CHAPTER 1: INTRODUCTION 1.0 Chapter Overview - DSpace@UM

the resources and support to establish continuity in leadership and other key positionswithin the organization during times of change. Businesses that do not take proactivesteps to plan for future talent needs at all levels will face certain disruption, and evendisasters, when key employees retire or are lured away by competitors (Rothwell, 2001).Succession planning should be a plan to replace people in every level of the firm from topexecutives to key support staff. Once a firm has a succession plan, it is in a better positionto promote and to hire without reverting to a ‘bums of seats’ style of recruitment, wheremanagers desperately rush to plug gap which don’t take long to start coming unpluggedagain (Lambert, 2005).According to Roberts (2002), the ultimate aim of succession planning is to promote thebest and brightest across the corporation by having the right person in the right place atthe right time for the right job. Succession planning and management need not be limitedsolely to management positions or management employees. Indeed, an effectivesuccession planning and management effort should also address the needs for criticalbackups and individual development in any job category-including key people in theprofessional, technical, sales, clerical, and production ranks (Rothwell, 2005). Ang(2007) states that according to Tan Sri Teh Hong Piow, the chairman and founder ofPublic Bank Berhad, succession planning is not only confined to top management but itshould also be cascaded through all levels of staff. He further emphasizes that thesuccession policy is to groom and ensure that a sufficient number of candidates areavailable for every existing position, for smooth transition.2

Succession planning should consider staffing needs at higher level from a medium tolong-term perspective. However, companies in Malaysia are just merely filling upvacancies without proper planning. The lack of talent with leadership skills is a majorissue in Malaysia. That is why there are people who passed their retirement age workingon a contract basis because companies could not find the right person to lead. As such,proper talent management and succession planning are vital to ensure that the rightpeople are in the right roles at the right time to deliver the organizational strategy nowand in the future.Succession planning is a long-term process and not a one-off exercise. It involves theunderstanding of the organizations’ long-term goals and objectives, identifying theworkforce’s developmental needs, and determining workforce’s trends and predictions. Itis more proactive and is concerned with developing a pool of high-potential people toassume the leadership positions that will be needed to support the future growth of theorganization. It also ensures that there are highly qualified people in all positions, not justtoday, but tomorrow, next year, and five years from now. And, it needs to be done insmall and medium-sized businesses just as much as it needs to be done in big businesses.Dodd & Simons (2005) stress that succession planning is not just for what if-scenarios: Itis a thorough process designed to ensure the continued effective performance of anorganization by planning for the development and replacement of key people when theneed arises.3

Cheng (2007) indicates that expatriates are not good solution for Malaysian companieswho look for talented employees for their corporate sector. What is needed is a morelong-term and permanent solution, and that is to nurture and build locals to a level tomeet that need. Therefore, Malaysian companies and most of Asia’s corporations mustthink carefully about succession planning.Succession planning is a complex area and one that needs careful consideration and aninvestment of time and resources to map out skills and competencies so that the rightpotential can be hired and trained to achieve a distinct competitive edge. Best-practiceorganizations should prepare for unforeseen events and the potential loss of keyexecutives or talents. Ultimately, a comprehensive succession planning strategy helpsbusiness leverage the full value of its human capital.Building or developing leaders from within the organization is more advantageous thangetting someone from outside the organization. This is because the individuals fromwithin the organization already understand the history and background of theorganization, its value and culture as opposed to someone from outside who would needto spend time adjusting to a new environment and whose values might be in conflict withthe organization’s values.Somehow or rather, developing a leader within the organizational talent pool for the nextlevel of leadership is a great challenge for business organization today. Implementationof succession planning in an organization has never been an easy task. At times, key4

people who were identified as successors had a tendency to resign unexpectedly, or didnot live up to expectations, so the plan became invalid.1.2 Purpose Of The StudySuccession planning is important to the Malaysian economy as companies are nowexpanding their businesses to global markets and entering knowledge-based competitivemarketplace, therefore the pressure is on to identify the right people, develop, motivate,and retain the talents for business continuity. This is because employees and top talentshave the freedom to choose their employers and expect to work for employers who willnurture their talents and allow them a share of the economic success. Mehta (2007)reports that according to a recent study conducted by ISR (a global employee researchand consulting firm), it was found that nearly half of Malaysia’s senior corporate staffemployed in companies wanted to leave their present employers.The study also concludes that companies in the five major Asia-Pacific regions:Australia, China, Malaysia, Singapore, and Thailand would face enormous challengesretaining talented employees, attributing this trend to rigid management styles amongcompanies in the region. With Malaysia home to the largest proportion of employees whodefine themselves as either disillusioned or actively disengaged, 47% of the country’smost talented staff indicated they are “mere steps” away from considering leaving theircompanies. The study also shows that high-performing employees preferred working forcompanies that have formal succession planning and talent management program. Thismeans, the current Malaysian employers are at risk in retaining their most talented5

employees. It also indicates that there is need for Malaysian corporate sectors to engagean effective succession planning and talent management program as their employeeretention strategy in order to maintain continuous organizational growth and competitiveadvantage.Wallum (1993) conducts a survey and concludes that succession planning helpsorganization with internal sourcing; reduces attrition of high-fliers; allows for morerealistic counseling and planning; and prepares candidates in advance for seniorappointment.Therefore, the major purpose of this study is to empirically investigate the use ofsuccession planning and management program among private sector firms in Malaysiaand explore its common practices, policy and process dimensions. Then, the impact ofsuccession planning program on organizational effectiveness/outcomes will be examined.1.3 Importance Of The StudySuccession plans form a vital informational input into the day-to-day decision making inbusiness organizations. They are also important tool for developing the managementexecutives who will implement the organization’s business strategy and achieve itsorganizational objectives (Huang, 2001). Succession management can lower employeeturnover rates, improve staff morale, and place the most qualified candidates in keypositions (Johnson, Costa, Marshall, Moran, & Henderson, 1994). Firms that fail to treat6

their succession plans as living documents risk losing their continuity and the opportunityto revitalize their organizations (Getty, 1993).Based on projections by the U.S. Census Bureau, 29.7% of the entire population inMalaysia will be aged 50 and above by 2050. In 2000, this figure was only 13.2% of theentire population (as shown in Figures 1.1 & 1.2). Whereas, Malaysia’s entire workforcestood at about 11.7 million in 2007 as compared to 9.7 million in 2000. This indicatesthat the Malaysia’s workforce is ageing steadily and the fundamental change inMalaysia’s demographic will have some consequences for the economy and firmsoperating in Malaysia. The retirement of the ageing workforce is of particular concern inindustries or sectors where they represent a large percentage of employees and a largeproportion of the organizations’ leadership in general. Thus, an effective successionplanning would help to ensure business continuity when the ageing workforce leaves theorganization.Therefore, this research will be able to address the following questions:1) Do private sector firms in Malaysia have an effective succession planningsystem?2) Why private sector firms in Malaysia feel succession is important?7

Figure 1.1: Malaysia’s Population Pyramid By Age And Sex - 2000Figure 1.2: Malaysia’s Population Pyramid By Age And Sex – 20508

3) What are the methods or tools used by organization to identify and evaluatecandidate for succession?4) Are there any links between succession planning and other organizationalsystems?5) What are the effective characteristics of succession planning system amongprivate sector firms in Malaysia?6) Are there differences that exist in terms of practices and approach ofsuccession planning between different industrial sector, firm type/ownership,and firm listing?7) Is there a relationship between succession planning characteristics andorganizational outcomes?8) Is there a relationship between demographic variables and organizationaloutcomes?9

1.4 Objective Of The StudyThe ultimate objective of the study is to develop a better understanding of successionplanning and management practices in the context of private sector firms in Malaysia.Specifically, the study endeavors to achieve the following objectives:1) To understand the practices and approach of succession planning amongprivate sector firms in Malaysia.2) To identify whether differences exist between industrial sector, firmtype/ownership, firm listing in terms of practices and approach of successionplanning.3) To investigate the relationship between succession planning characteristicsand organizational outcomes.4) To identify whether there are significant variations between the controlvariables (industrial sector, firm size, firm age, firm listing, and firmtype/ownership) and succession planning characteristics and organizationaloutcomes among private sector firms in Malaysia.10

1.5 Scope Of The StudyThe scope of this study encompasses Chief Executive Officers/Managing Directors, Headof Human Resources, Human Resource Managers, Human Resource Consultants andLine Managers of manufacturing and services sector firms in Malaysia e.g.manufacturing, financial, health, education, retail/wholesale, agricultural/plantation, andothers located in the Klang Valley, Penang, Johor, Sarawak, and Sabah. The abovelocations are chosen because most head offices or heart of business operations of privatesector firms in Malaysia are located here.1.6 Limitations Of The StudyDespite the contribution made by the present study, the following limitations areacknowledged.1) The factor of inaccessible information – there are some information that areinaccessible in the study since the Human Resource Departments of theparticipating firms, are not willing to divulge some confidential information,especially the profit before tax and staff turnover rate due to its sensitiveness.2) The factor of refusal by certain parties to cooperate. There are some firmswhich are not willing to participate in this study, the non-respondents to thesurvey is probably because they may be less likely to have an effective or11

formal succession planning in their firms and these could influence their nonresponse.Further, several best practice organizations, and their seniorexecutives, refuse to participate for reasons which include company policyprecluding participation in such research studies. As such, support andcooperation from some private sector firms are crucial.3) The sample of the study – the study is confined to the private sector firmslocated in the Klang Valley, Penang, Johor, Sarawak, and Sabah. Privatesector firms from other parts of the country are excluded from the study due totime and cost constraints. Thus, the study is subject to the limitations andpossible biases that exist in some geographical areas, which may not berepresentative of the entire Malaysia. There is a possibility that samples/firmsfrom other states of the country may lead to different findings. Furthermore,the study’s reliance on the responses of one internal informant (CEO/MD,Head Human Resource or Human Resource Manager) may lead to cognitiveand subjective bias.4) The interpretations and understanding of the questions in the questionnaire –There is a possibility that different respondents may have differentunderstanding on some questions even though clear instructions andexplanations are given. The questions are adopted from the Australian context.Thus, the applicability may not be relevant or suitable in the context ofMalaysia.12

5) The time factor – since this study is to be completed in six months’ time, theproject paper may be lacking in some aspects. However, in general, theconclusion made in this study is true and applicable to the context ofsuccession planning in Malaysia.1.7 Organization Of The StudyThis project paper contains five chapters. The first chapter focuses on the background ofsuccession planning and management practices in general, the purpose of this study,importance of this study, the research objectives, scope and limitations of the study.The second chapter aims to define succession planning and critically review the existingliterature on succession planning.The third chapter draws out the methodology of the study. In addition, the theoreticalframework of the present study is presented to show the relationships between thevariables investigated. Detailed explanations about the research instrument, samplingdesign, data collection procedures and techniques of processing and analyzing the dataare also presented.The forth chapter reviews the results of the data analysis and presents key findings of thestudy.13

The final chapter concludes the research by reinforcing the overview of the study, keyresearch findings, implications of these findings for theory and practice especially in thecontext of organizations in Malaysia. Recommendations for future research are alsoincluded.14

