The Importance of Developing Your ESOP Company's Future Leaders

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Today’s business leaders are faced with growing pressure to deliver strong results in an increasingly complex and uncertain economic environment. While your company may currently be led by talented, experienced executives, at some point, those individuals may move on or retire.

Fortunately, companies are often able to identify internal team members whom they believe have the potential to fill key leadership positions. Many times, these people have strong technical or functional skills directly relevant to leading their organizations,  not only in terms of their business knowledge and their specific job but also how to drive improved business results, think about the big picture, manage the financial impacts of changes in the economy and more.  

At the same time, however, oftentimes, these accomplished operational leaders have never been coached on what are commonly known as “soft skills.” These are the interpersonal attributes and capabilities required to successfully develop and leverage their workforces.  These skills include communication (active listening, effective questioning, giving actionable feedback), motivation, collaboration, conflict management, building trusting relationships, creative thinking, time-management and leading with empathy.  

Prairie recently surveyed several clients who have an Employee Stock Ownership Plan (ESOP) in order to determine what they believe are the most important leadership skills. Interestingly, the majority of the responses were qualities that fall under the “soft skills” category; in addition to the skills listed above, survey responses mentioned curiosity, optimism, humility, balance and enthusiasm.

Notably, according to Kathleen McInerney Kane, a principal at Praxis Consulting Group, Inc., there are varying degrees to which potential future leaders have been afforded the opportunity to develop these types of skills; however, she says that these skills are necessary to effectively lead the “human operating systems” of an organization. Indeed, Ms. Kane says that, since an important part of being a strong leader is to be able to articulate a vision and get others excited about achieving that vision, leveraging relational leadership skills is a critical component of success.  Therefore, Ms. Kane suggests it is important to develop a strategic leadership program for both current and future leaders. We have found that if leadership development is not actively pursued, an individual who is promoted to a leadership role will likely not experience the same level of success as they have in the past – resulting in frustration for the individual and disappointment for the organizations they lead.

In fact, in our experience, the strongest companies understand the value of proactively putting a strategic leadership development plan in place, since developing future leaders is an ongoing process that should be continually fostered throughout the life of an organization. Also, as Ms. Kane notes, planning for leadership succession and putting a plan in place allows a company’s employees to advance and to see potential career paths within the organization.

Moreover, in an ESOP company, strategic leadership planning is especially important. Generally, a company that implements an ESOP has the longevity of the company in mind. Indeed, at Prairie, we often speak with mature ESOP companies about the importance of the sustainability of the ESOP from a financial perspective.

However, in terms of leadership development at an ESOP firm, we have found that it is not only important to focus on developing leaders that can maintain the company’s economic health but also vital to look for leaders that will help maintain the company’s ownership culture and satisfy the communication needs of employee-owners. Whether the company practices open book management or just has employees who are naturally engaged and motivated to help the company succeed, developing leaders who share these goals is essential for companies that seek to fully harness the power of employee ownership and achieve long-term business success. In that regard, Ben Holder, president of Plastic Products Co. Inc., a 100% ESOP, says that when his company is planning for leadership succession, “We want people that already know our ESOP and our company philosophy...” He says this is important since “we also know they already fit the ESOP culture.” In addition, he says that Plastic Products Co. Inc. looks for leaders that are “able to effectively communicate the company's vision, mission and philosophy.”

The concept of leadership development and planning for leadership succession is quickly gaining in importance since Baby Boomers – the generation born between 1946 and 1964 – are heading for retirement in increasing numbers. In fact, according to the U.S. Census Bureau, about 10,000 baby boomers turn 65 every day, and by 2030, all baby boomers will be at least 65 years old. Further, a recent survey by Wilmington Trust shows that more than 58.0% of small business owners have not only failed to complete a succession plan, but also, many have not even begun to contemplate any type of transition. However, transition takes time, and it is therefore important for companies to have a leadership development program in place. That way, when a company faces leadership succession issues, the company is not also facing a void in terms of viable future leaders for the company; if this occurs, the company may not be able to continue. In the case of an ESOP company, this can also significantly impact the health of the ESOP.

Amy Byrd, CFO of Pacific Steel & Recycling, says her company recently implemented a leadership development plan that includes a list of “leadership competencies” for each executive position within the firm. According to Ms. Byrd, “Candidates are rated on current capacity for these competencies and are reviewed quarterly to determine their viability for the position.”  Like Mr. Holder, Ms. Byrd says Pacific Steel & Recycling prefers to “look within our company” for leaders who have a “cultural fit.” However, she says that they will look within their industry “if there is not a qualified candidate internally.”

Generally, Prairie has found that, when looking to fill a leadership position, it is natural to look within the company before looking outside – especially since there is compelling data that shows that when someone from within is promoted to a c-suite position, they often have a better chance for success. Typically, insiders who are developed into leaders have a longer tenure, and they boost shareholder returns significantly more so than outside hires. In addition, developing leaders who are already part of the company saves time and money in the search process and, as mentioned previously, results in a leader that already has knowledge of the culture, employees and existing clients or customers. Similarly, Rick Urschel, president and CEO of Urschel Laboratories, Inc., notes, “We find leadership that has grown up in the organization is much more effective and long-lasting than those we have brought in from the outside.”

However, if hiring an outsider is the only option, existing leaders will need to develop that person in order for the transition to be successful. Communication - both with the new leader as well as with the internal team - is key to ensuring that the transition is smooth. We recommend that companies clearly outline what success looks like for the new leader and provide a timeline within which the company expects the new member of the leadership team to learn about the company, the people, the culture and customers. It is also important to get the new person up-to-speed on any internal issues. Additionally, Ms. Kane notes that it is very helpful for someone within the company who has “currency” to support the outsider and make it their business to help the person be successful. According to Ms. Kane, “Connection to others and understanding how an organization really works is so important, and the more connected and integrated the person becomes the more successful they will likely be.”

Conclusion

As an increasing number of baby boomers move toward retirement, it is now more important than ever for companies to plan for the future and ensure sustainability over time.  In order to continue on a path toward success, companies should put a plan in place to identify individuals who have the potential to move into management roles and to work with those individuals to further develop both their technical and soft skills. This is especially important in ESOP companies, as any successful leader will also need to be a champion of the ownership culture that exists within the firm.

Franco Silva is a Director at Prairie Capital Advisors, Inc. He can be contacted at 312.445.9213 or by email: fsilva@prairiecap.com.

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