Board directors generally understand the importance of succession planning but for a variety of reasons they all too often just don't do it very well.
In survey after survey, directors consistently rank succession planning as one of the top three agenda items for the board. Yet many boards do not rate themselves highly when it comes to planning for a change of CEO and actual market evidence suggests that would be an accurate evaluation. According to a recent survey by the Center for Board Leadership (National Association of Company Directors) only about half of public and private corporate boards have CEO succession plans in place.
Succession Planning Scenarios
While in the past it was unclear who was responsible for CEO succession planning, the ultimate responsibility tends to rest with the board. Indeed, the stakes are higher than ever for boards to select the right leadership for their companies, given highly visible dismissals of CEOs, critical attention directed to CEO compensation, and increasing pressure on performance.
Generally speaking, there are three types of succession planning scenarios:
The first is the “gets run over by a bus” scenario, where there is a replacement, usually an emergency option, that the board has waiting in the wings.
The second scenario is the "planned transition," where a CEO makes known to the board his or her date for departure, allowing the board to start an orderly process, often over a 2 to 3 year period, to find a successor.
The third scenario, and the one most fraught with uncertainty, is the "deterioration in confidence." In our experience, many boards are less capable of handling succession when it becomes clear over a period of months they must change CEOs sooner than planned because the business is at risk of faltering, if it isn’t already.
There is however a fourth scenario; one where companies apply a rigorous process through the ongoing identification, development and review of internal successors that is continuously benchmarked against the external market. In deploying this approach the board removes the higher risk levels associated with the above three scenarios and positions the business to account for any planned or, more importantly, unplanned changes.
More and more, boards now understand they must gain deeper knowledge of senior leaders in their organization. More than that, they realize they need a much deeper appreciation and understanding of external talent in order to identify the best possible future leadership for their organizations well ahead of the planned or unplanned need. This does not require directors to become talent management experts! It does however require boards to take responsibility for ensuring that the right processes for succession planning and talent management are in place and that they have the appropriate knowledge of their risk.
By following these 3 succession planning best practices, companies can position themselves for growth and business continuity:
Succession Planning Best Practice #1: Benchmark
The most important task is to ensure a board has more than cursory exposure to its company's senior management. Directors should get to know the senior leadership well through presentations in the boardroom and regular meetings outside of it. The era when CEOs shielded directors from managers is long gone; CEOs are no longer sole conduits of information to directors, especially with new fiduciary responsibilities imposed on boards by Sarbanes-Oxley.
Boards should then put a continuous risk management process in place that includes collecting information about potential successors without the need to approach executives directly.
Benchmarking provides boards with in-depth profiles of potential leaders, putting the board in a better position to quickly assemble a list of potential candidates.
Succession Planning Best Practice #2: Look to the Future
Whether a board considers internal or external candidates or both, its starting point should be a Success Profile for a CEO who reflects the strategy and context of a company's future, not its present. The Success Profile should reflect the best characteristics of world class leaders in the company's business segment, including those of leaders in competitive companies.
This approach requires strategic consensus on the board about future growth and a vision of where the company should be in three to five years. Leadership changes are not easy, nor are they stamped from a mold. Each company is unique due to its strategy, situation, history, and culture. A highly skilled leader might not always be the best fit for an organization, given the organization's values, its way of operating, and its position in the marketplace. Boards should think carefully about fit because one of the biggest risks of bringing in an outside CEO is a poor cultural response.
Succession Planning Best Practice #3: Keep it Dynamic
Because organizations and marketplaces are dynamic, succession plans shouldn't be static. Boards need to update their plan, risk profile and leadership knowledge on a continual basis. Things change far too quickly for a succession plan to be mothballed and remain unexamined. Boards must embrace the reality that few things matter more to an organization than having the right leaders in place today and in mind for tomorrow, while recognizing tomorrow can arrive at any time!
Companies that follow these 3 succession planning best practices will find themselves in an enviable position among other companies that continue struggle each time there is a change in the senior leadership team.
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