CHAPTER 2: LITERATURE REVIEW2.0 Chapter OverviewThis chapter will first discuss the definition and concept of succession planning. Then,the existing literatures on succession planning will be critically reviewed.2.1 Concept and Definition of Succession PlanningThe concept of succession planning has been in existence for some years. Forty years agoit was called manpower planning, and was expected to ensure that the right number ofpersonnel of the correct technical competence would be available to an organization indesired locations so that corporate objectives are achieved (Walley, 1973). Carter (1986,pp. 13-14) defines succession planning as “a means of identifying critical managementpositions, starting at the levels of project manager and supervisor and extending up to thehighest position in the organization”. Succession planning also describes managementpositions to provide maximum flexibility in lateral management moves and ensure that asindividuals achieve greater seniority, their management skills will broaden and becomemore generalized in relation to total organizational objectives rather than to purelydepartmental objectives (Carter, 1986).Succession planning and management can also be defined as “a deliberate and systematiceffort by an organization to ensure leadership continuity in key positions, retain and15

develop intellectual and knowledge capital for the future and encourage individualadvancement” (Rothwell, 2001, p.6).According to Dessler (2000), succession planning is the process of ensuring a suitablesupply for current and future successors for key jobs, so that career of individuals can bemanaged to optimize the organization’s needs and the individuals’ aspirations. Anotherdefinition of succession planning as defined by Kim is “the ongoing process ofsystematically identifying, assessing, and developing organizational leadership toenhance performance (Kim, 2003, p. 533).Whereas, Hirsh (2000, p.609) has defined succession planning as “a process by whichone or more successors are identified for key posts (or groups of similar key posts), andcareer moves and/or development activities are planned for these successors. Successorsmay be fairly ready to do the job (short-term successors) or seen as having longer-termpotential (long-term successors)”. It is a long-term process and not a one-off exercise.Succession planning and management program need not be limited solely to managementpositions or management employees. Indeed, an effective succession planning andmanagement effort should also address the needs for critical backups and individualdevelopment in any job category including key people in the professional, technical,sales, clerical, and production ranks (Rothwell, 2005). It is the process of ensuring that aqualified person is available to assume a managerial position once the position is vacant16

due to untimely deaths, resignations, terminations, or the orderly retirement of a companyofficial (Mondy, Noe and Premeaux, 1999).Succession planning program can be divided into five levels based on degree of skill orsophistication involved (Sahl, 1987). At the first level, the CEO merely asks for the nameof the subordinate who has been identified as his backup. Then, the process issupplemented by the provision of appraisal data on the performance of potentialcandidates for succession. At the third level, the career goals and growth potential of thesuccessors are incorporated into the plan. This is followed by a management developmentplan for candidates identified as potential. At the final level, all the steps outlinedpreviously are taken to ensure a smooth succession transition for all management jobs inthe firm.In general, succession planning entails three steps: identifying and analyzing key jobs,creating and assessing candidates and selecting the right individuals who will fill up thekey positions (Dessler, 2005). Top management and human resource department basedon the firm’s strategic goals identify the company’s future key position needs;management looks into the job of creating and assessing candidates for these jobs. This isfollowed by identifying potential internal and external candidates for future key positions,and then providing them with the developmental experiences they require to fill up thefuture positions. Then, these people will be assessed and selected to fill up the keypositions in the firm. According to succession planning expert Wells (2003), a strategic17

usiness plan can only be realized when the right people are at right place and at the righttime to do the right things.According to Falmer (2002), in recent years many organizations have moved away fromthe traditional term of succession planning to “talent management”, a term that is moreinclusive of the many activities that are necessary in identifying, developing, andretaining talent. This broader understanding of succession planning allowed theorganization to look beyond the issue of knowing who would replace someone, and tolook at the supportive factors needed to develop and retain talent throughout theorganization.2.2 Why Succession Planning Matters?The topic of “succession” only become popular in the last 15 to 20 years due to highlypublic and disastrous leadership transition at successful companies like General Motors(Robert Stempel), AT&T (Robert Allen) and Eastman Kodak (Kay Ehitman), as reportedby Charan (2001). He further emphasizes that corporate leaders must pay seriousattention to develop and train their existing executives who will face the futureorganizational challenges. Otherwise, survival of the organization is at stake when theexisting key personnel leave the organization due to retirement, resignation, suddendeath, etc. Organizational leadership is in crisis when the transfer of “how to get workdone” process is being lost with aging and retirement of senior management and the18

mobility of the younger workforce (Rothwell, 2001). Thus, the potential for leadershipdisasters appears to be inevitable for those who are unprepared.There are a number of factors that have and will continue to shape the businessenvironment and role of company executive in the future including globalization, hypercompetition,technology, the expectation of board and financial markets, an emphasis oncustomer relationships, changing employee expectations and workforce demographic(Barrett & Beeson, 2002). All these factors stressed that succession planning mustflourish in an organization for business continuity and to sustain competitive advantage.Rothwell (2005) and Swanston (2007) indicate that challenges associated with growingaging global workforce would be another reason why succession planning is important.The retirement of baby boomers generation (those who were born from 1946 through1964) may have greater impact on occupations with functions not easily replaced bytechnology-driven productivity innovations, such as many of the jobs in the financialservices sector: customer service representatives, branch managers and executive officer.Therefore, effective succession planning helps to retain the loss of valuable institutionalmemory when experienced workers leave the organization.Also, organizations are often faced with the need to replace key management staff on avery short notice due to rapid change of merger, acquisitions, downsizing, rightsizing,and reengineering. These increase the competitive market for skilled and talentedindividuals (Orellano, 1997). Corporate leaders are not only responsible for the19

acquisition and retention of customers, but they must also form strategy to acquire andretain new organizational talent from the declining pool of people (Barrett & Beeson,2002). Just to cite one recent example: the Central Bank of Malaysia’s (Bank NegaraMalaysia) approval for the opening of more foreign bank branches in Malaysia leads topinching of talented individuals from the local banks to foreign banks such as KuwaitFinance House, Al-Rajhi Bank, Citibank, HSBC, etc.Ang & Yap (2007b) report that Datuk Nazri Razak, CEO of the CIMB Group Malaysia,in his recent interview with the Starbiz has stated that the winning bank will be the onethat can retain the best people, and therefore, talent management will be CIMB’s focusfor year 2008. An organization’s intellectual capital has increasingly become a keysource of competitive advantage in the 21 st century, according to Kotter (1996).Organizations are fighting a war for talent (Tulgan, 2001). Therefore, withoutdevelopment of leadership throughout a company, not just at its helm, the implementationof strategy for survival and advantage is threatened.Changes around the world also have greater impact as to why succession planning isimportant for organization in Malaysia. The 9/11 attacks on World Trade Centre in U.S.took the lives of 172 corporate vice presidents. This indicates that life is fragile and talentat all levels is increasingly at risk in a world where disaster can strike unexpectedly(Rothwell, 2005). Thus, a need for effective succession planning is vital to addressbusiness continuity at times of uncertainty.20

The corporate scandals that took place in Enron, WorldCom, Tyco, Global Crossing andmany other corporations – and the incredible departure of Arthur Anderson from thebusiness world resulted in growing concern for the ethics, morality and values of futurecorporate leaders (Rothwell, 2005). In view of that, the Sarbanes Oxley Act (which wasin force since 2002), requires all corporate boards to be adequately involved in successionplanning and leadership development to ensure talented individuals with exemplaryleadership behaviour are readily available to lead the company during critical time.Charan (2007) indicates that lack of succession planning in the financial services firmsdestroys credibility in the capital markets, erodes shareholder value, and stirs anxietyinside the companies involved, making it difficult for people to stay focused and maintainmomentum. Thus, boards that failed to have such plan were being judged negligent in thecourt of public opinion.2.3 Succession Planning And Employee Turnover RateEffective succession planning and management program would boost employee’sconfidence and commitment in achieving organizational goals. Johnson et al. (1994)stress that implementation of succession program can help to reduce firms turnover rates,improve staff morale, and place the most qualified employees into key positions. Anempirical research conducted by Wallum (1993, p.44), has concluded that adoption ofsuccession planning contributed to the following positive outcomes:21

1) Helped organization with internal resourcing.2) Reduced attrition of high-fliers.3) Allowed for more realistic counseling and planning4) Prepared candidates in advance for senior appointments.According to a survey carried out by IBM Business Consulting Services in 2005, it isfound that bringing in an outsider for a middle management position, rather thancultivating an insider, could lead to more employee turnover and lower morale. Thesurvey also showed that building talent within a corporation might be a better choice thanrecruiting outsider for management positions (The New Zealand Herald, business pages,5 th May 2005).It is the responsibility of line managers or supervisors to create a proper avenue orenvironment for employees to develop their fullest potential. Failure to provide such anenvironment would increase employees’ frustrations and could result in decliningperformance level and increase turnover (Steers & Porters, 1983).In the survey conducted by Bernthal & Wellins (2001), it was found that two-third ofemployees indicated that they would rather grow inside their present organization thanleave. The study also revealed that the ultimate reason for employees to leave anorganization is that they are not being developed and/or they do not have meaningfulwork. Therefore, this is evident that effective succession planning improves theorganization’s chances of retaining key personnel.22

Prior studies have shown that outside successions are usually accompanied by frustrationand resistance from inside executives (Greiner, Cummings & Bhambri, 2002). Further,outside successions also lead to a higher level of senior executive turnover than insidesuccessions, according to Friedman & Saul (1991).2.4 Succession Planning And Firm SizeSuccession planning emerged as a research topic in 1960 through Oskar Grusky, sincethen there were many research studies completed or underway in this field. One of thecommon findings in the earlier empirical research is that there is a significant relationshipbetween the organizational size and succession characteristics. Grusky (1961) indicatesthat a succession rate varies based on the size of the firms, whereby larger organizationsexperienced more frequent successions than smaller firms. Different-sized firms requiredifferent processes for effective succession planning (Aquila, 2007). Table 2.1 showsprior research findings with regards to the relationship between succession characteristicsand firm size adopted from Kesner & Sebora (1994). McConnell (1996) indicates thatlarge firms are more likely to set up a formal department and assign individual to handlematters relating to succession than the small ones.Huang (2001) has analyzed succession management survey data gathered from 166Taiwanese firms and concludes that firm size have a significant impact on the degree ofsophistication of the succession program. Similar findings are also reported in thesuccession management research conducted by Tracy & McGraw (2004) in 71123

Australian firms. It is reported that large firms are more likely than the small ones to havesuccession program in place. According to Dalton & Kesner (1983), larger organizationsare more likely to opt for insider for succession than smaller ones. However, Schwartz &Menon (1985) challenge this finding that firm size does not have any effect on the type ofsuccessors chosen. The possible reason for inconsistencies inprior studies is that the size of the firm may not be comparable as some research usednumber of employees as firm size, whereas others used sales, profit, or book value tomeasure size.Steele (2006) finds that the larger the firm, the more likely it is to have a formalsuccession planning program in place. As the firm size increases, the number of key orcritical positions increases, resulting in mounting pressure to institute formalizedprocedures that plan succession processes.2.5 Succession Planning And Firm Type/OwnershipHuang (2001) indicates that succession planning is widely used by the subsidiaries ofAmerican–owned firms than the local firms in Taiwan as it has been initially developedabroad as a new management tool. The multinational companies (MNCs) are those mostlikely to have succession planning in place (Tracy & McGraw, 2004). This is mainly dueto their existence in global marketplace and intense competition, therefore a formalsuccession planning hinder the loss of high potentials and high performers to thecompetitors.25

2.6 Succession Planning And Firm Listing (Listed /Unlisted)Succession planning is given more attention now at public listed companies since the2002 Sarbanes-Oxley Act forced corporate boards to improve their governance practices(Wall, 2007). Similarly, in Malaysia, Part 2 (Best Practices In Corporate Governance) ofthe Malaysian Code On Corporate Governance (Revised 2007) requires all public listedcompanies (PLCs) to have a formal succession planning for its senior management. Thisrequirement is part of the principal responsibilities of the Board of Directors. Bukart et al.(2002) argue that the type and quality of the regulatory framework and corporategovernance structures can influence succession.In countries where there are weak governance structures and poor systems to protectinvestors, then the separation of ownership and management is generally seen to be toorisky. As a result, successors will normally be family members. Alternatively, incountries where governance measures are strong, family businesses may appoint aprofessional manager as successor without placing the family business interests at themercy of vested interests outside the family. Thus, what emerges is a correlation betweenan increase in corporate governance and the possibility of appointing a professionalmanager as successor. According to the founder of Asia HRD Congress Dr. Palan andAsia Strategic & Leadership Institute (ASLI) CEO Datuk Michael Yeoh, Malaysiancorporations are now more aware of the need for succession planning to establishbusiness continuity in the interest of stakeholders. Listed companies on Bursa Malaysiahave now taken active measures to develop succession plan and they have now three or26

four possible candidates that could replace the CEO if required, reports Yap & Ang(2007a).2.7 Succession Planning And Industrial SectorBased on a study conducted by Tracy & McGraw (2004), it was found thatmanufacturing, transportation, communication and retail/wholesale sector organizationswere significantly more likely to have formal succession management program, whereaseducation and service-based industries were least likely to have formal plans.2.8 Succession Planning And Firm AgeMotwani, Levenburg & Schwarz (2006) have surveyed 368 family-owned small tomedium-size enterprises (SMEs) in USA and found that there was no evidence ofrelationship between firm size and the age of the firm with regards to the importance,nature and extent of succession planning.2.9 Succession Planning And Organizational Outcomes/PerformanceThe ultimate goal of succession planning is to improve organizational performance.Studies of succession outcomes typically seek to evaluate the survey conducted byFriedman (1986) on executive succession in 235 American firms and have concluded thateffective succession planning is clearly linked to corporate performance.27

