A recent survey of Fortune 1,000 companies showed that succession planning is now one of the top three issues concerning management and corporate boards, the others being revenue/profitability and shareholder value, i.e., stock price. If you are a business founder or owner, the question of what to do down the road is rarely far from your mind. If you have a partnership and the partnership agreement does not have appropriate provisions for departure of a partner, this question is even more acute … if a partner dies or leaves, what then? In many cases it’s the end of the business, certainly for the partnership structure. Few partnerships have ever gotten around to creating a viable buy-sell agreement. For individuals who are a business unto themselves, finding the time to deal with what happens when they are out of the picture, be it death or health incapacitation, is a significant challenge. The recent death of the actor James Gandolfini was even bigger news than it might have been because, despite his success and wealth, there was no estate plan in place, leaving his wife and children in uncertainty. Just never got around to it. As with so many things in life, such things take advance planning. There is an old saying “It’s too late to shut the door after the horses have run off.”In all the conversation about succession planning, most of the discussion revolves around the future continuity of the business. Very little is said about the impact of such a transition in human terms, not only on the Owner or Chief Executive directly, but on their personal staff, other executives, and their respective families. An enterprise is a system that extends beyond the walls of the business. Like adding ice to the punch bowl, a change in one part is felt throughout the system and the culture. In this article, I will be examining this human factor and sharing my recommendations for how to effectively deal with that aspect of succession planning. You may be wondering why you should pay attention to one more article about the problems of the succession process. What does this writer have to add that has not already been said? A fair question indeed.
Business, Wealth, and Life
My name is Sherilyn Casiano and I am the owner of a multi-family office in New York City. My clients are exclusively investment bankers and venture capitalists. They are, depending on the context of the meeting, a business owner’s, CEO’s, or Board of Director’s answer to a prayer … or their worst nightmare. They buy, grow, and sell businesses as their stock-in-trade. Because of the sheer number of deals they have been part of over many decades, their personal financial lives are very complex, beyond those of the typical “well off” executive or business owner. I also have a controlling interest in a hold mail service and a financial software business. To top it off, I am also a widowed mother with two young boys. This gives me a rather unique perspective on business, wealth, and life. In my capacity as an expert in forensic accounting for family wealth, I have been involved with a large number of the personal challenges related to the succession process, often being brought in to assist advisors outside of my own practice. These situations range from being called in to help beleaguered estate attorneys sort out an aging patriarch’s legacy, to working against the clock to catalog and safeguard the assets of a young, cancer-stricken venture capitalist who had been given only a year to live, to the loss of my own husband to a heart attack before his 41st birthday. For me, the issues surrounding the succession conversation are always personal. Very personal. Over and over I see the same mistakes that put all of one’s plans at risk. Yet they could so easily be avoided if understood and pro-actively dealt with. If you have read any of my articles in The European Financial Review (“What Ship is Your Wealth Riding On?”, April/May 2013), you know that I invariably wind up preaching the “Gospel of Information Management” and the need for people to have real control of their wealth … instead of merely settling for the “Illusion of Control” that comes from a diverse set of advisors, such as provided by the wealth management industry. These core concepts take on particular significance inside the process and conversation “succession,” and I will expand and clarify them as we go along.
Problems of Succession
When I look at the problems of succession for both the company and the owner, the things that cause the greatest mischief revolve around two things: the lack of a system for the collecting, verifying, organising, and presenting comprehensive and accurate information, and the hidden agendas of the people involved with access to that information. The most common mistakes I see are:
• Failure to anticipate the impact on one’s own behavior, emotions, family, and business family
A quote from an article in the July 2002 Robb Report captures the experience:
“I know for me it was a strange feeling,” explains a California businessman. “I had just sold a company, and this fax came over the line telling me that X millions of dollars had been deposited into my account. I had always been concerned with running my business, and all of a sudden I realised that all of these numbers represented a new kind of responsibility—to my remaining employees, my family, my children, my children’s children.” (Feature: The Bank and I: Living with Your Private Bank, Brett Anderson, Robb Report: July 01, 2002)
Another executive who had served as national sales manager for two Fortune 100 companies anticipated the retirement that would finally give him time to be with his wife. It went like this: “Where’re you going, honey?” “To the mall.” “Okay, I’ll get my hat and come with you.” After 4 months of this, she declared: “You’re my husband and I love you. But you’ve got to get another job. You’re driving me crazy!”
• Failure to factor in and allow for the “grieving process” needed to effectively navigate the transition
If you are the founder of a company, it’s your baby. The loss, even if it was your dream to sell it for a big windfall, can be devastating. The death of a partner can be equally devastating, as can a firing after years of service. Professional grief counselors know this “grief process” typically takes at least two years and passes through many stages. Trying to ignore, dismiss, or just tough it out prolongs the process and can cause the grief to manifest in other forms such as depression, unwarranted anger, and irresponsible or irrational acts.
