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Succession planning: How prepared are you?

Replacing an outgoing CEO is vital for a company’s long-term strategy, but few have succession plans to ensure smooth transitions

Replacing an outgoing CEO is vital for a company’s long-term strategy, but few have succession plans to ensure smooth transitions

Succession planning is an important but undersubscribed aspect of corporate governance. Research suggests that the average tenure for a CEO in the financial industry is five years, but only 2.5 percent of companies have succession planning committees. It is often a tricky issue to have on the agenda, as no CEO takes a job with retirement plans already in mind, but it can be vital for a company to have a clear, long-term strategy for management, for the sake of growth.

A badly-thought out succession plan can set a company back months, affecting everything from morale to stock price. It seems that boards consider resignations to be a sporadic enough event that they might just be able to address them as they come, rather than plan for it. Experts suggest that this approach is a mistake. Stephen Miles, consultant to CEOs and boards of directors, wrote that because “CEO succession is a rare event there are few opportunities for board members to develop expertise handling this task.” He suggests that the only way to overcome this hurdle is to actively seek members with this particular expertise in order to ensure a smooth transition, and start fostering a culture of succession planning.

Russell J White references a survey in the Credit Union Times, in which 69 percent of respondents thought CEO successors must be ‘ready now’ to assume the roles of the departing leader, but only 54 percent of boards admitted to ‘grooming’ executives for upcoming positions in advance. Miles suggests that this lack of preparation is bad strategy; “grooming a new leader is a continuous process—it begins long before the chief executive officer plans to step down and it ends long after the new CEO has taken the reins,” he says. “Truthfully, it could be argued that the process never ends.”

It is important for a company to have succession planning in place as a growth strategy, particularly as CEOs can leave abruptly, particularly in crisis situations. For instance, former BP CEO Tony Howard was thriving at the job which he seemed destined to have for years to come, that is, until the Deepwater Horizon disaster struck and he revealed a deeply unappealing facet of his public persona. The BP board had no contingency plan and was forced to stand by Hayward as they selected a new CEO, and the move still took months to become effective, further hindering BP’s crisis efforts.

Most experts agree, that under normal circumstances, the outgoing CEO should stay on as a board member for a few months in order to guide the new incumbent through the company’s development vision and strategy. Though there is the risk that a successful and popular former chief executive might cast a shadow over the newly appointed head. “Many boards keep the retiring CEO around for six months just in case,” says White. “Most of the time this becomes a hovering shadow leader who actually inhibits transformation.”

 

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