According to Fizel & D’ltri (1997), there are many conflicting findings in terms ofsuccession planning and firms’ performance over the years. As such, the relationshipbetween succession planning and firms’ performance is dependent on the characteristicsof the organizations under study. The way leadership transition and succession processesare handled can exert a significant influence on shareholders’ confidence and thus thefirm’s financial performance in the marketplace. Well-managed successions instillconfidence in heir owners and this correlates well with overall business financialperformance. Practices such as the smooth promotion of the designated heir, can lead topositive investor sentiment while surprise elevations of unknown candidates are poorlyreceived by shareholders (Shen & Cannella, 2003).Huang (2001) concludes in his study on Taiwanese firms that there is no empiricalevidence to support that firms with succession management system have better HRoutcomes than those who do not. The data collected for Huang’s (2001) study alsosuggests that the mere implementation of a succession management plan does not make asignificant difference to reported business outcomes.2.10 Characteristics Of Effective Succession Planning and ManagementAccording to Rothwell (2005, p.304), the characteristics of effective succession planningand management program are such:1) Tied the succession planning program to organizational strategic plans.28

2) Tied the succession planning program to the employees’ career plans.3) Tied the succession planning program to the training programs.4) Established measurable objectives for program operation.5) Identified what groups the program serves in priority order.6) Established a written policy statement to guide.7) Articulated a written philosophy.8) Established action plan.9) Established schedule of events based on action plan.10) Fixed responsibility for organizational oversight of the program.11) Fixed responsibility of each participant in the program.12) Established incentives/rewards for identified successors.13) Established incentives/rewards for managers with identified successors.14) Developed a means to budget.15) Devised means to keep records for individuals who are designated assuccessors.16) Created workshops to train management employees about the program.17) Created workshops to train individuals about career planning.18) Established a means to clarify present position responsibilities.19) Established a means to clarify future position responsibilities.20) Established a means to appraise individual performance.21) Established a means to compare individual skills to the requirements offuture positions.22) Established a way to review organizational talent at least annually.29

23) Established a way to forecast future talent needs.24) Established a way to plan for meeting succession planning needs throughindividual development plans.25) Established a means to track development activities and preparesuccessors for eventual advancement.26) Established a means to evaluate the results.According to the Chief Executive Magazine (April 2004, pp. 1&4), the best practices ofsuccession planning encompass four key elements. They are:1) Identify - find high potential candidates in the organization by usingconsistent, objective criteria.2) Diagnose - assess individual candidates’ strengths and weaknessescompared to the organizations’ needs.3) Prescribe - provide the right development to build competencies in theorganization.4) Monitor - ensure that the succession process works to build leaders overtime.According to Huang (2001), the success of succession planning depends on the carefulimplementation process, well-planned design, commitment of top-level management,credibility of staff, and resource allocation. In many organizations, there are a huge gapbetween the desire for effective succession planning and its actual practice (Hall, 1986).30

In 1986, Hall conducted a research on two large US based companies and identified thefollowing organizational barriers in implementation of effective succession planning:1) Reluctance of managers to give up talented people for developmental jobmoves.2) Lack of perceived strong candidates at middle and senior levels.3) Uneven implementation of formal systems, such as the profiling system.4) Evaluating and integrating management talent in newly acquiredcompanies.5) High organizational diversity of operations, with strong independentbusiness units.6) Weak corporate organization.7) Organizational technology and related mindset.8) Weak, understaffed, under-budgeted human resource staffs in most areas.9) A high-pressure, task-oriented management style which rewards successstrongly and punish for mistakes.10) Strong barriers to lateral movement (between function and betweenbusinesses).11) A complex, turbulent environment, which reduces the organization’sability to control its own destiny.31

Carey, Ogden, & Roland (2000), recommend the following 10 core principles to be usedto describe corporations that are serious about implementing and maintaining bestpractices in executive succession planning.1) They have strong, involved boards.2) They continually expose their top management team to the board.3) They encourage “next generation CEO’s” to gain exposure to outsideboard service, to the media and to the investment community.4) They form executive committees or operating committees to facilitate thedevelopment of several executives who are aware of the challenges,business plans, and strategies across the entire organization.5) They view succession planning as an ongoing and “real time” process.6) They take as much of the human drama out of the succession process aspossible.7) They link the CEO’s compensation to the development of successionplans.8) They pay their directors increasingly in stock and require the directors tomake a personal investment in the company.9) They periodically calibrate likely internal candidates for CEO againstcomparable outside leaders.10) They develop a “succession culture”32

The characteristics of an effective succession planning, according to Ostrowski (1986)are:1) Futuristic – focused on future needs of the organizational leadershipinstead of immediate placement need.2) Dynamic – the succession planning capable of change and modificationthat can be adjusted to changing business needs.3) Organic – total organizational participation.4) Continuous – must be carried out throughout the life of a corporation.Ostrowski (1986) also argues that the following conditions must exist in a firm ifeffective succession planning is to become possible.1) Total Management involvement.2) Integration of manpower forecasting and business planning.3) Periodic management assessment.The former CEO of General Electrics Co., Jack Welch, wrote in his 2001 book aboutchoosing of his successor: “Making the pick was not only the most important decision ofmy career, it was the most difficult and agonizing one I ever had to make. For at least ayear, it was often the first thing I thought about each morning and the last thing on mymind at night”. Jack Welch approached the selection process with four criteria. Hewanted his successor: to be GE’s unquestioned leader; to take the politics out of theprocess: to be young enough to be in the job for at least a decade; and he wanted the33

oard involved in the decision. His succession and leadership strategy worked very well,it is evident from the remarkable success and progress brought by his successor JefferyImmelt who was twice named as “World’s Best CEO” by Baron’s polls. For example,four days after Jeffery Immelt became CEO in September 2001, 9/11 occurred. Thatalone left GE with a US$600 million hit to insurance business and huge uncertainty in aweak economy. However, Immelt managed to turn around the GE business toprofitability in the same year. GE is now one of the most successful companies in theworld with a good track record of returns to shareholders.Davis (2008) has stressed that proper succession planning involves strategic and longterm “talent mapping” – that is, integrating the skill sets and competencies needed to fillcurrent and future leadership roles into high-potential employee development efforts andtracking individual results as these efforts go forward. Davis also argues that talent is aprecious resource, not just because it is scarce but also because it is valuable fororganizational success. By mapping existing talent against key business needs, smartcompanies can create real competitive advantage.Aquila (2007) states that succession planning is now more complex than 15 years backand has recommended 7 key best practices for succession planning implementation:1) Deployment of a process – that links succession planning and firm’soverall business strategy.2) Continuous identification of future leaders.34

3) Development plans for future leaders.4) Measure result for success5) Keep it simple6) Align succession with firms’ overall strategic objective.7) Support from top managementSeveral studies (Friedman, 1986; Pattan, 1986; McElwain, 1991; and Huang, 2001)indicate that the characteristics of effective succession planning rely on the:1) Extent to which the prescribed rules and procedures of succession andexecutive development are formalized.2) Extent to which departments and staff are assigned specific responsibilityfor succession planning.3) Extent to which auditing and follow-up are pursued in the executive or HRreview process.4) Extent to which higher-level management becomes involved in thesuccession process.5) Extent to which department heads are evaluated and compensated for theireffort to develop subordinates.6) Extent to which a firm compiles data on employees and job positions forthe purposes of succession and development.7) Extent to which selection for promotion is based on personal relationshipsand network ties.35

8) Extent to which selection for promotion is based on past performance,range of experience, and ability.9) Extent to which members of the succession planning staffs are viewed ascredible and competent in performing their job.10) Amount of time that the CEO devotes to managing succession issues.The Instep Learning Resources, UK (2005) indicates that an effective successionplanning provides a balanced impact to both the organization and individuals. Thebenefits for each are shown in the following Table 2.2.Table 2.2: The Benefits Of Succession Planning For Organization And IndividualsOrganizationIndividuals• Controlled costs for recruitment and development.• Anticipated changes.• Back-up resources in place.• Development of a talent pool of flexible people.• Leaders for the future.• Increased knowledge and skills bank.• Clarity of role.• Opportunity to develop or multi-skill.• Strong Supportive relationships.• Valued and rewarded.• Aspirations met.Source: Instep Learning Resources, UK (2005)Several studies (Kilian et al., 2005; Charan, 2005; Yukl, 2006) have discovered that theincorporation of leadership development and succession planning responsibilities intomanagerial job expectation (Key Performance Indicators / Key Result Areas) andperformance appraisal criteria would be an effective means of ensuring that successionplanning is a top priority among managers at all levels.36

Busine & Watt (2005) recommend seven measures to measure the impact of successionplanning and management activities in an organization. They are:1) The number of jobs ready for employees to fill senior jobs when theyopen.2) The percentage of jobs filled by internal candidates measured againstcompany objectives.3) Cost of acceleration pools against the cost of finding outside hires.4) Cost of turnover and de-motivation inside the organization when anoutside hire is made.5) Time it takes for an outside hire to get up to speed and the lack ofproductivity during that time.6) The attrition rate of outside hires coming into organization.7) Measuring the reduced turnover of identified pool members.37

CHAPTER 3: RESEARCH METHODOLOGY3.0 Chapter OverviewThis chapter details the research design and methodology used in the study. The studywas carried out by using survey approach. The methodology used here is based on themethod used by Taylor & McGraw (2004) who studied the succession managementpractices in Australian organizations. Here, I intend to use the same method toempirically test succession planning and management practices among private sectorfirms in Malaysia. The theoretical framework and research hypotheses will also bediscussed in this chapter. In addition, a description of the design of the researchinstrument, the sampling procedures, the method of data collection, and the data analysistechniques are provided.3.1 Theoretical FrameworkA theoretical framework is a conceptual model on how one theory or logical sense of therelationships is identified as important to the problem. The theoretical framework of thisstudy is shown in Figure 3.1. In this study, the succession system characteristics andorganizational outcomes are based on the work of Rioux & Bernthal (1999) while thecontrol variables are developed based on a number of selected organizationalcharacteristics.38

Figure 3.1: Theoretical Framework: Succession Planning Characteristics, ControlVariables, And Organizational OutcomesIndependent VariableDependent VariableSUCCESSIONPLANNINGCHARACTERISTICSORGANIZATIONALOUTCOMESCONTROL VARIABLES• Firm Age• Firm Size• Industry• Firm Listing• Ownership (National/MNC)• Employee TurnoverFrom the theoretical framework, the hypotheses, which are predictive statements aboutthe outcome, will be tested in the research. The hypotheses are:H1 (a): There is a significant difference in the practices and approach ofsuccession planning between the manufacturing and services sectors inMalaysia.39

H1 (b): There is a significant difference in the practices and approach ofsuccession planning between the national and multinational corporations.H1 (c): There is a significant difference in the practices and approach ofsuccession planning between the listed and unlisted firms in Malaysia.H2: There is a significant relationship between the succession planningcharacteristics/approach and organizational outcomes of private sectorfirms in Malaysia.H3: There is a significant relationship between the control variables andsuccession planning characteristics/approach of private sector firms inMalaysia.H4: There is a significant relationship between the control variables andorganizational outcomes of private sector firms in Malaysia.3.2 Research InstrumentProfessor Tracy Taylor of University Technology of Sydney, Australia contributed thesurvey instrument to carry out a research among private sector firms in Malaysia. Sheused the same instrument (questionnaire) to study the succession management practicesin Australian organization. The questionnaire was initially developed to assess succession40

management policies, practices and outcomes (Rioux & Bernthal, 1999). Since the surveyinstrument had been developed and tested before in a Malaysian workplace condition, byDevelopment Dimension International Malaysia, a further pilot test was not required. Theinstrument was a 6-page self-administered questionnaire consisting of four sections,namely section A, B, C and D.Section A of the questionnaire included the organization’s general profile. There were 11questions covering the organization’s current approach and readiness level for successionprogram. First, the respondent was asked to indicate whether there was a formalsuccession plan or not in his/her firm. If the respondent firm’s did have a formalsuccession plan in operation he/she was asked to indicate how long the company hadbeen in existence. This was followed by a third question on the current approach tosuccession, the respondent was asked to choose one of the 3 options that best describedthe firm’s current approach: “Heir – identify and nurture a single heir for each position”;“Pool – develop reservoir of qualified candidates who are capable of filling a number ofvacancies”; and “React – wait until a position opens, then begin searching for areplacement (without any formal pre-planning)”. Then, the respondent was asked to ratethe overall effectiveness of the firm’s current approach in making succession decision ona scale ranged from (1) ‘Not at all effective’ to (10) ‘Extremely effective’. For questionnumber 5, the respondent was asked to indicate ‘Yes’, if the respondent’s firm intendedto make changes in its approach to making succession in the next 1 to 2 years. This wasfollowed by the questions : “Which organizational level do you have clearly defined planfor succession?”; “What percentage of jobs in your organization are covered by a formal41

succession process?”; “If you were given opportunity to replace (select new individuals)any proportion (percentage) of your organization’s current leaders/managers, whatproportion would you replace?”; “If a mid-level management position suddenly becameavailable in your organization, how many internal candidates would be readily availableand qualified to fill that position?”; “When filling management positions internally, whathas been your approximate success rate?”. These questions were answered in percentageranging from 0% to 100% except for the question on availability of internal candidate formid-level management position, where respondents were given 7 multiple choice answersfrom ‘None’ to ‘More than five’. Finally, the respondent was asked to choose threereasons or challenges that drove the need for good succession planning from thefollowing 12 reasons or challenges.1) Desire to improve business results.2) Recent merger / acquisition.3) Company growth / expansion.4) New CEO or leadership change.5) Immediate vacancies.6) Poor promotion history.7) Change in the structure of management.8) Demands in the business have created new requirements.9) Retirement of current managers.10) Anticipated changes in skills of future leaders.11) Need for greater diversity in management.42

