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Goodbye to all that!

By Fiona Rotherham

Monday 1st December 2003

Text too small?
Perched in the corner of Stephen Tindall's office at The Warehouse HQ hangs a red shirt - the uniform that all employees from the shop floor up are expected to wear. The shirt is obviously the high-profile retailer's spare one, but to the casual visitor it looks symbolic, as if it is sitting waiting for the next chief executive to come along and fill Tindall's "shirt". That's easier said than done, as former chief executive Greg Muir found out.

Tindall started planning his succession five years ago. Then aged 47, he wanted to hand over the top job while still retaining a key role in the executive team until he retires at about 60 or 65. Greg Muir was hired as heir apparent in 1999 with the understanding he'd spend two years as chief operating officer while being groomed as Tindall's successor. In a March 1999 Herald article he said: "The only way to play it is for Greg Muir to be Greg Muir," he said. "There is no doubt that I can never be Stephen Tindall."

Muir was right. He resigned this year just two years after taking over the reins, citing "differences with the board". In the absence of further explanation, market speculation was that anyone following in Tindall's wake would have struggled because he couldn't relinquish control of the company he'd run since 1982. The normally friendly, soft-spoken Tindall gets a steely edge to his voice when asked if he had trouble letting go. "There was no secret that I always wanted to keep an association with the business and be part of the team, to help nurture it and make sure the values we built up over the years are preserved. Greg knew right upfront that this was not a transition where Stephen would actually disappear."

Now working on short-term contract with Telecom, Muir says it's crucial for anyone replacing a company founder to find out the extent to which that person wants to walk away. He thought Tindall would stay on as an executive director and gradually decrease his involvement in the business. That didn't happen as he had assumed it would. Prior to Muir's resignation, Tindall was still working one to two days a week and crossed the Tasman every three weeks to help with the company's troubled Australian operation.

Muir has walked away from three or four other opportunities since he left The Warehouse because the company founder wasn't ready for a clean break. "What happens to people that start companies and build them into something of significance is that unravelling the thread between them and the company is often incredibly difficult because in many cases it defines who they are and what they are."

So what went wrong? According to Tindall, Muir and the board agreed on what should be done, but disagreed on the way to do it. "It was an interface with the board as opposed to me," Tindall says (he's on the board). "We had discussions over a period of time and it became obvious to both parties that long-term it wasn't going to work." In terms of his succession plan, Tindall was back to square one.

He replaced Muir as chief executive and the company is now conducting an international search for a replacement. Tindall says there have been applicants from Australia, New Zealand, South Africa and the UK, along with some internal company candidates. An announcement is unlikely until the second calendar quarter next year, Tindall says. You get the feeling he wants to get this one right.

Meanwhile, Tindall is working on the "hit by the bus" theory - if the chief executive was hit by a bus tomorrow the executive team should be good enough to keep the business going. "In my view it's not the leader that is the most important part of the business. It's the team. We've always had a strong team culture here." To that end, in the last year The Warehouse has introduced succession planning for 300 staff - from the chief executive right down to assistant store manager. It's about to do the same in Australia.
"If you really want to build a company that will hopefully be around in 100 years you need to preserve the culture and have succession coming through on a multi-level basis."

Greg Muir's two-year transition period at The Warehouse gave investors time to digest the idea of a change at the top and for him to learn the ropes. How long that transition should be depends on whether the successor comes from within or outside the company. Tindall says in his replacement's case it will depend on that person's retailing experience. Muir says the time needed is usually overestimated. "It's often a security blanket for the owner/operator and used more to ease them out than ease the other person in." It is now accepted best practice in the US, especially where a founding chief executive has been around for a while, that they leave completely after choosing a successor, he says.

It's understandable that owners who retain a large shareholding want some overview of their investment, but again, it is best practice to have an independent chairman on the board. The Warehouse does have a non-executive chairman - Keith Smith. Tindall agrees if he was chairman, having the new chief executive report directly to him would restrict his desire to play a coaching role.

