The Crown Prince Naruhito’s ascension to the throne as Emperor of Japan earlier this year exemplifies why succession planning is crucial for every business, regardless of size or industry.

His ascension was supported by a carefully constructed transition plan, which began in 2016 when the former Emperor expressed his intention to abdicate and has resulted in minimal disruption at a time of significant change for the country. From this, there are useful takeaways for entrepreneurs and business leaders when planning their departures as well as that of any colleague.

The importance of a succession plan

Without a clear succession plan, the departure of senior staff members can lead to the loss of investor or customer confidence, falling share value, and even the departure of other employees who feel unsettled by the change. The resulting vacuum following the exit of a senior individual can be very damaging, even for an otherwise successful business.

While it is not possible to predict all departures, having a clear succession plan in place, particularly for key executive roles, can be instrumental in mitigating disruption (also having D&O insurance in place to protect against acts of management wrongdoing isn’t a bad idea either). Planning well in advance allows an organisation more time to consider its stakeholder messaging, ensuring a smooth transition into the next phase of leadership.

Succession conversations are difficult

Despite the clear benefits of succession planning, many employers neglect to put the necessary plans in place. This is often due to a reluctance to have awkward conversations around potential departures and to engage in the process of identifying staff who do (or do not) demonstrate the skills required to replace them. However, with thorough preparation and careful consideration of the issues likely to arise, such conversations do not have to be difficult.

Succession planning conversations often necessitate employees disclosing their career plans and a frank assessment of their skills. These discussions are unlikely to be effective if either party does not feel they can be open and honest. Trust is, therefore, key.

Employees are more likely to trust the succession process if it is transparent, which can be achieved by promoting objectivity when choosing the right candidate to replace a departing employee. Assessing skills using selection criteria that are aligned with an existing business plan can help with this. To further avoid any perceived bias, it is often useful to have more than one decision-maker although this can give rise to practical problems with conflicting opinions.

It perhaps goes without saying, but most important of all is taking steps to keep conversations confidential. If these private matters are discussed more widely than is necessary, employees will soon become wary of being open with their employer.

Talent development is critical

Developing future leaders is at the heart of successful succession planning and should not be limited to individuals at, or near, the top. Conducting talent development and leadership training at junior levels as well as for senior roles can prevent stagnation and provide a sense of progression. Also, a culture of mentoring can be a particularly useful tool in nurturing talent and encouraging an open dialogue between junior and senior staff.

In growing organisations, it is particularly important to consider future expansion and how the creation of new roles might affect the workforce. Training staff to develop skills that could be transferable across different areas of the business as it develops can be vital to managing this growth successfully.

Sometimes, external recruitment is necessary to fill a vacant role. However, employers must consider how this could affect the existing workforce – it could have a demotivating effect if internal candidates feel they have the necessary skills to take on the role instead. Having honest conversations will help manage employees’ expectations and lessen disappointment in these circumstances.

Avoiding risk & employment claims

Succession planning is not without its risks. Unhappy employees who feel overlooked for promotion could bring employment claims. However, following the steps identified above can help reduce such risks.

Employers should also be mindful of the legal risks associated with retirement succession planning. Making assumptions about how long an employee will want to continue working based on their age could result in a costly age discrimination claim. Employers should instead enter into discussions with an open mind and, rather than ask older employees when they will retire, should ask what their future career plans are – as they would with any employee.

Protecting your business from employees leaving

Businesses should carefully assess the competitive risk posed by employees if they were to depart and consider the most effective ways to mitigate this. Individuals with close client relationships, or with access to highly sensitive business information, should be required to enter into restrictive covenants to limit their ability to act in competition with the business following their exit. This can, for example, prevent them from working at a competitor altogether, or from poaching customers and colleagues.

Such restrictions are only enforceable to the extent that they are reasonable. Careful drafting is needed to ensure that they go no further than is necessary and that they are appropriate for the seniority of that particular role. The reasonableness of such restrictions is assessed at the time the restrictions are entered into, and it is therefore tricky to futureproof restrictions for employees who might be earmarked as future leaders of the business. Instead, the restrictions should be kept under review as the individual’s career progresses and updated where appropriate.

Final thoughts on succession planning

Having a succession plan in place at all times is vital for businesses as, unlike Japanese heads of state, departing employees rarely give much warning. The loss of a team member can send far-reaching shockwaves through a small business and has the potential to hamper its growth significantly. So, even a modest amount of time invested in planning for this can be time well spent in helping to ensure the long-term sustainability of a business.

The post was written by Shaun Hogan, Senior Associate and Kate Maguire, Trainee Solicitor at Stevens & Bolton LLP.