12) Need to increase retention.In Section B, 4 dimensions of the organization’s practices and approach were covered.This included organizational system, succession characteristics, an open-ended questionto list the most valuable practice in succession planning, and methods used for successioncandidate evaluation. The organizational system consisted of 7 items rated on a 5-pointLikert-type scale ranging from (1) ‘Not at all’ to (5) ‘Very much’ measures the linkage ofsuccession planning process with each item. The succession characteristics consisted of18 items rated on the same scale from (1) ‘Not at all’ to (5) ‘Very much’ measures thefirm’s degree of succession qualities/characteristics effectiveness. In addition, therespondent was also asked to list the most valuable practice in succession planning, basedon the question “What practice has been most valuable to your organization in successionplanning?” This was followed by a measurement on the method used for evaluatingcandidate for succession. It consisted of 8 items on a 5-point Likert-type scale rangingfrom (1) ‘Not at all’ to (5) ‘Very much’ to measure the degree to which organizationrelies on each of these methods for evaluating succession candidates. The firms wereconsidered to have good succession system characteristics or practices if the mean valuewas between 4 and 5. If the mean value was between 1 and 2, they were considered tohave weak succession system characteristics or practices and if the mean value was 3,they were considered to have average succession system characteristics or practices.Section C of the questionnaire measured the organizational outcomes or performance.The respondent was asked to rate his/her firm’s performance in the current year as43

compared to the previous year based on 6 items: financial performance; productivity;quality of products or services; customer satisfaction; employee satisfaction; andretention of quality employees. A 5-point Likert-type scale ranging from (1) ‘Worse’ to‘Better’ was used to evaluate organizational effectiveness. The organizational outcomesor performance in terms of financial, productivity, quality, customer satisfaction,employee satisfaction, and retention of quality employees were considered being good ascompared to last year if the mean value was between 4 and 5. If the mean value wasbetween 1 and 2, it was considered to have weak organizational outcomes or performanceand if the mean value was 3, it was considered to have average organizational outcomesor performance.The final section, Section D of the questionnaire was designed to explore theorganization’s background or demographic profile of the respondents. The demographicdata was collected using closed-ended multiple choice format, except for ‘Number ofemployees’, ‘Latest annual profit before tax’, ‘Number of years in business’, and ‘Annualstaff turnover rate’. The closed-ended questions included were the organization’s corebusiness function, organization type, organization listing in Bursa Kuala Lumpur, and therespondent’s position in the organization. This section was deliberately designed to beasked at the end of the questionnaire to prevent unnecessary resistance from therespondents in completing their questionnaire and to reduce biased response in case therespondents were aggravated with confidential nature of the questions.44

3.3 Sampling DesignThe data for this research was collected through Human Resource Department/Divisionof profit based private sector firms in Malaysia. The questionnaires were sent with acover letter to the CEO/Managing Director or Head of Human Resource of 500 firms.They were regarded as the main sources of information, largely of companies becausethey were directly responsible for the planning and implementation of strategies. Thestratified sample of 500 firms consisted of a cross-section of industrial sectors, small,middle and large, national and multinational organizations located in Klang Valley,Penang, Johor, Sarawak and Sabah. Due to the absence of previous researches done onthis discipline in the perspective of Malaysia, the current study would focus mainly ontwo large industrial sectors, namely manufacturing and services. The targeted sample sizewas 500 firms, selected through Bursa Kuala Lumpur website and other businessdirectories. Since the study was intended to focus on succession planning, a sample (firm)that had been in operation for five or more years and had seven or more employees wasused (Motwani et al., 2006). The respondents were assured that their responses were forresearch purposes only and would be kept confidential. At the beginning of thequestionnaire (as attached in Appendix 1), a definition of succession planning was givenin order for the respondents to better understand the meaning of succession planning andto avoid ambiguity.45

3.4 Data Collection ProceduresThe type of research data would be primary data, gathered through various channels,namely postal, e-mail, fax, and by hand. A total of 300 envelopes containing the surveyquestionnaire and self-addressed reply envelope were mailed to a cross-section ofmanufacturing and services sectors that was identified through Bursa Kuala Lumpurdatabase and various business directories. Besides that the survey questionnaire was alsosent via e-mail to about 100 members of Malaysia Human Resource Online(malaysiaHRonline@yahoogroups.com) website inviting Human Resource practitionersand consultants to participate. In addition, 100 copies of the questionnaire were alsodistributed in the Graduate School of Business of University of Malaya, inviting theorganizations of working postgraduate students of Master of Management (MM) andMaster of Business Administration (MBA) program to participate. The workingpostgraduate students were requested to forward the questionnaires to their respectiveorganizations’ Human Resource Department/Division. To increase the response rate afollow-up via phone call and e-mail reminder was sent 3 weeks after the initial mailingsor e-mail. The name of the participating respondent’s firm was recorded and monitoredto ensure that the data was captured from one respondent only in each firm. According toTaylor & McGraw (2004), the purpose was to collect information pertaining tosuccession planning and management practices as well as demographic descriptors suchas age, size, ownership, staff turnover, and industry type of the firm. A copy of thequestionnaire and cover letter were presented in Appendix 1. The data was collected overa period of 3 months (October to December 2007).46

3.5 Data Analysis TechniquesThe data collected was analyzed through Statistical Package for Social Sciences (SPSS)Version 13. The data was first coded in alphabetical and numerical order and then keyedin into the statistical program. Then, the data was screened and treated for errors andmissing values. The selection of techniques to analyze the results of this study was basedon the research objectives. The descriptive analysis, reliability analysis, Pearson’scorrelation, independent sample t-test, multiple regression, and factor analysis was usedto test the hypotheses. The data was first analyzed with a descriptive analysis from SPSSproviding data for frequency and percentage of demographic, succession characteristicsand organizational outcomes.A reliability analysis was then employed to study the properties of measurement scalesand the items, which made up the scales. This procedure calculated the measures of scalereliability and provided information about the relationships between individual items inthe scale. The reliability measurement was used to ensure that the developedscales/factors measured consistently what were intended to be measured; the Cronbach’scoefficient alpha was employed to test reliability. The data was reliable and acceptablefor further analysis if the alpha coefficients were more than 0.6 as indicated by Malhotra(2004), and more than 0.7 by Nunnaly (1978) and Hair, Black, Babin, Anderson &Tatham (2006).Further, an Independent sample t-test was conducted to test whether there was asignificant difference between the industrial sectors, i.e. manufacturing and services,47

etween national and multinational corporations, and between listed and unlistedcompanies. Then, Pearson’s correlation was used to test the direction, relationship andstrength of each independent variable in influencing the dependent variable.The data was then analyzed using a multiple regression analysis. The regression analysiswas used in this study to determine the prediction power between a dependent variableand a single or multiple independent variables. It allowed for simultaneous investigationof the effect of two or more independent variables on a single interval-scale dependentvariable (Zikmund, 2000). The multiple regression analysis was conducted to determinewhether there was a relationship between succession planning characteristics,organizational outcomes and demographic variables.48

CHAPTER 4: RESEARCH RESULTS4.0 Chapter OverviewThis chapter presented the findings of the survey. It began with a description of thegeneral characteristics of the participating firms and demographic comparison. This wasfollowed by the discussion on practices and approach of succession planning by differentsizes of firms. A comparison would also be made between the firms’ practices andapproach of the two major industrial sectors, firm type, and firm listing. The results ofCronbach’s coefficient alpha for reliability, means, and factor loadings for successionplanning characteristics and the organizational outcomes would then be examined. Then,the results of correlation analysis for organizational outcomes, succession planningcharacteristics and the 6 control/demographics variables were discussed. Finally, theresults of the multiple regression analysis were presented using organizational outcomesas the dependent variables and the demographic characteristics, and successioncharacteristics as the independent variables. The results of the study would be discussedin accordance to the research objectives and hypothesis of the study.4.1 Response RateOut of 500 questionnaires sent out through various channels, only 108 usablequestionnaires were received and used for analysis, giving a usable response rate of21.6%. Although the response rate was low but comparatively it was still better thanseveral studies, such as Islam, Hamid, & Karim (2007) at 17.5%, Gilgeous & Gilgeous49

(2001) at 15.4%, and Koch & McGrath (1996) at 6.5%. The lower response rate wasbasically due to the absence of formal succession planning in many organizations inMalaysia and also resistance from firms to participate in the survey as the informationrequired in the survey was highly confidential in nature. Table 4.1 showed the overallresult of response rate.Table 4.1: Response RateMethod of QuestionnaireDistributionNumber of QuestionnairesSent Returned UsablePost 300 35 35E-mail 100 48 46By hand 100 27 27Total 500 110 108Rate of usable response 21.6%4.2 Characteristics Of The Demographic ProfileThe respondents of the survey were from two main industrial sectors in Malaysia, namelyservices (74.1%) and manufacturing (25.9%). Most of the respondents (73.1%) whoanswered the questionnaires were those who had direct accessibility to management orhuman resource information such as Managing Director or Chief Executive Officer, Headof Human Resource/Human Resource Manager, and Human Resource Consultant. Interms of the age of the firms, 18.5% of the responding firms were established for lessthan 10 years, 23.2% of the firms were established between 10 – 15 years, and 58.3% ofthe firms were established for more than 15 years.50

Out of the 108 responding firms, 53.7% were national type with business presence onlyin Malaysia and not in other countries while 46.3% indicated that they were multinationalorganizations with operations/affiliate offices in several countries. In terms of the firms’listing in Bursa Kuala Lumpur, 33.3% of the firms surveyed were listed and theremaining 66.7% were unlisted.With regards to the size of the firm, categorization of firm size as small, medium andlarge was done based on the number of full time employees employed by the firm asshown in Table 4.2.Table 4.2: Categorization Of Firm SizeSectorCategorization of firm size by no. of full time employeesSmall Medium LargeManufacturing / Services 5 to 50 51 to 150 Above 150Source: Ministry Of Domestic Trade & Consumer Affairs (2008)The firm was categorized as small if the number of full time employees employed was 5to 50 employees, medium for 51 to 150 employees and large for above 150 employees.Thus, 67.6% of the respondents were from large firms employing more than 150 people,this was followed by medium-sized firm (13.9%) employing 51 to 150 people and smallsizedfirm (18.5%) employing 5 to 50 people.51

About 67.8% of the firms surveyed were reporting more than RM10 million annual profitbefore tax and having staff turnover rate of 10% and below (62.0%) per annum. Thedetailed descriptive statistics relating to the profiles of the responding firms are shown inTable 4.3.52

Table 4.3: Characteristics Of The Demographic ProfileItem Frequency %Industrial SectorManufacturing 28 25.9Services 80 74.1Total 108 100Firm Type/OwnershipNational 58 53.7Multinational 50 46.3Total 108 100Firm Listing In Bursa MalaysiaListed 36 33.3Unlisted 72 66.7Total 108 100Firm Size (No. of Employees)5 - 50 (Small) 20 18.551 – 150 (Medium) 15 13.9150 & Above (Large) 73 67.6Total 108 100Age / Years of EstablishmentLess Than 10 years 20 18.510 - 15 years 25 23.2More than 15 years 63 58.3Total 108 100Employee Turnover Rate10% and below 67 62.011% - 20% 20 18.621% - 30% 8 7.4Above 30% 13 12.0Total 108 100Latest Profit Before Tax (PBT)Less than RM10mil. 20 32.2RM10mil. – RM100mil. 21 33.9More than RM100mil. 21 33.9Total 62 100Missing Cases 46Respondents’ PositionManaging Director / CEO 7 6.5Head of HR / HR Manager 58 53.6HR Consultant 14 13.0Others 29 26.9Total 108 10053

