Grooming successors. (Succession Planning).

Succession planning is essentially about business continuation and people. While middle-market and family-owned businesses are often lax about formalizing plans, CFOs around the U.S. are taking it upon themselves to groom their successors.

When there's talk about replacing the U.S.'s oldest and longest-serving chairman of the Federal Reserve, Alan Greenspan, you know it's inevitable that one day you, as CFO, are going to be replaced. And, just as jitters surround replacing an icon, like Greenspan, your firm's performance could be greatly impacted by how its succession plan is handled.

The purpose of succession planning is to ensure business continuity following a leader's retirement, death or -- often these days -- a myriad of other unplanned reasons. Ideally, succession planning is a "formal" and ongoing process of systematically identifying, assessing and developing talent to fill vacancies both from within a company and appropriate external talent sources.

Sound like the system in your company? If you're a large corporation, it probably is the case; if you're a mid-sized company, you may be in the 50 or so percent with formal succession plans; and if you're a smaller, closely held or family-owned business, you're likely too busy working to plan for your successor. While most businesses have a crisis "hit-by-a-truck" plan for short-term replacements, the fully developed transitioning process from leader to leader can be daunting, be it in a multinational or family-owned business.

In his 2001 book, the former CEO of General Electric Co., Jack Welch, wrote of choosing his successor: "Making the pick was not only the most important decision of my career, it was the most difficult and agonizing one I ever had to make. For at least a year, it was often the first thing I thought about each morning and the last thing on my mind at night."

Welch approached the selection process with four criteria. He wanted his successor: to be GE's unquestioned leader; to take the politics out of the process; to be young enough to be in the job for a least a decade; and he wanted the board involved in the decision.

Insurance giant American International Group Inc. announced this past May that it had put a succession plan in place for its highly visible chairman and CEO, Maurice R. "Hank" Greenberg. AIG promoted 10 senior executives and indicated that almost any one of them could nab the top spot, a move analysts said would ease investor concerns over who will succeed the popular 77-year old Greenberg.

Just how significant is grooming a successor? In a nationwide study of the largest 1,000 companies, 100 percent of the executives polled confirmed the value of identifying and grooming a successor, and 72 percent said they are currently preparing someone to take their place. The survey was developed by RHI Management Resources, a consulting services firm providing senior-level accounting and finance professionals on a project basis.

In another study, from a stratified random sample of 1,100 U.S. companies with more than 20 employees, CFOs were asked: "Do you have a process in place to groom your successor?" Thirty-nine percent of the respondents said "yes," 58 percent said "no," and the remaining 3 percent didn't respond or didn't know.

Paul McDonald, executive director of RHI Management Resources, advises that top candidates be included, early and often, in planning and strategy discussions, and be given opportunities to lead high-profile meetings to gain visibility. He also advises potential successors to enhance soft skills such as communication, leadership, negotiation and diplomacy.

While middle-market and family-owned businesses are often lax about formalizing plans, CFOs around the U.S. are, indeed, taking it upon themselves to groom successors.

Dick Jackson, early in his career, was told by an older executive, "You don't want to get blocked from a promotion because you didn't have your successor trained." Now, at age 58, Jackson brings his experiences from 25 years of senior management positions at larger-companies to the post he's held for 18 months, Senior Vice President and CFO of Road & Rail Services Inc., a $30 million closely held Louisville Ky.-based provider of outsourced logistical services to the transportation industry.

Jackson believes that companies need the discipline of planning. "Short-term fixes are shortsighted -- and generally ineffective," he says, "not only for the growth of your organization, but from the corporate profitability standpoint. You need to keep this 'on-going business' concept that we were taught in the first business class we ever had."

For Jackson, succession planning is linked to strategic planning. The strategic planning process itself focuses on the future and what resources (including people and people development) are needed to get there. He says while the previous Road & Rail management team had certain skills and attributes, it was growing at 30 percent a year and found itself in need of a stronger team. Besides himself, they've added a controller and vice president of marketing.

The planning process for Jackson starts with looking at a "nameless" organizational chart and identifying the tasks required for each position while determining: does the current person meet those requirements? 'When gaps are found, he says, management asks, "Do we have people in-house that we can train?" If an incumbent is doing fine, they'll leave him/her in that position. Often the person needs additional training; in some cases, a person has to be replaced.

Succession planning for all positions, according to Jackson, involves knowing who would come behind you, and behind each of the people who work for you. "When I was a vice president, I looked at my controller, my tax guy, my cash manager, my risk manager, my MIS person, etc."

His larger-company practices are what he intends to instill in the small and growing company he's at now, where, he says, "It's even more difficult. You've got to make sure that the players out there are hitting the ball good. You can't have any mediocre performance."

