. There might be two people involved in creating a company, but there is always only one source role.
The source role can be passed on to another individual with an orderly succession process that is voluntary and often includes a memorable moment. This only happens when the outgoing source is able to fully let go and pass the source role on to another individual.
What makes a successful succession?
I found that some of the answers lie in the complex, messy and emotional side of succession and these 6 factors I discovered to be amongst the most important:
1. The founder’s willingness and readiness to let go
This is the most important factor. If the founder is not willing or ready, succession will not happen. It is as simple as that. The other 5 factors enable the founders’ willingness and readiness to develop over time
2. Natural flow of exchange (aka love, for the courageous)
This became central to my findings. Love in succession is “when two people are engaged in a relationship, which is mutually fulfilling and enriching, without coercion, simply voluntarily, which allows them to transfer their initiative between them in a loving and caring way.” When this was not present between the founder and their successor, succession did not take place.
3. Alignment of values
The flow of exchange develops over time, and I could observe its presence when the founder’s values were in alignment with their successor’s. The founder looked for the same values/needs present in their successor to the ones they had when they started their company.
4. Successor willingness and motivation
This plays a huge part in developing trust, and a flow of exchange, of course. Contributing factors to these are the successor’s career aspirations and commitment; and their readiness and preparation.
5. The founder’s relationship with the initiative
My research showed that being able to let go is hugely influenced by the founder’s relationship with the initiative. When the founder is ‘separate from’ and has a temporary relationship with the initiative, it is easier to let go. It’s not surprising that when their identity is fused with their project, they find it much harder, sometimes impossible, to let go. Mitigating factors are usually high emotional and social intelligence and reflective practice.
6. Successor selection
When a successor is not chosen, not obvious or it is chosen by someone else (i.e. not the founder), succession doesn’t happen. However, when the successor is an obvious, emerging choice made by the founder, it happens easily.
Through my research I found that these six factors collectively contribute to the success of founder succession in organisations. Understanding and addressing the psychological and emotional effects a transition has on the founder is crucial. Considering the complex and emotional nature of succession, HR and talent partners 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 founder transitions in organisations.