4.3 Characteristics Of The Succession SystemTable 4.4 provided a summary of the survey results by organization size. Overall, 61 outof 108 (56.5%) firms surveyed had formal succession plan. From the 56.5%, large firmsconstituted about 45.4%, while medium to small-sized firms constituted about 11.1%. Forthose with formal succession plan, 70.5% had been using them for five or fewer years(mean = 6.5 years, median = 4 years, and mode = 5 years). Based on the analysis, it wasevident that large firms were significantly more likely to report having formal successionplan as compared to medium and small-sized firms. This could be due to the fact thatlarge firms had more financial resources and in-house personnel to develop and maintainthese plans.Table 4.4: Formal Succession Plan By Firm SizeDoes yourorganizationhave aformalsuccessionplan?Small(5-50 employees)Firm SizeMedium(51-150 employees)Large(>150 employees)Totalnumber ofrespondentsYes 4 (3.7) 8 (7.4) 49 (45.4) 61 (56.5)No 16 (14.8) 7 (6.5) 24 (22.2) 47 (43.5)Total 20 (18.5) 15 (13.9) 73 (67.6) 108 (100)Note: Figures in Parentheses are percentagesIn terms of the firms’ approach to succession plan, the majority of respondents (39.8%)indicated that their organizations adopt a “pool” approach, which was defined as,“worked to develop a reservoir of qualified candidates who are capable of filling a54

number of vacancies” on the questionnaire. This was followed by the “react” approach,“wait until a position opens, then begin searching for a replacement” (38%), and the“heir” approach of “identifying and nurturing a single heir for each position” (22.2%),when analyzing the approach taken by firms according to industrial sector, differencesbetween sectors were apparent. The “react” approach was most common inmanufacturing sector (46.4%) and the “pool” approach was most largely used in servicessector (46.3%), as detailed in Table 4.5.Table 4.5: Firms’ Approach To Succession Planning By Industrial SectorFirms’ approach tosuccession planning.ManufacturingSectorServicesTotalHeir 9 (32.2) 15 (18.7) 24 (22.2)Pool 6 (21.4) 37 (46.3) 43 (39.8)React 13 (46.4) 28 (35.0) 41 (38.0)Total 28 (100) 80 (100) 108 (100)Note: Figures in Parentheses are percentagesHeir – identify and nurture a single heir for each position.Pool – develop a reservoir of qualified candidates to fill vacancies.React – wait until a position opens, then begin searching.Firms which had participated in this survey represented a cross-section of services andmanufacturing firms in Malaysia. Though the survey data was not representative of allbusinesses in Malaysia, but overall it covered the practices of two main industrial sectorin Malaysia in which most people were employed, i.e. services (51.4%) andmanufacturing (29.2%), as reported by Economic Planning Unit, Department of Statistics55

Malaysia (2007). Table 4.6 below showed the percentage of employment by industrialsector in Malaysia from 2001 to 2007.Table 4.6: Percentage Of Total Employment By Industrial Sector In Malaysia 2001-2007EmploymentUnitYears2001 2002 2003 2004 2005 2006 2007*Total 000’ 9,379 9,709 10,047 10,464 10,893 11,144 11,363Services % of total 49.9 50.3 50.2 50.4 51.0 51.4 51.4Manufacturing % of total 26.4 26.7 27.6 28.4 28.7 28.8 29.2Agriculture % of total 15.1 14.6 14.1 13.4 12.9 12.5 12.2Construction % of total 8.2 7.9 7.7 7.3 7.0 6.8 6.8Mining % of total 0.4 0.4 0.4 0.4 0.4 0.4 0.4Note: * EstimatesSources: Economic Planning Unit, Department of Statistics, Malaysia (2008).While most firms (56.5%) in Malaysia had a succession planning in place, many hadindicated that the existing succession system or approach were moderately effective(mean = 5.47, on a scale of 1 = not at all effective, 5 = moderately effective, 10 =extremely effective). This indicated that some of the responding firms were not satisfiedwith the way succession decisions were currently made in their respective firms. Further,the majority (56.5%) of the respondents had indicated that their organizations intend tomake changes in their approach to succession decisions in the next 1 to 2 years. This wasbecause succession planning is becoming an important tool in developing future leadersin organization who will be responsible in implementing the firm’s business strategy andachieve its organizational objectives (Huang, 2001).56

In terms of organizational levels or group of employees that were included in successionplans, majority of organizations (56.5%) responded that they had succession plans for toplevel management which covered CEO and his direct reports. This was followed byfunctional department manager (50.9%), multi-department manager or manager ofmanagers (49.1%), first-level functional supervisors (29.6%) and individual contributors(19.4%). In the past, only important leadership positions were the primary focus in thesuccession planning process. However, now organizations have considered adding morelevels to their succession plans to include employees in middle management and nonmanagementpositions due to talent shortage (SHRM, 2006). Further, most of therespondents (71.3%) had indicated that only less than 50% of the jobs in theirorganizations were covered under formal succession. This meant that more than 50% ofthe jobs in the participating firms were not covered by formal succession process.All respondents, regardless of whether the organization that they were working in had aformal succession or not, were asked to indicate that if they were given a choice toreplace their current leaders or managers, what proportion would they replace. For whichmajority (64.8%) of them answered that they would replace less than 50% (mean = 47%,median = 45%, and mode = 30%) of the current leaders or manager. In terms of fillingmanagement position internally, 82.4% of the organizations had identified candidatesinternally before it became vacant. Of these organizations, 10.2% practice replacementplanning whereby a single candidate was identified versus 72.2% which was identifiedfrom a pool of candidates. Most of the organization (72.2%) had indicated more than50% success rate (mean = 66.4%, median = 70%, and mode = 60%) for having internal57

candidate to fill up management position when it became vacant. Therefore, an inferencecould be made that the respondents’ organizations believed internal candidate might beable to lead the organization successfully as compared to external candidate should therebe any leadership change in the organization. The full reports of these findings weremade available in Appendix 2.Table 4.7: Reasons For Succession Planning By Firm SizeReasons for using succession planningSmall(%)Firm SizeMedium(%)Large(%)Total(%)Company growth/expansion 12.0 8.3 33.3 53.6Desire to improve business results. 11.1 4.6 35.2 50.9Demand in business which had created newrequirements.13.0 5.6 17.6 36.2Change in the management structure 6.5 5.6 21.3 33.3Need to increase retention 1.9 6.5 15.7 24.1New CEO 2.8 1.9 14.8 19.5Anticipated changes in skills of future leaders 0 5.6 12.0 17.6Need for greater diversity in management. 3.7 1.9 11.1 16.7Poor promotion history 1.9 0 13.9 15.8Immediate vacancies 1.9 2.8 11.1 15.7Recent merger /acquisition 0.9 0.9 9.3 11.1Retirement of current managers 0 0 7.4 7.4Table 4.7 showed the reasons for using succession planning program by firm size. Therewere a number of reasons that pushed organizations to put in place a good successionprogram. Overall, the results showed that the ultimate reasons for the use of successionplanning program were related to company growth (53.6%) and desire to improvebusiness results (50.9%). The third reason for the use of such a system was due to the58

demand in the business which had created new skills requirements. However, the leastpreferred reason for succession planning program would be retirement of currentmanagers (7.4%) and recent merger/acquisition (11.1%). In terms of succession planningreason by firm size, large firms indicated that the ultimate reason was their desire toimprove business results (33.3%), whereas the medium (8.3%) and small-sized firms(12.0%) had indicated company growth as their ultimate reason for having successionplanning program. Desire to improve business results as ultimate reason for successionplanning program, appeared to be consistent with the findings of firms surveyed inAustralia (Taylor & McGraw, 2004) and United States and Europe (Rioux & Bernthal,1999). These firms felt that an effective succession planning process was needed toensure that leaders with the right capabilities were available at the right time to drivebusiness results.4.4 Mean AnalysisMean analysis was conducted to measure the effectiveness of organizational systemlinkage to succession planning and to identifying methods used for evaluating candidatesfor succession planning.4.4.1 Organizational System Linkage To Succession PlanningTable 4.8 presented the means and standard deviations to show the extent to which anorganization’s succession planning process was linked to other human resource59

management system. Majority of the responding firms had indicated that their firms’succession planning system was linked to their performance management (mean = 3.64),training & development (mean = 3.44), and career planning (mean = 3.41). However, fewfirms linked succession planning system to compensation (2.97), equal employmentopportunity or affirmative action (mean = 2.96). Overall, the result of the mean analysisindicated that on average the succession planning system was linked to organizationalsystem. The average linkage was mainly due to the fact that the succession planning wasstill in its infancy in Malaysia.Table 4.8: Organizational System Linkage To Succession Planning By Firm Size,Mean And Standard DeviationOrganizational SystemSmallMean(SD)Firm SizeMediumMean(SD)LargeMean(SD)TotalMean(SD)Performance management 3.05(1.10)4.13(0.74)3.70(0.83)3.64(0.92)Training and development 2.50(1.36)4.07(0.88)3.56(0.99)3.44(1.15)Career planning 3.00(0.97)3.80(0.86)3.44(0.83)3.41(0.89)Recruitment and selection 2.65(1.35)3.80(1.01)3.41(1.07)3.32(1.16)General Management And Development Programs 2.40(1.35)3.47(0.74)3.36(1.01)3.19(1.11)Compensation 2.10(1.12)3.27(0.70)3.15(0.89)2.97(1.01)Equal employment opportunity / affirmative action 2.50(0.95)3.40(0.74)3.00(0.97)2.96(0.97)Note: Figures in Parentheses are standard deviation.60

Prior studies found that the most effective succession plans were those closely linkedwith and built upon available information from existing human resource managementsystem, such as performance appraisal, management development, training anddevelopment, compensation, EEO and affirmative action, career planning, andrecruitment (Borwick, 1992; Buckner & Slavenski, 1994; Moore, 1986). Further, severalcorporate case studies summarized by Eastman (1995) provided evidence of suchintegration for effective succession planning implementation.4.4.2 Identifying And Evaluating Candidates For Succession PlanningIn identifying and evaluating succession candidates, most firms indicated that they reliedon data drawn from performance appraisal (mean = 3.92), as depicted in Table 4.9. Also,a significant number of firms used data from interviews (mean = 3.47), analysis of worksamples (mean = 3.43) and recommendations (mean = 3.36). However, very few firmsused evaluating techniques like personality test (mean =2.88), 360-degree assessment(mean = 2.76), simulation or role play (mean = 2.68), and paper-pencil ability test (mean= 2.44). Buckner & Slavenki (1994) suggest that succession candidates should beidentified through formal assessment methods such as performance appraisal and othersources of job-relevant information, such as psychological tests and assessment centers.According to Taylor & McGraw (2004), firms with highly effective successionmanagement systems tend to use a range of methods, particularly multi-rater instrumentssuch as 360-feedback, simulations and assessment centers to evaluate succession61

candidates. The use of wide range of techniques is apparent in large firms as they arewell-developed and well-resourced.The survey findings in Table 4.9 also explained that large firms focused mainly onperformance appraisal data, whereas the mid-sized firms used more interviews inevaluating their succession candidates. It was widely recognized that performanceappraisal data was only as reliable as the system that generated it. Nevertheless, firms inMalaysia should seriously consider other methods to identify and evaluate candidate forsuccession planning in order to have the right talents to match the firms’ key positions.The findings of this research were consistent with findings of prior research whereperformance appraisal data was viewed as an important source of information inidentifying candidates for succession planning (Mahler & Gaines, 1983; Rothwell, 1994).62

