A key component in any company’s lifecycle is ensuring that a role transitions successfully. From employees retiring or exiting the company for any number of reasons, to selecting candidates that are well suited for the role, it’s critical that succession is kept top of mind. Proper succession planning is especially important in the event that a sporadic internal shift occurs.
Now let’s consider transition at a senior management level. As many know, leadership has an outsized impact on the strategy, execution, and culture of a company (as previously discussed in the August 19, 2022 QV article). So being mindful of leadership impact, it’s even more crucial that a role transition is handled well.
Here are a few patterns we have observed as investors about how management succession can be handled successfully.
HAVING A SUCCESSION PLAN IN PLACE
While there is no way to predict a team member’s sudden retirement, an organization can ensure succession plans are built and that leadership develops internally so that there are suitable candidates to succeed the retiree.
Aritzia is a fashion retailer that we currently hold in our Canadian Small Cap strategy. The company successfully navigated a CEO succession from its founder, Brian Hill, to Jennifer Wong, an employee of over 36 years.
For Aritzia, this succession plan encompassed a transfer of responsibilities over time from back-office functions to more critical functions like operations and eventually, all parts of the business. Identifying potential leaders and building up their leadership skills over time takes effort and patience but it tends to pay off in the long-term.
A SOLID FOUNDATION ENSURES CONTINUITY ACROSS A COMPANY
It should come as no surprise that companies with a solid foundation in strategic direction, culture, and a good track record of execution are better able to manage through tougher workforce transitions. Another holding in our Canadian Small Cap strategy, Neighbourly Pharmacy, is a great example of this in action.
The company operates close to 300 community pharmacies across Canada. Chris Gardner, the company’s former CEO of five years who abruptly left the role for personal reasons, is currently being succeeded by Skip Bourdo. Bourdo is an external hire with extensive leadership experience in the pharmaceutical sector.
Despite the abruptness of this transition, the company’s primary strategy of expanding its nationwide network of neighbourhood pharmacies remains intact. This is in part due to the commitment to this strategy by the main private equity investor who owns 50% of the company and is part of the board of directors staying on through the transition. Through a difficult transition, the continuity of other senior leadership can ensure both a continuity of culture as well as of good execution.
Alternatively, a lack of continuity in strategy and culture during a management transition can result in a more disruptive succession. For example, Pacific Smiles, a holding in our Global Small Cap strategy, operates 129 dental clinics across Australia.
Five years ago, the company transitioned leadership to an external hire, Phil McKenzie. He has since taken the company on a different strategic path by opening dental clinics primarily in high-traffic mall locations. While this strategy may ultimately be successful, it was disrupted by the unforeseen events of the pandemic.
As a result of poor performance throughout the pandemic, the company faced an activist campaign, led by a prior co-founder and still large shareholder, to replace the current CEO and most of the board of directors. Since then, the company has shown very early signs of a return to pre-pandemic levels of demand for dental care and improving margins. The management team has additionally been open to adopting some of the ideas detailed in the activist campaign against them.
IMPORTANCE OF A TEAM OVER THE INDIVIDUAL
When a single individual rather than a team of people is perceived to have a large influence on the company’s success, the risk of a bumpier succession can be especially high. We’ve observed this in organizations like Disney, a holding in our Global Large Cap strategy.
Bob Iger was instrumental in shaping Disney’s strategic direction as its CEO for 15 years, but in 2020 he handed the reins over to Bob Chapek. This lasted less than two years before Iger ultimately returned as CEO at the request of the board of directors who wanted to see better execution at Disney.
EVALUATING SUCCESSION AS AN INVESTOR
At QV, we use a tool called the management change scorecard to further evaluate management change when it occurs at a portfolio holding. This scorecard prompts us to do further due diligence on why the change has occurred and whether the company will be better off or not going forward with the new management team. This process ensures that management succession is being reflected in our updated investment thesis of the company. Being mindful of our observations around management succession and implementing tools to evaluate management change should lead to better informed investment decisions over time for our team.