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The importance of succession planning

On Behalf of | Feb 16, 2022 | Business Law

No matter if a company is small, new and a start-up or one that is large and has been in operation for decades, certain business planning should take place to ensure the longevity of the company. A CEO and other executives of a company are imperative to the successful operation of a company. Therefore, it is important to consider who will take this position when one seeks to retire. This is where succession planning comes into play.

Understanding succession planning

A succession plan essentially provides the information needed for board members when they chose the successor for a CEO or the like. The process is most successful when the plan identifies multiple potential candidates. This typically occurs when an insider is chosen for the position. Whether it is handing it down to a family member or a current executive, it is important to develop programs in the plan to help the individuals named to grow as a leader and hit the ground running when and if they are chosen for the position.

Making internal or external hires

Frequently, internal successors are more successful than an external hire replacing a CEO. Nonetheless, it is still possible to have a successful outcome with either an internal or external successor. An internal successor is more common and more successful because the individual likely already understands the company and how things are run. In contrast, an external successor may experience a culture shock due to it being a new company, environment and culture. This could be seen as a disruption, as it can take time to acclimate.

Oftentimes, internal candidates are primed once they are deemed a qualified candidate. Therefore, they are ready and prepared to take on the role if the time comes. This is often viewed as the easiest and best solution if a CEO suddenly decides to retire.

While an external hire means time used for onboarding and a chance that it may interfere with the normal business operations, it could also be a beneficial option. There may not be a qualified internal candidate, and an external hire is the only option. However, an outsider could bring in new ideas and perspectives, allowing for new business strategies and possibly a more successful business.

Whether it is succession planning or another business law matter, it is important that companies understand how best to address the process early on. This can help ensure they understand what options available and what steps are necessary now and in the future.