Table 4.9: Methods Used For Evaluating Candidates For Succession Planning By Firm Size,Mean And Standard DeviationMethodsSmallMean(SD)Firm SizeMediumMean(SD)LargeMean(SD)TotalMean(SD)Performance appraisal data 3.25(1.16)3.60(1.12)4.16(0.85)3.92(1.02)Interviews 2.85(1.50)3.87(0.83)3.56(1.04)3.47(1.15)Analysis of work samples or outputs 3.25(1.29)3.27(1.10)3.51(0.92)3.43(1.02)Recommendations 2.90(1.16)3.20(1.15)3.52(1.20)3.36(1.20)Personality / Psychological testing andassessment2.15(1.50)2.40(1.18)3.18(1.12)2.88(1.27)360-degree assessments 2.10(1.65)3.20(1.52)2.85(1.49)2.76(1.55)Simulations and/or role plays 2.15(1.14)2.27(0.80)2.90(1.08)2.68(1.10)Paper-pencil ability testing 1.80(1.11)2.20(1.01)2.66(0.99)2.44(1.06)Note: Figures in Parentheses are standard deviation.4.5 Internal Consistency Reliability AssessmentsTable 4.10 showed the coefficient alpha scores for the entire variables. In order to ensurethat the developed scales/factors measure consistently what were intended to bemeasured, the Cronbach’s coefficient alpha (Cronbach’s & Meehl, 1955) was employedto test their reliability. The acceptable level of reliability coefficient was 0.70 or greateras proposed by Nunnally (1978) and Hair et al. (2006). They further stress that alphacoefficient that is below 0.70 should therefore be dropped from subsequent analysis as it63

had limited use in regression analysis due to its low reliability. As shown in Table 4.10,the alpha coefficients for the dependent variable (Organizational Outcomes) and all theindependent variables (Succession Planning Characteristics, Organizational System, andMethods of Evaluation) were more than 0.70. The succession planning characteristicsdimension indicated an alpha value of 0.959, which was considered a relatively highreliability estimate. This was followed by organizational outcomes, organizationalsystem, and methods of evaluation at alpha value of 0.921, 0.909 and 0.864 respectively.This indicated that the dimensions/variables used in this exploratory research were highlyreliable and acceptable.Table 4.10: Cronbach’s Alpha Comparison Between VariablesVariables Cronbach’s Alpha No. of ItemsOrganizational Outcomes 0.921 6Succession Characteristics 0.959 18Organizational System 0.909 7Methods of Evaluation 0.864 84.6 Independent Sample T-TestThe independent sample T-Test was used to determine whether there were any significantdifferences between the industrial sector, firm type and firm listing with regards topractices and approach of succession planning in Malaysia. This test was suitable asCoakes & Steed (2007) indicate that the independent T-Test is an appropriate measure to64

conduct when the participants in one condition were different from the participants in theother condition.4.6.1 Practices And Approach Of Succession Planning By Industrial SectorThe practices and approach of succession planning between the services andmanufacturing were analyzed using the t-test to see whether any differences existbetween the two sectors in terms of their practices and approach to succession planning.Mean values of the two groups were compared. The results were presented in Table 4.11.Table 4.11: Practices & Approach Of Succession Planning By IndustryVariables Manufacturing Services Total Sig.*Organizational System 3.22 3.29 3.25 0.702Succession Characteristics 3.01 3.23 3.12 0.259Methods of Evaluation 3.05 3.14 3.09 0.631Note: * Level of significance using t-tests.As shown in Table 4.11, the average mean value for the 3 dimensions of successionplanning practices and approach was above 3.0. This indicated that the firms in themanufacturing and services sectors in Malaysia had an effective system in implementingits succession planning. The following hypothesis H1(a) was tested to see whether therewas any significant difference between the two industrial sectors.65

H1 (a): There is a significant difference in the practices and approach ofsuccession planning between the manufacturing and services sectors.The result showed that the 3 dimensions of succession practices and approach were notsignificant (p > 0.05), thus H1(a) was not supported and concluded that there was nostatistically significant difference found between the manufacturing and services sectorsin terms of the 3 dimensions of practices and approach of succession planning i.e.organizational system (p = 0.702), succession characteristics (p = 0.259), and methods ofevaluation (p = 0.631). Since no past research had been conducted in this area, nocomparison could be made. The studies by Tracy & McGraw (2004) and Huang (2001)had not attempted to make industry comparison with regards to this area.4.6.2 Practices And Approach Of Succession Planning By Firm Ownership / TypeThe t-test was also conducted to examine whether there was a significant difference in thepractices and approach of succession planning between the national and multinationalcorporations. Table 4.12 summarized the results of independent t-test for firm type.Table 4.12: Practice & Approach To Succession Planning By Firm TypeVariables National Multinational Total Sig.*Organizational System 3.11 3.47 3.29 0.018Succession Characteristics 3.02 3.34 3.18 0.059Methods of Evaluation 2.89 3.38 3.13 0.002Note: * Level of significance using t-tests.66

H1 (b): There is a significant difference in the practices and approach ofsuccession planning between the national and multinational corporations.The results showed that the overall mean value of practices and approach of successionplanning was high for multinational organizations as compared to national organizations.This was because the multinational organizations were very diversified in their nature ofbusiness and they had enough resources to provide a well-developed and sophisticatedplan for succession to ensure leadership continuity. According to Tracy & McGraw(2004), the multinational companies (MNCs) were those most likely to have successionplanning in place. When the differences between the two types of organizations withrespect to practices and approach of succession planning were examined, the study foundthat only two dimensions were significant (at p < 0.05), namely organizational system (p= 0.018) and methods of evaluation (p = 0.002). It was noteworthy that there weredifferences in terms of organizational system linkage planning and methods used forevaluating candidates for succession planning between the national and multinationalcorporations. Thus, H1(b) was partially supported. The multinational corporations whichwere mostly managed by Western Society (e.g. United States and Europe) had significantlinkage between their organizational system and succession planning as compared toMalaysia (DDI, 2006).However, no significant difference was found between the two types of organization withregards to succession characteristics. This indicated that organization type had no impact67

on succession characteristics as both the national and multinational corporations hadsome similarities in their approach to succession planning.4.6.3 Practices And Approach Of Succession Planning By Firm ListingIn terms of firm listing, the mean values of listed firms were higher than the unlistedfirms for all the 3 dimensions of practices and approach of succession planning. Thisprobably was due to the fact that all public listed companies (PLCs) were required by theMalaysian Code On Corporate Governance (Revised 2007) to have a formal successionplanning for their senior management. Thus, listed companies were more concerned oversuccession issues as compared to unlisted companies.Table 4.13: Practices & Approach To Succession Planning By Firm ListingVariables Unlisted Listed Total Sig.*Organizational System 3.24 3.34 3.29 0.569Succession Characteristics 3.16 3.20 3.18 0.803Methods of Evaluation 3.06 3.23 3.14 0.292Note: * Level of significance using t-tests.H1 (c): There is a significant difference in the practices and approach ofsuccession planning between the listed and unlisted firms in Malaysia.No significant difference was found between the listed and unlisted firms with regards tothe practices and approach of succession planning. Table 4.13 showed the 3 dimensions68

of practices and approach of succession planning with p-value of more than 0.05. Thisindicated that the listed and unlisted firms did not differ with respect to the 3 dimensionsof succession planning. As such, H1(c) was not supported. Since no past research had beenconducted on this issue, no comparison could be made.4.6.4 Summary Of Independent Sample T-TestTable 4.14 showed the summary of T-Test for the 3 dimensions of practices and approachof succession planning by industrial sector, firm type and firm listing. Coakes & Steed(2007) argued that the hypothesis could not be rejected if sig. value < 0.05.Table 4.14: Significance Difference Between Succession Planning Practices/Approach ByIndustrial Sector, Firm Type/Ownership, And Firm ListingVariablesSector(Manufacturing vsServices)H1(a)Ownership(National vsMultinationals)H1(b)Listing(Listed vsUnlisted)Organizational System No Yes NoSuccession Characteristics No No NoMethods of Evaluation No Yes NoHypothesis Testing Not Supported Partially Supported Not SupportedH1(c)Based on the findings, hypothesis H1(a) and H1(c)were not supported as there were nosignificant difference in terms of practices and approach of succession planning forindustrial sector and firm listing. However, hypothesis H1(b) was partially supported sincethe national and multinational differed significantly for 2 dimensions of practices and69

approach of succession planning, i.e. the organization system and methods of evaluationdimensions in which the multinational corporations were found to be more sophisticatedthan the national type corporations.4.7 Factor AnalysisFactor analysis was performed on the 18 statements/items of succession planningcharacteristics and 6 statements/items of organizational outcomes to identify theunderlying dimensions measured by the statements. The factor analysis was conducted todetermine whether the data could be condensed or summarized into smaller set of factorsor dimensions. The collected data was sufficient to run factor analysis as the minimumnumber of observation was 50 (Hair et al., 2006). Further, the factor analysis provided thetools for analyzing the structure of interrelationship (correlations) among large number ofvariables by defining the sets of variables that were highly interrelated, known as factors.4.7.1 Factor Analysis Of The Succession Planning Characteristics StatementsA principal components analysis (PCA) with varimax rotation was performed forsuccession planning characteristics to determine formation of any grouping. Prior toperforming PCA, the suitability of data for factor analysis was assessed. Pallant (2001)suggests that factor analysis is considered appropriate if the value of coefficients is 0.3and above in the correlation matrix. The Barlett Test of Sphericity and Kaiser-Meyer-70

Olkin (KMO) were also used to assess the factorability of the data. Table 4.15 showedthe results of factor analysis.The results indicated that the Bartlett Test of Sphericity (Bartlett, 1954) reachedstatistical significance (Chi-Square = 1633.69, p < 0.000) and the Kaiser-Meyer-Olkin(KMO) Measure of Sampling Adequacy was 0.934, exceeding the recommended value of0.60 (Kaiser, 1974; Tabachnick & Fidell, 2001). These results suggested that thefactorability of the data was considered appropriate. Using eigenvalue of > 1, theanalysis produced two factors, accounting for 66.7% of total variance explained. Hair,Anderson, Tatham & Black (1995) suggest that for social science studies, it is notuncommon to consider a solution of about 60% as satisfactory.Factor 1 (F1) and Factor 2 (F2) explained 60.1% and 6.6% of the variance respectively.To facilitate easy interpretation, these factors were then rotated using the varimaxcriterion for orthogonal rotation. Only statements/items with factor loadings of 0.50 andabove in the rotated factor matrix were considered as significant in interpreting thefactors. Table 2 showed the factor matrix indicating the factor loadings of every variableon these two factors. Factor 1 (F1) and Factor 2 (F2) comprised 12 statements/ items and6 statements/items, respectively. By analyzing the items in the factors, some interpretabledimensions could be identified (see Table 4.15 for the results of factor analysis). Factor 1,was labeled as “Strategic” and Factor 2 (F2) as “Reactive”. The first factor (F1),“Strategic” succession planning practices contained 12 items (eigenvalue = 10.8).71

Table 4.15: Characteristics of Succession Planning: Scale Items, Means, StandardDeviations (SD), KMO, Bartlett’s Test For Sphericity And Factor LoadingsScale/Items : Characteristics of Succession PlanningMean (SD)Managers are rewarded for development of staff 2.96 (1.21) .832Shares ownership across all levels of the organization 3.10 (1.24) .823Contains a time frame for achieving planned actions. 3.19 (1.13) .777Relies on a computerized tracking system. 2.61 (1.19) .758Uses objective assessment 3.28 (1.13) .728Involves line management to identify and develop candidates. 3.27 (1.09) .713Lists well defined requirements and competencies3.10 (1.14) .704Measures/considers employee career wishes and aspirations 3.11 (1.16) .683Openly shares information with succession candidates 2.85 (1.13) .610Used to improve organizational outcomes 3.32 (1.07) .608To fill future jobs 2.99 (1.12) .577Relies on HR staff to provide functional support and advising 2.97 (1.31) .509Factor LoadingsF1 F2Involves the CEO (or most senior leader) 3.53 (1.22) .822Focuses on finding candidates for existing job openings. 3.56 (0.97) .703Includes development as part of succession management 3.35 (1.07) .685Is linked to business strategy 3.27 (1.03) .683Is supported by senior management 3.47 (1.08) .679Changes in response to changing business plan 3.13 (1.10) .642Eigenvalue 10.82 1.19Percent of variance 60.10 6.60Cumulative percent 60.10 66.70KMO Measures of Sampling Adequacy = 0.934Bartlett’s Test of Sphericity = (Chi-Square = 1633.94, p < 0.000)Factor 1 (F1) : StrategicFactor 2 (F2) : Reactive72