Muir reckons the right chief executive to step into the shoes of a company founder is one who is prepared to live with the owner's transition plan. He says the board needs to be conscious of picking a chief executive who is comfortable with life the way the owner wants it.

But Tindall says filling his shoes shouldn't be that hard because he's not the sort of person that dominates the business. "If we sit around the executive room table I probably say less than anyone. Some people find that disconcerting. They think the leader should be the one hitting the table and driving the team. I'm more a consensus-type team player so the fact that another person could come in and follow that style and continue the growth of the business is not inconceivable." Follow his style?

Think ahead
But company founders can't run the show forever. Dying in the saddle could jeopardise their life's work. In most Kiwi companies, the founder is also chief executive. Ernst & Young director Jim McElwain reckons a lot of baby boomers who established businesses are now in their late 50s or early 60s and are starting to think about slowing down. Yet few have formulated a succession plan or any other exit strategy.

There is scant research in New Zealand on succession planning. An Australian study conducted this year by RMIT (Royal Melbourne Institute of Technology) University - the "Australian Family and Private Business Survey" - shows half of the 4000 business owners surveyed intend selling their business. Of these, 88% say they will do so in the next ten years. Despite this and the fact the average age of business owners is 56, they seemingly pay little regard to succession planning. Only 23% have a documented succession plan and half of these feel the plan they have is inadequate. Only 15% are concerned about selecting a successor.

Planning your succession early is key to maximising the value tied up in your company, McElwain says. "When the entrepreneur's name is over the door this becomes even more difficult." Retaining the company's value after sale is hard when most of the value resides in the founder. Often the new investor wants the founder to stay on for at least a year or two.

At US-based Wal-Mart, David Glass spent five years planning his succession. The world's largest retailer has changed heads just twice - when founder Sam Walton handed leadership over to Glass in 1988, and in 2000 when Glass handed the top job to H Lee Scott Jnr. In Boss Talk, a book of Wall St Journal interviews, Glass says he realised early on that no one in the company had a broad enough background to step easily into the top job, so he developed potential candidates by exposing them to new fields. Scott, for example, had spent 16 years in Wal-Mart's logistics operation and then was moved on to become its top merchant.

As Walton had done before him, Glass elected to stay on in an advisory capacity after he stepped down as chief executive to help with the ­transition. Still, he was worried he would have trouble letting go, a mistake he had seen other corporate leaders make. He and Scott talked through potential stumbling blocks before making the transition. A key point was early exposure of the top executive group to the board of directors, Scott says. "A lot of people don't talk about that but one of the things [for] a new chief executive is understanding and developing that relationship with the board so we understand what the expectations are."

Another Kiwi retailing icon, jeweller Michael Hill, spent three years working closely with his chosen successor, Mike Parsells, before stepping down from the top job in 1995. "We worked at a big round office desk for three years together like we were Siamese twins," he says. He claims to have had no difficulty letting go, saying the ultimate in the art of delegation is to be left with nothing to do. Trust your own judgement in picking the next winner, he says. "You're not going to see the full potential of anyone if you keep putting your finger in and getting in the way." Then, in the next breath, he says he's remained a hands-on chairman to ensure the company culture continues to filter through the ranks, and to provide strategic vision. "The moment you just sit back you may as well sell out. You either stay involved or get out."
Parsells himself wouldn't comment.

Three steps to succession
For founders, succession planning hinges on three main questions: When is the right time for the business to be handed over? Who is the right successor? And what will your role be after the hand over? Your exit options include a trade sale, bringing in an equity partner, a management buyout or listing on the sharemarket. Or you may want to retain majority ownership and just hand over the day-to-day management.

The first step is determining your priorities - what ongoing managerial and financial involvement you're going to be comfortable with. Personality has a big say in whether you continue as chief executive, says ­PricewaterhouseCoopers director Ian Kennedy. Ask yourself whether you are ready to fully let go. Some people need a continuing link due to a strong sense of responsibility for their business's survival and staff welfare, Kennedy says. But retaining a minority interest may not be the answer if you don't like no longer calling the shots.