Linda Pearce, the 44-year old CFO of Portland, Ore-based Warn Industries, says its succession plan is "more informal than formal, in the sense that there is no documentation." She says it's recognizing what individual can fill a gap, what training they need and how they are progressing.

Family-owned for 52 years, Warn -- a $150-200 million manufacturing company with an OEM division and after-market division -- went through a leveraged buyout in February 2000, just when Pearce came on board. "We take succession planning very seriously," says Pearce, "because, as a smaller company -- unlike, say, a GE -- we don't have a lot of people lined up that we could pull from that would be good potential CFOs, and it takes some time to develop people." Also, she explains, managers don't know when a role is going to be open -- in one year, or not for 10 years.

"We have six people on our senior leadership team, and we focus on succession planning for each of those individuals," says Pearce. In her former position, she was not the CFO but "part of the succession plan;" when the opening did come up, she'd already made the decision to move to Warn. This raises a critical issue, she notes: If you've got people who become ready before a position opens, how do you keep them motivated and keep them in your company long enough to take that next step?

"The health of the company really does depend upon it [planning], and our outside investors and shareholders deserve it," argues Pearce. As for the CFO spot, she says, "If you have no back up, it makes it hard to vacation or leave to get training. Having people coming along to fill your shoes gives you more freedom to do more, learn more and even create more value for your company in other ways."

Eric M. Tanaka, the CFO, treasurer and vice president of finance of Seattle-based Regence BlueShield, says with no formal company plan, he's established a pattern for climbing the corporate ladder within finance that involves coaching and mentoring. "It's kind of my own personal plan," he says, "and it's based on what I believe was critical to my rise to the top spot."

The 37-year old Tanaka has been in the CFO role for two years and with the firm for 12 years, having started in an entry-level accounting position, earning CPA and CFA certifications, and rising through the ranks. Regence BlueShield is an independent licensee of Blue Cross/Blue Shield that insures about one million members with medical and dental insurance products and has sales revenues of $2.2 billion.

Tanaka says he meets weekly with his four direct reports in efforts to recognize where they could increase their skills. He believes that working with these individuals allows them to gain confidence, as well as wider recognition throughout the company -- to be perceived as promotable, as a potential replacement for the CFO spot.

"Where some CFOs can run into problems, says Tanaka, "is that they might be hesitant to make people promotable and marketable." Besides individual time, he describes an array of company-required off-site training programs on such subjects as leadership, project management, conflict resolution and time management.

"I set goals and expectations for each individual that I think would make them a better fit for the CFO role, but I don't have a formal plan to document that there would be a successor at any given point. The company doesn't work that way," says Tanaka -- though he adds that succession planning for the CEO spot is in the process of becoming formalized.

Road and Rail's Jackson says the lesson he learned early on about having a successor has stayed with him as his career has advanced.

In fact, when offered his first management-level role -- manager of a department of internal audit -- he was asked: "Do you have someone who can take your slot, and how long will it take?" He replied, "I do, this is who it is, he can move tomorrow morning, and things will be fine." The changes were made about a week later. Jackson sums it up: "We're really derelict if we don't provide for our successor."

RELATED ARTICLE: Closely Held and Family Businesses Lax in Succession Planning.

Major changes are expected in closely held and family-owned businesses within the next five to 10 years: Over the next five years, 32 percent of the CEOs are expected to retire or semi-retire; in 10 years, the number jumps to 50 percent. Yet, a pair of studies conducted by global accounting firm Grant Thornton found companies sorely unprepared.

One survey of middle-market firms reported only 51 percent have a CEO succession plan; while another study cited only 43 percent of the respondents indicated intentions to develop or update their succession plans within the next six months.

"The issue becomes how to preserve and protect the value and find the right talent to continue," says Michael Fredlender, a tax partner based in Grant Thornton's Los Angeles office.

"Succession planning is really about people, and one of the biggest issues today is identifying, attracting and retaining top talent," he adds.

What should companies be doing? "Planning has got to be considered a high priority, and individuals have got to focus the time, effort and energy to really get it done," says Fredlender.

He says, "Number one is simply setting aside the time and making sure that there is a plan in place -- basically having the right people to allow the company to continue to be successful, or become more successful."

Another major issue, Fredlender says, is "preserving and maintaining the value of the company -- probably a family's largest asset and significant cash flow generator."

Other factors include: moving the ownership of the company from one generation to the next; financial issues (dealing with bankers and other finance sources), tax issues and relationship issues (bankers, customers and vendors).

Fredlender points to a host of problems unique to family-owned businesses. For example, while trying to "keep it in the family," they might be limiting the talent pool and not always getting the best and brightest to move the business to the next generation.