Whereas the second factor (F2), classified as “Reactive” practices of succession planning,contained 6 items (eigenvalue = 1.19).The items on succession planning characteristics in this study were not similar to Tracy &McGraw (2004) except for the number of factors produced i.e. 2 factors. Items that wereloaded in factor one (FI) in this study were loaded in factor (F2) in previous studyconducted by Tracy & McGraw (2004). The plot of eigenvalue in Figure 4.1 was basedon the Latent Root Criterion, which clearly depicted the point where the eigenvalueleveled off at 1.0 and therefore denoted the point (vertical dotted line crossing thehorizontal axis) where the factor loading should be stopped. Catell (1966) hasrecommended retaining all factors above the elbow, or break in the plot, as these factorscontribute the most to the explanation of the variance in the data set.73

Figure 4.1: Eigenvalue Plot For Scree Test Criterion – Succession PlanningCharacteristics12108Eigenvalue642Latent Root (Eigenvalue) > 10123456789101112131415161718Component NumberTable 4.15 also showed the mean value for each statement of succession planningcharacteristics, the responses to each statement were multiplied by each evaluation of thefive scales respectively, and summed for the mean of the sample. Higher mean wasreported for statements – “focuses on finding candidates for existing job openings” and“involves the CEO or most senior leader” at mean value of 3.56 and 3.56, respectively.However, lower mean was reported for statements – “relies on a computerized trackingsystem” and “openly shares information with succession candidates” at mean value of2.61 and 2.85, respectively. The overall means of the statements/items were higher than74

3.00 on average, indicating that the responding firms had effective approach tosuccession planning.4.7.2 Factor Analysis Of The Organizational Outcomes StatementFactor analysis was also performed on the 6 items of organizational outcomes. Theprinciple components analysis performed extracted one factor with eigenvalue greaterthan 1.0. This one factor accounted for 72.37% of the variance explained with eigenvalueof 4.34. The solution could not be rotated as it produced only one factor/component.Table 4.16 and Figure 4.2 showed the factor analysis results for the organizationaloutcomes or performance variable.Mean of the organizational outcome was highest (mean = 3.92) for statement/item-“financial performance” and lowest (mean = 3.33) for statement/item-“employeesatisfaction”. Overall, the mean value for organizational performance was above average,indicating that the responding firms’ performance as a whole was slightly better than theprevious year (2006).75

Table 4.16: Organizational Outcomes: Scale Items, Means, Standard Deviations (SD),KMO, Bartlett’s Test For Sphericity And Factor LoadingsScale/Items : Organizational OutcomesMean (SD)Factor LoadingsF1Employee satisfaction 3.33 (1.05) .885Quality of products or services 3.71 (0.87) .862Customer satisfaction 3.64 (0.86) .851Productivity 3.73 (0.77) .847Retention of quality employees 3.35 (1.04) .843Financial performance 3.92 (0.81) .815KMO Measures of Sampling Adequacy = 0.877Bartlett’s Test of Sphericity = (Chi-Square = 468.63, p < 0.000)Eigenvalue 4.34Percent of variance 72.37Cumulative percent 72.37Figure 4.2: Eigenvalue Plot For Scree Test Criterion-Organizational Outcomes54Eigenvalue32Latent Root (Eigenvalue) > 110123Component Number45676

4.8 Pearson Product-Moment CorrelationCorrelation analysis was used to describe the strength and direction of the linearrelationship between two variables (Pallant, 2001). The correlation analysis determinesthe relationship or association between the organizational outcomes (dependent variable),succession planning characteristics (independent variable), and demographic variables(control variable). Table 4.17 displayed a correlation matrix using the Pearson Product-Moment correlation coefficient for all variables. According to Cohen (1988), the valueof Pearson’s correlation is divided into three areas. A correlation coefficient between0.10 and 0.29 will indicate a small correlation, a correlation coefficient between 0.30 and0.49 will indicate a medium correlation, and a correlation coefficient between 0.50 and1.0 will indicate a large correlation. From Table 4.17, some variables were able to showsignificant bivariate relationship between each other.The results of the correlation analysis indicated that the organizational outcomes (mean =3.61) scored higher mean as compared to succession planning characteristics (mean =3.17). Organizational outcomes showed a significant positive correlation with successionplanning characteristics (r = 0.62, p < 0.01), firm age (r = 0.26, p < 0.01), firm type (r =0.29, p < 0.01), and firm size (r = 0.19, p < 0.05). However, significant negativecorrelation was reported for staff turnover rate (r = -0.412, p < 0.01). In addition,significant positive correlation was also found between succession planningcharacteristics and firm size (r = 0.23, p < 0.05), between firm age and firm size ( r =0.28, p < 0.05), between firm age and firm type (r = 0.21, p < 0.05), between firm size77

and firm type (r = 0.22, p

Based on the results reported in Table 4.17, Hypothesis H2, was supported as the value ofcoefficient (r = 0.62) was large and significantly positive (p < 0.01). Therefore, it couldbe concluded that there was a significant positive relationship between the successionplanning characteristics/approach and organizational outcomes of private sector firms inMalaysia. In other words, effective succession planning characteristics would result in animprovement in organizational outcomes.4.8.2 Relationship Between Succession Planning Characteristics And ControlVariablesH3: There is a significant relationship between the control variables andsuccession planning characteristics/approach of private sector firms inMalaysia.Among the 6 control variables, only firm size and staff/employee turnover were foundsignificantly correlated with succession planning characteristics. The firm size positivelycorrelated (r = 0.23, p < 0.05) and staff/employee turnover negatively correlated (r = -0.32, p < 0.01). The remaining 4 control variables, i.e. firm age, industry, firm type, andfirm listing was found not significant. Thus, hypothesis H3 was partially supported.4.8.3 Relationship Between Organizational Outcomes And Control VariablesH4: There is a significant relationship between the control variables andorganizational outcomes of private sector firms in Malaysia.80

As depicted in Table 4.17, 4 out of 6 control variables were found to be significantlycorrelated. Firm age (r = 0.26, p < 0.01), firm size (r = 0.19, p < 0.05) and firm type (r =0.29, p < 0.01) were found positively and significantly correlated with organizationaloutcomes. However, staff turnover (r = -0.41, p < 0.01) negatively and significantlycorrelated with organizational outcomes. Thus, hypothesis H4 was partially supported.4.8.4 Summary Of Pearson-Moment CorrelationTable 4.18 showed a summary of hypothesis testing by using Pearson-Momentcorrelation between independent, control, and dependent variables.Table 4.18: Summary Of Hypothesis Testing Using Pearson Product-Moment CorrelationBetween Independent, Control, And Dependent VariablesHypothesis Association Between Variables Significance ConclusionH2 TotOC vs TotCR Yes H2 SupportedTotCR vs Firm AgeNoTotCR vs Firm SizeYesH3TotCR vs IndustryTotCR vs Firm TypeNoNoH3 Partially SupportedTotCR vs Firm ListingNoTotCR vs Staff TurnoverYesTotOC vs Firm AgeYesTotOC vs Firm SizeYesH4TotOC vs IndustryTotOC vs Firm TypeNoYesH4 Partially SupportedTotOC vs Firm ListingNoTotOC vs Staff TurnoverNote: TotOC = Organizational Outcomes, andTotCR = Succession Planning CharacteristicsYes81

4.9 Multiple Regression AnalysisMultiple regression analysis was conducted to examine the extent to which the successionplanning characteristics (independent variable) and demographic (control variables)variables influence the organizational outcomes (dependent variable). Table 4.19summarized the results of multiple regression analysis. The VIF index showed nosignificant multicollinearity problem (Neter et al., 1996; Kennedy, 1998; Hair et al.,2006). The independent and control variables (i.e. firm age, firm size, industry, firmtype/ownership, firm listing and staff turnover) were regressed across organizationaloutcomes. The multiple regression linear model was derived as follows:Y = α + β 1 X 1 + β 2 X 2 + β 3 X 3 + β 4 X 4 + β 5 X 5 + β 6 X 6 + β 7 X 7 + εY, Organizational Outcomes represented the criterion or Dependent Variable, which wasbelieved to be influenced by the X 1, X 2, X 3, X 4, X 5, X 6 and X 7 that denoted the predictors orthe independent variables and control variables.Y = Organizational Outcomes (TotOC)α = Constantβ = CoefficientX 1 = Succession Planning Characteristics (TotCR)X 2 = Firm Age (natural log)X 3 = Firm Size (natural log)X 4 = Industry (dummy)X 5 = Firm Type (dummy)X 6 = Firm Listing (dummy)X 7 = Staff/Employee Turnover Rate (natural log)ε = Error termControl Variables82

Table 4.19: Results Of Regression Analysis On Organizational OutcomesModel /VariableR 2 Adj R 2 F Sig. F B SEB VIF t-value Sig.*Model 1 0.385 0.379 66.297 0.000Constant 1.882 0.221 - 0.529 0.000TotCR 0.546 0.067 1.000 8.142 0.000Model 2 0.347 0.308 8.930 0.000Constant 3.185 0.292 - 10.915 0.000FirmAge 0.170 0.070 1.114 2.444 0.016FirmSize 0.079 0.038 1.591 2.065 0.041Industry 0.103 0.143 1.036 0.721 0.473FirmType 0.269 0.134 1.182 2.007 0.047FirmListing -0.407 0.158 1.467 -2.578 0.011StaffTurn -0.283 0.054 1.009 -5.201 0.000Model 3 0.556 0.525 17.881 0.000Constant 1.867 0.309 - 6.047 0.000TotCR 0.452 0.066 1.258 6.865 0.000FirmAge 0.206 0.058 1.123 3.564 0.001FirmSize 0.026 0.033 1.685 0.796 0.428Industry -0.036 0.120 1.066 -0.300 0.765FirmType 0.157 0.112 1.207 1.394 0.166FirmListing -0.308 0.132 1.485 -2.337 0.021StaffTurn -0.175 0.048 1.133 -3.659 0.000Note: 1) * Level of significance using t-tests2) Abbreviation: S.D = Standard Deviation; TotOC = Organizational Outcomes; TotCR= Succession Planning Characteristics; FirmList = Firm Listing; StaffTurn = EmployeeTurnover Rate.3) Firm Age (natural log) ; Firm Size (natural log) ; Industry dummy (manufacturing = 0,services = 1) ; Firm Type dummy ( national = 0, multinational = 1); Firm Listingdummy (unlisted = 0, listed = 1) ; and Staff/Employee Turnover Rate (natural log)For analysis, all variables (enter) regression approach were used. As shown in Table 4.19,there were 3 regression models derived to analyze the relationship between the83

independent (succession planning characteristics), control (demographic characteristics)and dependent (organizational outcomes) variables.4.9.1 Model 1 - Regression Analysis Between Organizational Outcomes AndSuccession Planning CharacteristicsThe first model showed regression analysis between the succession planningcharacteristics and organizational outcomes. The initial round of linear regression wasconducted without the controlling effect of demographic variable. It was noteworthy thatthe variable of succession planning characteristics made a statistically uniquecontribution to the prediction of the organizational outcomes/performance (R 2 = 0.385, F-value = 66.297, t-value = 8.142, p = 0.000), as shown in regression Model 1. Therefore, itcould be concluded that the model was adequate and the large F value indicated that alarge portion of the variation in the dependent variable, organizational outcomes (Y) wasexplained by the model. According to Hair et al. (2006) the variable used in regression isa predictor if the p-value is < 0.05. In this model, adjusted R 2 of 0.379 indicated that37.9% of the variance in the organizational outcomes was explained by the independentvariable of succession planning characteristics. Specifically, the significant positiverelationship indicated that for every increase of one point in the level of successionplanning characteristics there was an increase of 0.620 (standardized beta) inorganizational outcomes. This result was somehow anticipated because there was alreadya correlation found between the two variables based on the previous Pearson’s correlationtest. Therefore, this result further supported the acceptance of hypothesis H2 in previoustest. Results of these findings did have some consistency with prior research (Pattan,84

