The law of success(ion) – shifting stakeholder interests from rags to riches

We plan almost every second of our lives. We plan for the well-being of our older selves, our children, and our loved ones. We ensure that our wills, estates and investments are in order.

Yet, the most important underlying components of our investments – the companies that we invest in – are failing to adequately plan on leadership continuity and to implement contingencies for when current management moves on.    

Former president Thabo Mbeki in his “African Renaissance” speech once said: "In our world in which the generation of new knowledge and its application to change the human condition is the engine which moves human society further away from barbarism, do we not have need to recall Africa's hundreds of thousands of intellectuals back from their places of emigration in Western Europe and North America, to rejoin those who remain still within our shores!

Ashburton Equity Fund Investing in South African listed equity securities with the aim of delivering returns ahead of the FTSE/JSE All Share Index. Learn more

We argue, that possibly the greatest threat to executive leadership potential is not the flight of human capital that we have witnessed, but a resistance to the transfer of skills – an issue transcending borders, race and gender.  The lack of skills transfer limits opportunities, leading to – as demonstrated in the Great Gatsby curve - inequality and economic immobility, further entrenching poverty. This is particularly problematic, as the knowledge Mbeki speaks of is not just technical or theoretical - and thus easily learnt - but broader and intangible. It encompasses leadership and strategy with specific application to the generational longevity of businesses. 

The Great Gatsby curve


The Great Gatsby curve examines income and opportunity inequality as a reflection of socio-economic influences, resulting in inter-generational immobility. The more opportunities available to children, the better the future adults resultant living standards. If the concept of the Great Gatsby curve is extended to a corporate environment, it can be deduced that the more a management team (parents) spend on upskilling employees (children), the more opportunities employees will have to grow out of lower level jobs resulting in a reduction of the inequality gap. This is imperative in the information age, where conventional and human capital are being converted into social and digital capital. If the current socio-economic climate does not facilitate digital education at grassroot level, it would fall to employers to provide that educational stepping stone resulting in more balanced equality of opportunity. The transfer of skills is an intrinsic key to closing the inequality gap. A lack of collaboration in business culture limits the ability of employees to leverage off their respective knowledge bases.

Environmental, social and governance scorecards place importance on the quality of a management team in the valuation process, but the question of clearly delineated succession planning underpinned by skills transfer, appears to be a less robust and forceful conversation transpiring with management and company boards.

In corporate South Africa’s’ (SA) recent past, there have been a series of managers who have moved on without seamless transitions into their vacated senior leadership positions. Most disturbing are CEOs at the helms of companies for many years staving off the inevitable, with the board of directors often unnervingly filling these positions with people from outside of SA with limited institutional memory and innate cultural contexts with which to seamlessly continue the running of these businesses.  Some former CEOs tend to continue serving as board members, further entrenching the old regime and culture. No matter how successful these leaders track records are in terms of value creation, the lack of seamless transition when they leave (resulting mainly from a culture of limited skills transfer) is a terrible indictment on their scorecards. It creates a legacy of value destruction from a severe lack of stakeholder integration driven by the loss of institutional memory. The context underpinning business processes and long-term capital expenditure projects is lost. A shift in strategy post a senior management switch could considerably change a shareholders’ long-term investment thesis.

Environmental, social and governance scorecards place importance on the quality of a management team in the valuation process, but the question of clearly delineated succession planning underpinned by skills transfer, appears to be a less robust and forceful conversation transpiring with management and company boards. Driving this issue across strongly in management meetings as an integral input into a company’s’ valuation is imperative.
The succession plan of a company is critical, as most investors tie up capital for the medium to longer-term, and need to understand how the strategy of the company unfolds over time relative to their investment thesis and time horizon. Companies tend to trade on a management franchise premium (or discount), valuing the ability of management to successfully allocate capital and create value. The quality of a management team is reflected in the price of a business. Returns are directly linked to risks on the efficient frontier relative to an investors’ timeframe, and the management of a business is an integral component of this risk through their ability to generate a suitable return. More importance should then be given to succession planning and skills transfer in the valuation of a business. 

The market should be a self-regulating beast, with the investment community as a fiduciary asking questions on behalf of the shareholders, keeping management and company boards accountable. It appears that in this we are becoming negligent. Questionable management decisions (backed by boards) have destroyed shareholder value and are being left unaccounted for. Shareholders suffer from value attrition and are poorer for it. Board members should be chastised and take ultimate responsibility for errant CEOs.
Earnings mobility can be increased by the inter-generational transfer of skills, helping previously disadvantaged employees close the inequality gap by leveraging off the experience of older employees. Vast amounts of experience and information is being lost as veteran employees are routinely discarded from corporate SA when retirement ages are reached. The mentorship role that they play should not be so flippantly disregarded.  Corporates need to recognise many new truths, and consequently adjust policy to consider the increasing longevity of its employees. Many industries are cyclical, and it takes decades to trade through these cycles. The knowledge and experience that resides in veteran employees should not be lost as frivolously as is currently occurring. Loyalty and commitment are often espoused as values are welcomed by companies in employees. Losing institutional memory is wasteful and lacking in precisely these ideals, impeding the bedding down of these values in current employees.
Departures are often unpredictable. With clearly defined succession planning and skills transfer as an intrinsic part of business culture, not only is the longevity of a business secured, but value is created for all stakeholders. This ultimately ensures a much sought after social good:  that elusive ‘better life for all’.