Succession planning for the CEO is a basic duty of the board. The future of the company depends on the board or the committee that’s tasked with making a choice of the best individual. In the best-case scenario, CEOs plan their retirement and give the board some idea of when they plan to retire. In the worst-case scenario, a CEO becomes ill or injured or gets fired abruptly. Either way, boards must prepare for a new CEO to fill the vacant role. A smooth transition makes it easier on the incoming CEO, the board and the rest of the company.
While most boards are aware that they need to plan for CEO succession, only a small percentage of boards have prepared for a new CEO under any circumstances. According to the proxy and governance statements by Korn Ferry Market Cap 100 companies, only 17% of the companies had identified a viable interim candidate and annually reviewed candidates for CEO. In addition, the same companies reported having succession plans in place, as well as written procedures for succession planning. About 25% of companies said that they would not disclose their plans for succession and 75% were willing to do so.
Best practices suggest that all companies should participate in early succession planning. This is an undertaking in which companies should customize their approach to succession planning, as every company is unique in its needs.
How a Board Portal Can Aid CEO in Succession Planning
Succession planning requires a clear leader. Depending on the size of the company, the number of board directors and other factors, various people or committees can take the lead in succession planning. One or more board committees may be involved in the succession planning process, including human resources, the compensation committee, and the nominating and governance committee. Regardless of a company’s approach to succession planning, a Diligent board portal makes it easier for all the necessary groups and individuals to communicate and collaborate using a digital platform with a high level of security.
A board portal uses cloud-based technology to securely store the resumes of potential internal and external candidates for CEO. The portal also stores self-evaluations for board directors, which will help the board determine if one of their board directors is a viable candidate for CEO. The portal is also useful for storing records for the development of internal candidates that the board has identified as individuals who could be groomed for the position of CEO.
Diligent Messenger is a highly secure communications platform that boards and succession planning committees can use to communicate at any time of night or day and from any location.
Best Practices for a CEO Succession Plan
Whomever the board chooses to lead the succession planning process must understand the process and be able to apply it effectively. Leaders must design the succession planning process around the unique needs and circumstances of the company to reduce the risks of changing the top leadership position in the company. Following are some best practices within the industry for choosing your company’s future CEO.
If your CEO left his or her position tomorrow, would you know what to do? Would your board know which steps to take to find an interim or permanent replacement? All CEOs leave a company at some point. Whether the separation is planned or unexpected, boards need to have an ongoing plan to replace the current CEO.
It’s common for boards to delegate the task of succession planning to the nominating and governance committee. The leader of succession planning may be the chair of the nominating and governance committee or an independent board member. Regardless of whom the board selects to lead this important task, it’s important that the leader is disciplined and strategic-minded. The leader should also be someone with CEO experience and who displays good judgment and intuition.
The board may have a little or a large degree of involvement in the selection process. It’s best if the leader and the board decide early on how involved the board might be. Board dynamics, the pace of transition and board composition all factor into whether the board gets directly involved earlier or later in the process.
As the date of succession nears, it can create an awkward position for the current CEO. Boards should decide early on what part the current CEO should play in the process. The current CEO can take the lead in it, be a key advisor or stay out of it. If the board and the current CEO don’t share the same opinion about the current CEO’s role in succession planning, things can get awkward pretty quickly.
For boards that make the decision for a committee or an independent board director to take the lead, it’s important to keep the board informed. The leader should practice continual, open communications and alert the board to problems and progress.
Ultimately, succession planning should be driven by corporate strategy. The new CEO should be prepared to address the short-term issues of the company. In addition, the new CEO must be chosen not for the skills the company needs them to have now, but for the skills the company needs for the long term. This requires the board to think through where the company will be in three to five years and what skills their main leader will need to run the company at a future time. Succession planners shouldn’t be looking to get an individual who is a mirror image of the incumbent because the new leader will be leading in very different times.
Many boards believe they should entertain internal candidates first. If the current CEO has invested his or her time in evaluating current leaders and developing their talents with an eye on promotions, that may be the best approach. It’s usually best if CEO candidates have at least three years of targeted development under their belts first.
It’s always prudent to pursue outside candidates at the same time as you evaluate internal candidates. Boards can reduce risk by bringing external candidates in early enough so that they can be comfortable with the board and vice versa.
While the bulk of the search often focuses on internal and external candidates, it’s important not to overlook board directors as possible candidates. Just be sure that political candidates aren’t part of the selection process to avoid any conflicts of interest.
Lastly, it’s considered best practices to develop a timeline for transitioning. It’s helpful for the incoming CEO to have a little time to spend with the current CEO before his or her final departure.
Benjamin Franklin said that if you fail to plan, you plan to fail. This quote is certainly true as it applies to succession planning. Best practices require succession planning to be an ongoing event where boards assess the skills of internal candidates on a continual basis and set up a plan for development to cover any gaps or weaknesses. Mastercard’s CEO, Ajaypal Banga, sets a prime example of preparing for succession planning by developing internal talent. He showcases 75-80 employees to the board that he considers to be rising stars. Because of his early and continual preparation, most likely one of them will succeed him.