• Lack of in-depth contingency scenarios
The often-cited experience of McDonald’s, in which two CEO’s died within 9 months of each other, is an example of the need to think beyond the most likely events. In addition, there are so-called “Black Swan” events, those that have a small probability of happening, such as a Tsunami, global banking collapse, revolution, assassination, or kidnapping, etc., but have a very high impact if and when they do occur. Thinking through such scenarios on the personal level takes real courage and is often best done with others, so that all possible scenarios are thought through and plans developed. And of course there are some areas of the world where such scenarios become extremely likely.
• Failure to factor in flexibility
In his remarks at the National Defense Executive Reserve Conference (November 14, 1957), General Dwight D. Eisenhower said “I heard long ago in the Army: Plans are worthless, but planning is everything. There is a very great distinction because when you are planning for an emergency you must start with this one thing: the very definition of ‘emergency’ is that it is unexpected, therefore it is not going to happen the way you are planning. So, the first thing you do is to take all the plans off the top shelf and throw them out the window and start once more. But if you haven’t been planning you can’t start to work, intelligently at least. That is the reason it is so important to plan: to keep yourselves steeped in the character of the problem that you may one day be called upon to solve – or to help to solve.” I don’t think this can be said better than Eisenhower said it.
• Lack of a system for delivering a consistent, comprehensive, and accurate picture of one’s wealth over time
It’s an ironic fact that people who are adept at making money are often quite unskilled at keeping track of it. But it really is a different skill set and process, requiring time and commitment. If you are one whose eyes glaze over when you look at a spreadsheet, you are actually in the majority. Most executives don’t really understand those things. They aren’t designed to be understood, except by the high priests of finance. So if you’ve ever been one to ask your CFO “so what does that mean?” you are, in fact, in the majority. Worse yet, most people do not think of their financial life as a business. If it were, you would keep track of it in a very different way. For instance, in a business, the category “Revenue” on a profit and loss statement is of little practical use. You need more information for you to do anything really effective with that information. Add the sub-category Sales and you now have more to work with. But still not enough. You need the additional criteria of “by product lines, by customer, by profit margin, by territory, by sales representative,” to be able to know what really accounts for the category “revenue.” As you add each one, you get a more detailed and useful picture. Once you know those other factors, you can begin to take actions that can make a difference. Your wealth is the same: a statement of net worth by itself will not tell you what accounts for that net worth, what assets are doing well and what assets are at risk. At any level, whether your first thousand or your first billion, if you treat your wealth as a business and bring the same analytical and forensic tools to bear, you will be way ahead of the game.
• Failure to capture and document the processes and procedures used by personal secretaries and assistants, who are the “guardians of the secrets.”
Most executives have no clue what their assistants do or how they do it … and no plan for transferring that knowledge when they leave. Rarely does the secretary to the CEO or other senior executive stay on after a transition. It is much more common that they go with that executive to the next situation. Add to this their legitimate concern that if what they do and how they do it is fully documented, they can be easily replaced and you have a big challenge indeed. This is one of the big under-leveraged advantages of quality initiatives such as ISO 9000. Such projects start with fully documenting what processes are being done, and step-by-step how they are carried out; and then require that any changes or improvements to the process be documented as well. While such projects and standards have dramatically improved manufacturing processes, particularly in Europe, they have rarely been carried over and applied to the administrative domain. Yet, in the context of a project or initiative for business improvement, this vital work has the best chance of getting done. The same is even more true for those who have a personal secretary/assistant outside the corporation. There is no plan for how to transfer that knowledge in the event of that person leaving, whether due to termination, illness, or death. And what gets lost is that tremendous knowledge set that is the real source and secret of consistently effective leaders. In addition, there is your own knowledge transfer. So much of what we do, our competencies, approaches, and decision processes, exist just in our heads. They have never been articulated and documented. I have recently been wrestling with this myself as I try to document my own unique forensic process for software products developed for both the family office and estate attorney markets. Because it’s so very difficult to objectively observe oneself, I enlisted the help of Dr. Lester Hoffman, a leading expert on software documentation and Joseph Schufle, a leading expert on business processes. I am amazed at how much I do intuitively without realising it. Trying to document the process so that others can use it and benefit from it has been a real awakening. It is best facilitated by someone who doesn’t know what you do, but whose expertise is asking dozens and dozens of questions about what you do and how you do it without thinking they know what you’re doing.
Unfortunately, we can only touch on these points now, when, in fact, each deserves its own article or even a book to really do them justice. Whatever the reason for a succession, be it a sale, a relocation, a termination, or a retirement, and excluding such things as sudden death, there is usually some build-up to the actual event. Typically, as such a transition nears, one decides that it’s time to take stock. The questions you immediately ask are:
• What do I really have?
• What will I need, in terms of income, to maintain or change my lifestyle and commitments?