One chief executive (who wants to remain anonymous) says in his case, the company founder thought he wanted to step back from the pressures of the top role but in reality couldn't let go. He continually interfered in the day-to-day running, particularly when his replacement began introducing a new strategy he disapproved of. "What helps is for the founder to stay on for two to three months' transition and I'd recommend they then physically disappear - go to Europe or somewhere for three months," the chief executive says.

A big stumbling block for entrepreneurs is that their whole sense of self-worth is tied up in the company, says Leith Oliver, from business incubator The Icehouse. "Often these people think it will be great to be retired and to play golf. But when they do exit, they're not happy."

Company founders need to find a new business interest, says Direct Capital Private Equity director Mark Hutton. "By definition these are highly charged, motivated people. In the US traditionally they become angel investors but you don't see a lot of that here." Hutton handles a surprising number of business sales that fall over because the founder can't back away. His advice is to sell out and get out. Where the founder does retain an interest, he advises having a two-year transition period before handing over the reins, and recommends appointing an independent chairman to the board who will give the new managing director a point of liaison other than the founder.

The second step is grooming your business for sale. This is a lot like readying your house for sale - you'll get a better price and it will sell quicker if you paint your flaky front fence and weed the garden before prospective buyers are shown through. McElwain recommends grooming 18 months to three years before you want to get out. Before you leave, you have to ensure your expertise, including customer and supplier dependencies, are transferred to someone else. Other issues include having an appropriate governance structure with non-executive directors, well-documented operational and management information systems in place, protection of intellectual property and a strategic plan for future profitability.

The final step is timing your exit. By planning ahead, you can recognise windows of opportunity to exit as they arise. "Sometimes owners can hang on too long. You do hear horror stories where they wake up one day and don't want to do this any more," McElwain says.

And if you intend passing the mantel to your children, be aware that shared family ownership can lead to conflict. A study by Massey student Luke Fitzgerald, "Dynamics of the succession process within ten small scale family businesses in Christchurch", revealed that of the eight businesses yet to go through the succession process, seven owners had never discussed the issue with their children. Six successors assumed the business would stay in the family and all were concerned about dilution. Four successors said they definitely wouldn't accept ownership while two said they would do so to eliminate other siblings.

Stirling plan
Stirling Sports founder Colin Taylor decided this year he wanted to "pace" himself a bit, but not retire completely. The 75-year-old recently sold his 49% stake in the Stirling Sports franchise company to his youngest son, Mark (who also owns the Building Depot, Toyworld and several Stirling Sports stores). The founder offered his stake to his four children who are all involved in his business activities. But as a parent, he says, there is no point expecting all your children to be "tycoons". Mark Taylor says while his siblings were interested, they didn't have the resources to buy out their father. He points out the sale was handled like an outside transaction and he paid full price for the profitable business. Other stakeholders - including the Singapore-based Goh Brothers' Ossia Group - were bought out at the same time.

Taylor retained a 26% stake in the company he founded in 1964 and remains chairman. "He'd be silly to not want to use the history I have on offer," he says. For his part, Mark Taylor welcomes his father's input. "It's hard to walk away after you've built up a lifetime of relationships and friendships within the organisation. He still likes to come into the office and say 'Gidday' to the troops, which is good." It helps that father and son think alike on how the business should be run, Mark Taylor says. It also helps that the founder had already resigned as managing director when the company went public some years ago. He only returned earlier this year when Stirling's chief executive resigned.

Sitting in his newly-purchased St Heliers apartment with a view to die for, an ebullient Taylor Snr says one of the best ways to avoid stepping on his son's toes is having other business interests to focus on. He owns Modern Bags and the irrepressible entrepreneur already has his eye on purchasing a "complementary" retail outfit. His wife, Lynn, rolls her eyes disparagingly, but with a look of resignation on her face.

Clearly, getting out doesn't have to mean giving up.

Are you ready to let your baby go?
Ask yourself:

  • what is the value of my business?

  • how do I maximise value?

  • how much capital and income will I need for retirement?

  • do I make a full or partial exit?

  • what are the options for realising my investment?

  • how will I choose my successor?

  • how do I manage the transition?

  • how long will the process take?
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