The Cost of Failing to Plan For and Execute Leadership Succession

Since transition of top leaders is something all organizations have and/or will face, and there’s heavy reliance on leadership for success, one might expect the process to be well-defined and executed. That’s often not the case.

There is considerable variance in how – and how well – succession planning is integrated into key strategic plans. Also, boards vary in how they view their role in creating and implementing succession plans.

Many stakeholders would be aghast at the “real” cost of failing to have viable succession plans. Per strategy+business’ recent CEO succession study , these costs are astounding.

“Large companies that underwent forced successions in recent years would have generated, on average, an estimated US$112 billion more in market value in the year before and the year after their turnover if their CEO succession had been the result of planning.”

Even when succession is well planned, sizeable costs are inherent. This reinforces the importance of CEO selection. Selecting the right CEO greatly reduces the likelihood of short tenure with its associated costs.

Examples of costs from unexpected CEO departures:

Severance package

Executive search firm retainer

Unplanned board meetings – with unexpected travel costs

Communications consultants, lawyers, movers…

And those are just the easily-tallied hard costs.

Soft costs may greatly exceed hard costs. The impact of business disruption creates costly – often not short-term – issues such as:

Suddenly halted initiatives

Ambiguity tainting substantial projects

Failure to close critical deals

Disrupted third-party relationships

Employees leaving to accept positions at more stable organizations

Loss of revenue, earnings, and, if public, stock prices

Market turbulence poses issues for even stable companies. Uncertainty due to a sudden CEO departure slows progress for some time afterward – at significant cost.

Not surprisingly, an unexpected CEO transition hits underperforming companies harder than strong, profitable companies.

What Does ‘Getting Succession Right’ Look Like?

Development of a company’s succession plan should focus on four key questions:

Does the board truly “own” the succession process? Given the sensitivity of succession planning, it’s advisable to schedule succession planning as a regular board agenda item. Optimally, the lead outside director will handle this responsibility, and the CEO will step out for this part of the meeting.

Does the board have a “real” plan? Is it private? The board should always have a summary of the succession plan immediately available. The potential successor list should always be kept secret to avoid creating employee discontent.

Does the company actively develop future generations of CEOs internally? If internal development is handled well, find the next CEO from among internal candidates is far more likely, which smooths and shortens the process considerably.

Does the company’s succession plan focus forward or backward? Strong succession plans focus on company leadership needs for the future – which may be very different from past needs.

Leaving a Worthy Legacy

It’s no small feat to create and recreate a stellar company. Try it when following Jack Welch as chairman and CEO of GE.

Jeffrey Immelt succeeded Jack Welch just days prior to September 11, 2001. Aftershocks substantially hurt GE’s aviation, power generation and reinsurance businesses. And, given the finance-dominated GE Jack built, the 2008 financial crisis was another huge setback.

Jeffrey Immelt’s success results from being market-driven and focusing on areas where GE’s expertise is both proven and rare. He’s returned GE to its manufacturing and industrial roots; dismantling its financial businesses. Today GE is driven to become a digital technology based manufacturing leader.

A highly respected legacy…

Organizational leadership transition is a given. Whether those transitions are successful largely depends on careful preparation.

Action Items:

Review your company’s current succession plan. To the extent it’s either lacking and/or not up-to-date, set a time to review its importance and key elements with your board chair.

For critical initiatives, third-party relationships, and substantial deals, ensure multiple individuals within the leadership are intimately involved, and can keep things from going too far astray should an unexpected CEO departure become reality. (Board leadership should be involved in determining in what situations, which leaders and how to address these potential scenarios.)

Only you are responsible for leaving a legacy you will be proud of. Work on yours today and every day.