The Best Time to Plan for CEO Succession

Leadership transitions – particularly unexpected transitions – are extremely significant events within organizations. Multiple studies show a negative correlation between the time it takes to replace a CEO with future company earnings. Long CEO searches – or worse – making a poor hiring decision, are extremely costly.

CEO transitions are appropriately considered risk management events. Therefore, viable succession plans are critical for every organization. However, often no succession plan exists, the plan is out-of-date, or for whatever reason can’t be executed. Being prepared for a CEO’s sudden departure isn’t desirable, but it’s clearly a good business practice.

Alix Partnersˡ, a leadership consulting firm, surveyed 100 senior executives. Of those 31% – nearly one third – said currently no CEO successors have been identified. Another 20% said there only one potential successor has been identified. Risky business!

CEO Tenure

Recently several well-known organizations experienced CEO transitions. Examples:

Volkswagen – unplanned; amid crisis

United Airlines – unplanned during corruption investigation; new CEO had a heart attack and has received a heart transplant

Procter & Gamble – well-planned and communicated

Cisco – planned; stepping down after serving for 20 years

Per Fortune², among the 500 largest U.S. companies median CEO tenure is 4.9 years. Fortune’s analysis showed 20 CEOs have served for 20+ years, and 26 have been in office at least 15 years. When you also consider examples like Warren Buffett’s (Berkshire Hathaway) 59-year tenure, Rupert Murdoch’s (News Corp.) 63-year tenure, and Fred Smith’s (FedEx) 42-year tenure, it becomes clear a 4.9 year median tenure also must include some very short tenures.

While there is no “right” timeframe, it’s appropriate to consider what is optimal for your organization.

Succession Planning

While it may seem overly cautious, the right time for a board to begin a CEO’s succession plan is immediately after they take office. There are too many instances of boards caught off guard when a new CEO turns out to be a very short term CEO – for a myriad of reasons.

A strong board will identify several potential internal candidates, spend time with each of them, identify strengths, weaknesses and skill or experience gaps for each. Once the board determines desirable candidates, the next step is to help each gain the appropriate skills and experience.

Because multiple board members are involved, they are able to learn a good deal about each potential candidate. Beyond understanding the interest level of each individual in becoming CEO, they gain insight into decision-making styles, responses to tough challenges and how they work with others throughout the organization.

Once established, a viable succession plan requires periodic review. Potential successors may leave the company, or their career aspirations may change. As well, putting new candidates through the process may change the board’s perception of the best candidate.

All CEO placements involve risk. However, board member comfort level with internal candidates who have been thoroughly evaluated is considerably higher than external candidates where knowledge is considerably more superficial. Of particular importance is cultural fit – more difficult to determine among external candidates.

Optimally, a similar process will take place at lower levels within the organization. Identifying high performers interested in advancing, providing the experiences and skills needed for the next level, and implementing a mentoring/coaching program will develop strong leaders at each level.

Looking Forward

Given the frequency of abrupt CEO departures, having a succession plan in place will greatly limit disruption to the company internally, and perceptions of stability externally.

This is just as important – if not more so – for smaller firms that may not have a formal board. Business continuity is dependent upon having a leader prepared to make decisions as necessary on a timely basis.

Recalibrating Actions

To the extent it exists, review the current succession plan. Identify whether it is a) up-to-date, b) the candidates identified are still appropriate, and c) the status on development plans for the candidates to fill any gaps that would help prepare them to become CEO. If a plan is lacking, you and the board will need to begin creating one.

Determine the key criteria for candidates – in conjunction with the board. Potential criteria to consider: People leadership skills; experience with similar strategic challenges as the company faces; personal values are aligned with company core values and culture.

If the succession plan for a CEO is in good shape , consider beginning a similar program targeting leadership positions in different functional areas as well as different levels of responsibility. An effective program will serve you well in simplifying promotions and filling gaps as needed among your management team.

Sources:

1. Pellet, Jennifer, Leadership Transition: How to Succeed at Succession, Chief Executive, February 5, 2016

2. Sonnenfield, Jeffrey, http://fortune.com/2015/05/06/ceo-tenure-cisco/, Fortune, May 6, 2016