1986; Johnson et al., 1994; Huang, 2001) where adoption of succession plan improvedorganizational performance. Based on the regression coefficients findings from model 1in Table 4.19, the regression line for this model was derived as follows:-Y = 1.882 + 0.546X 1 + εHowever, prior research by Huang (2001) had failed to support the argument of Pattan(1986) as the relationship between adoption of succession planning program and HumanResource outcomes was statistically insignificant.4.9.2 Model 2 - Regression Analysis Between Organizational Outcomes AndDemographic Variables (Control Variables)In regression Model 2 of Table 4.19, it was found that except for industrial sector, theother 5 demographic/control variables are linearly related to the dependent variables. Theregression results indicated that the model was significant (R 2 = 0.347, F-value = 8.930, p= 0.000). The firm age (beta = 0.207, p < 0.05), firm size (beta = 0.209, p < 0.05) , andfirm type/ownership (beta = 0.175, p < 0.05) were positively and significantly related toorganizational outcomes/performance. Whereas, firm listing (beta = -0.251, p < 0.05) ,and staff turnover rate (beta = -0.420, p < 0.05) were negatively and significantly relatedto organizational outcomes/performance. Interestingly, though, the industrial sector wasnot significantly related (p > 0.05) to organizational outcomes. The adjusted R 2 of 0.308indicated that 30.8% of the variance in the organizational outcomes was explained by theindependent variables i.e. firm age, firm size, industrial sector, firm type, firm listing andstaff turnover rate. The highest value of variance inflation factor (VIF = 1.591) suggested85

there was no serious multicollinearity problem in the model. The overall results in thismodel showed some similarities with Pearson’s correlation test which was donepreviously where 4 out of 6 demographic/control variables were significant. However, inthe regression analysis 5 out of 6 demographic variables were significant. Industrialsector was not significant in both analysis, this indicated that industrial sector had noimpact on organizational outcomes. From the findings it could be concluded that thedemographic/control variables were important predictors of the dependent variable.Therefore, hypothesis H4 was partially supported.The regression line for this model was derived as follows:-Y = 3.185 + 0.17X 2 + 0.079X 3 + 0.103X 4 + 0.269X 5 - 0.407X 6 - 283X 7 + ε4.9.3 Model 3 - Regression Analysis Between Organizational Outcomes AndSuccession Planning Characteristics With The Effect OfControl VariablesModel 3 showed the linear relationship between independent and dependent variableswith the effect of control variable. Overall the regression model was significant (R 2 =0.556, F-value = 17.881, p = 0.000). The predictive power of the model improved withthe controlling effect of demographic variables, whereby, the adjusted R 2 improved from37.9% (Model 1) to 52.5% (Model 3) with the effect of control variable. The resultsshowed that succession planning characteristics (beta = 0.513, p < 0.05) and firm age(beta = 0.252, p < 0.05), were positively and significantly related to organizational86

outcomes. Whereas, firm listing (beta = -0.190, p < 0.05) and staff turnover rate (beta = -0.260, p < 0.05), were negatively and significantly related to organizational outcomes.Interestingly, though, firm size, industrial sector, and firm type/ownership appeared to benot significant (p > 0.05). Thus, it could be concluded that the controlling variables ( i.e.firm age, firm size, industrial sector, firm type/ownership, firm listing and staff turnoverrate) detected a significant relationship between succession planning characteristics andorganizational outcomes. The regression line for this model was derived as follows:-Y = 1.867 + 0.452X 1 + 0.206X 2 + 0.026X 3 – 0.036X 4 + 0.157X 5 – 0.308X 6 –0.175X 7 + ε87

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS5.0 Chapter OverviewThis chapter provides the interpretation of key findings, summary and conclusions whichhave been drawn from the findings, recommendations for future research, andimplications of the findings on succession planning and management practices in thecontext of organizations in Malaysia.5.1 Summary And ConclusionsThis study provides an empirical result of succession planning practices and approach ofa cross-section of firms in the services and manufacturing sectors in Malaysia. Further,unlike previous studies, this study intends to empirically investigate the relationshipbetween succession planning characteristics, demographic characteristics andorganizational outcomes.This study shows that on average firms in Malaysia employ an effective successionplanning system. The findings of the study reveal that 56.5% the firms surveyed haveformal succession plan and are mostly from the large-sized firms. The most commonlyused succession planning approach is the “pool” approach and this approach is widelyused in the services sector. The “react” approach is the second most preferred approachfor succession planning and it is a common approach in manufacturing sector. Company88

growth, desire to improve business results and changes in business demands that willcreate new skill requirements are the main reasons why succession planning is importantto the responding firms. Most firms indicate that performance and competency-basedapproach are the most valuable practices of succession planning. This is in line with therecent trend in strategic HRM, whereby an increasing number of organizations inMalaysia are using competencies to drive integrated human resource processes,particularly in the areas of talent management, leadership development and successionplanning.The study indicates that most firms rely on information obtained from performanceappraisal data, face-to-face interviews, analysis of work samples, and recommendationsas important methods to identify and evaluate candidates for succession planning.Further, performance management, training and development, and career planning aresome of the organizational systems which on average are linked to succession planning.The study also reveals that on average, effective succession planning characteristics ofthese firms include the involvement of CEO and most senior leaders. A majority of thefirms do not openly share information with the succession candidates and they hardly usecomputerized tracking system for succession. However, the effectiveness of theirsuccession planning characteristics is only average due to the fact that successionplanning is relatively new in the context of Malaysia.The reliability tests on variables used, i.e. organizational outcomes, successioncharacteristics, organizational system and methods of evaluation show relatively high89

eliability estimate. In addition, the factor analysis results obtained from this study wereon average better than the results of the previous study which was conducted by Tracy &McGraw (2004). The cumulative variance of the present study is 66.7% for successionplanning characteristics as compared to the study done by Tracy & McGraw (2004)which scored a cumulative variance of 59.9%.The independent sample t-test shows that there is no significant difference found betweenpractices and approach of succession planning and industrial sector (manufacturing andservices) and firm listing (Hypothesis H1(a) and H1(c) are not supported). This implies thatthere is no difference in terms of organizational system, succession planningcharacteristics, and methods of evaluation of succession candidates between national andmultinational corporations and between listed and unlisted firms. Basically, the practicesand approach of succession planning are similar across the industrial sectors. However,significant difference is found between some of the variables of practices and approach ofsuccession planning (i.e. type/ownership. organizational system and methods ofevaluation) and firm type. Thus, H1(b) is partially supported. These findings are similar tothe study conducted by Huang (2001) and Tracy & McGraw (2004). It stated thatmultinational companies (MNCs) were those most likely to have sophisticated successionplanning system as compared to the national-type organizations.In terms of relationship between the independent, control and dependent variables, thisstudy shows that there is a significant positive correlation between succession planningcharacteristics and organizational outcomes. Both the Pearson’s correlation and multiple90

egression analysis support the findings. Specifically, the significant positive relationshipindicates that for every increase of one point in the level of succession planningcharacteristics there is an increase of 0.62 in organizational outcomes. The results alsoshow that some of the demographic/control variables are significantly correlated tosuccession planning characteristics. Firm size shows positive significant correlation withsuccession planning characteristics whereas employee turnover rate shows negativesignificant correlation with succession planning characteristics. There is no significantcorrelation between firm age, industrial sector, firm type, and firm listing with successionplanning characteristics.Most of the demographic/control variables show significant relationship withorganizational outcomes. The multiple regression analysis reveals that except forindustrial sector, the other 5 demographic variables (i.e. firm age, firm size, firm type,firm listing, and employee turnover rate) show significant relationship withorganizational outcomes. However, the Pearson-Moment correlation analysis indicatesthat organizational outcomes are significantly correlated with the 4 demographicvariables i.e. firm age, firm size, firm type, and employee turn over rate. These resultsshow evidence that there is a significant relationship between the demographic/controlvariables and organizational outcomes.Succession planning is the key strategic management tool to sustain organizationalgrowth and competitive advantage in the twenty first century. It is a unique processwhereby a one-size-fits-all approach may not seem appropriate. Further, the departure of91

a key talent or leadership can happen at any time and this may result in a severe loss tothe organization if the succession is unplanned. As such, corporate leader must payserious attention to build and develop a well-structured succession planning systemwhich is linked to the organizational/departmental vision, mission and goals.5.2 Suggestions For Future ResearchA few suggestions are proposed here for the benefits of future research in the area ofsuccession planning and management practices. First, future research should be carriedout by using different methodologies such as face-to-face interviews and focus groupwith HR Experts/Practitioners. Although survey provides quick, inexpensive, efficientand accurate means of assessing information, interviews and focus group offer the uniqueadvantage of obtaining immediate feedback, opportunity to probe for clearer and morecomprehensive explanation.Second, the study should also include other possible items in the tested instrumentswhich are considered to be more suitable to expand the knowledge base in the area ofsuccession planning. For example, future research should attempt to measure the impactof succession planning and organizational performance on ROI (Return On Investment).It may also include a cross-cultural study on neighboring countries to obtain interestingfindings which can benefit HRM and researchers. In addition, elements of organizationalculture should also be tested in future research because succession planning does not92

happen in a vacuum, since such initiatives are influenced by organizational culture. Thus,interesting findings in this area will be of great use for succession literatures.Furthermore, prior research in the area of succession planning has not attempted tomeasure the impact of succession planning/management from pre-program through fullscaleand long-term implementation. Therefore, future research should focus onlongitudinal research to measure the effectiveness of succession planning and its impacton organizational performance.Third, research sample, the present study focuses on two main industrial sectors (servicesand manufacturing) in Malaysia and such a sample lowers the external validity of thestudy and the small sample size in some way restricts generalization of the findings.Therefore, future studies should include more than two industrial sectors and use largersample sizes in order to increase the external validity and reliability of the researchfindings.Fourth, the respondents, present study relies on the response of one internal informant(CEO/MD, Head HR or HR Manager) and this may lead to cognitive and subjectivebiases. Thus, future research should include more than one respondent/informant fromeach organization. This would provide more comprehensive information allowing forrepresentation of not only HR managers and staff involved in the implementation but alsofrom the perspective of other members in the organization.93

While this study attempt to look into the practices and approach of succession planning,there still remain many fruitful avenues for future research in the area of successionplanning. Kesner & Sebora (1994, p.327) are quoted as saying “when it comes toexecutive succession, there is little that we know convincingly, much that we do notknow because of mixed results and even more that we have not yet studied”. With thatnote, it is hoped that the findings of this research and the direction for future researchwould add invaluable contribution to the literature of succession planning.5.3 Implications Of The StudyThe findings of this study have several implications, one of the most important one tonote is the degree of effectiveness or sophistication of succession planning among privatesector firms in Malaysia. From the findings it can be observed that most of the firms havescored an average (mean value below 4) for practices and approach to successionplanning. This indicates that the current practices and approach to succession planningcan be improved further by adopting a formal and well-structured succession planningsystem. These findings are consistent with Tracy & McGraw (2004) whereby for manyfirms succession planning and management is still in its infancy and there is still room forimprovement.This study provides further insight into the succession planning system, its approach andthe linkages to the organizational system. The HR practitioners and other organizational94

managers who do not have strong academic background can use this report to drawbusiness and organizational strategies.The present study also helps to provide greater understanding on current practices andapproach of succession planning as adopted by firms in Malaysia. The findings from thestudy can be used as a benchmark to integrate a formal succession planning system that iscustomized to meet the specific needs of the organization and every facet of its business.The present study also shows that large firms are more likely to adopt a formalsuccession planning system as compared to medium and small sized firms. Hence, thisinformation can be used by HR practitioners and consultants to develop or create a moresuitable succession planning system to cater for medium and small-sized firms atreasonable costs. In addition, findings from the study can also be used by trainingproviders or HR consultants to design relevant training program in the area of successionplanning in order to cater for individuals who are responsible or involved in designingand implementing succession plans.The result of the study shows that succession planning characteristics have an impact onorganizational performance. This implies that organization which has a sophisticated oreffective succession planning characteristics develops superior organizationaloutcomes/performance. Organizations with effective succession management systems aremore likely to outperform those with ineffective systems in the area of financialperformance, productivity, customer satisfaction, employee satisfaction, quality of95

products/services, and retention of quality employees. These findings could assist HRpractitioners/experts/consultants to convince organization to implement formalsuccession planning in their organizations. In addition, the findings of this research couldalso assist them to understand better the practice and importance effective successionplanning.The results of the study also have important implications on the relationship betweensuccession planning characteristics, demographic variables and organizationaloutcomes/performance. Basically, the study has confirmed that a positive and significantrelationship exists between succession planning characteristics and organizationaloutcomes. Furthermore, certain demographic variables used in the study have shownsignificant relationship with the two main variables: succession planning characteristicsand organizational outcomes. Previous studies have shown significant relationshipbetween the degree of sophistication in succession planning and HR outcomes but do notshow any potential relationship with some demographic variables like firm size (no. ofemployees), firm age, industrial sector, and investor nationality (Huang, 2001).Finally, the findings of this research have many potential implications for future researchi.e. which pertain to both the methodology employed in collecting and analyzing the data,and to the substantive findings of the research effort.96

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