• How do I safeguard and preserve what I have?
Getting a Complete Picture of Your Wealth
To answer those questions, you need a complete picture of your wealth. But here’s the secret that your financial advisors don’t want you to know: most of them, not even at the biggest name companies, have the skill set to put together that kind of picture. It is beyond the realm of standard accounting OR tax planning OR investment management … and here’s why. Each of those advisors has their own focus and area of expertise. The portfolio manager doesn’t know what’s happening with the performance of your limited partnerships. The tax advisor only cares about them when there’s a taxable event, as in the case of a disbursement. Your estate attorney is primarily concerned with who ultimately gets what upon your passing. But none of them can tell you if the true cost of owning and maintaining an estate, a city apartment, three vacation homes, and a yacht is worth it. As good as any one of those advisors may be, you cannot get a truly complete picture without a methodology and a system to tie all that information together into an understandable picture. That is a separate and distinct systematised process that starts with identifying what information – and in what format – will give you true insight, certainty, and control, and then systematically collecting, verifying, authenticating, organising, and archiving that information in a way that it is easily available now and years into the future. Plus, you need someone or a team to manage that process. A full-time job in itself. Without such a system, you wind up with inaccurate “guesstimates,” approximations of what you have.
More importantly, the decisions you make for your future are then based on incomplete and often inaccurate information. Because you’ve hired the best (I’m assuming that if you are reading this article, you don’t use the cheapest advisors you can find!), it’s only natural to assume that the reports you get from them show you the complete picture. They are, after all, as complicated as any financials for your own company. And if those reports don’t give you the understanding you need, it’s also natural to assume that it’s due to some lack of knowledge on your own part. Like trying to understand what a “derivative” really is. Or, more dangerously, you take a certain pride in the complexity as a demonstration of success. As one VC in the technology arena said to me, with a combination of pride and frustration, “Here’s my tax report from my Big 4 tax advisor – over 600 pages!” Yes. Impressive, to say the least! What this all adds up to is what I call an “Illusion of Control” rather than true control. People of any means have been forced to accept such an illusion as the standard, not realising they need and deserve much more in order to achieve the best use of their wealth.
Here is a list of some key information that needs to be captured to ensure that true control is realised.
TRANSACTIONAL
Money in and out and the information behind/related to that: Who, When, Where, How Much, Why, What for.
OWNERSHIP
• Provenance (history of ownership)
• Authenticated documentation of ownership
• Who, What, When, Where, Why, What for (purpose or use), Initial Cost, Current Valuation, Protected, Insured and how much, In place and in Force (adequately insured and up to date/ by which company and agent)
RISK PROTECTION
(What needs to be protected/ types of assets to insure)
• Individuals:
• Loss of income
• Property: Flood, Fire, Vandalism, Theft, Confiscation
• Health: Personal, Family and Travel
• Protection for minor children, such as irrevocable trusts and second-to-die insurance policies
• Security Types
• Technology: Ever changing. Internet, Smart-phones, Mobile computing, Banking
• Self-defense: Personal and Family, Training, Bodyguards
• Transportation: Vehicles and travel locations
OPERATIONS
(How your life and lifestyle get managed)
• Documentation of :
Revenue Streams
• Personal Wealth Management Costs
• Other Costs (Private business and investment entities/Trusts/Hobbies)
• Track trust activities beyond taxable events / advisors only interested in taxable events
If you institute a practice of collecting and maintaining all the above information consistently over time, you will be very well prepared for the turbulent, rapidly evolving future we are living into. It won’t just happen, though, without your directive and structures to deliver it. You must demand no less from the people charged with safeguarding your wealth.
A Personal Plan
What to do from here? If you are an owner planning on selling or a senior executive looking at retiring in the next 1-2 years, start to take stock now. It typically takes a year or more to sort things out. If you are a new young executive, realise that the sooner you establish a system to rigorously document and manage your financial life, the easier it will be to deal with whatever hand life deals you. Knowing exactly what you have will put you in better shape to accurately judge career opportunities beyond just the money. The peace of mind that comes from true financial control is difficult to describe. As my terminally ill client said when he finally got a complete picture, “You’ve freed up my brain to think of other things.” Whether on the near or far horizon, each day brings your exit (including that one final exit we all face) nearer. Do you have a personal plan? If not, start today. Half a plan is better than no plan at all.
About the Author
Sherilyn Casiano is the Founder and CEO of S.I. Williams Wealth Management, LLC, in New York City. She holds an MBA from Columbia University. She was a key member of KKR’s personal wealth group service for the New York general partners. She has headed her own multi-family office for 14 years. For further information about her Dynamic Wealth Management System (http://dwimbs.com/) or for help with establishing your own dedicated family office (http://www.williamswealth.com/), call (212) 886-9078. Look for her soon-to-be released book, Take Back Control, for a more complete guide to establishing your own family office.
