Board agendas can move along in rote fashion for long periods of time without any bumps and bruises. However, a major public scandal quickly forces complacent boards to sit up and take notice of the areas in which they are not proactive enough. The SEC is taking executive CEO succession planning more seriously than ever before, and that means that boards of directors should be taking it seriously, too.
Several big-name corporations like AIG, General Motors, Sears and Yahoo got caught off guard with an outgoing executive CEO and no succession plan. The latest casualty in lack of executive CEO succession planning is ride-sharing giant Uber. CEO Travis Kalanick resigned with no obvious successor in the wings. To make matters worse, many senior executives resigned from their posts before Kalanick resigned, leaving the company with ultra-weak leadership.
Poor or nonexistent executive CEO succession planning causes investors to raise their eyebrows and causes a corporation’s ratings to drop. It should also raise a red flag of liability concerns for board members.
Executive CEO Succession Planning by the Numbers
As the SEC and other regulatory bodies place pressure on boards to make executive succession planning an integral part of good corporate governance, research is showing us that boards are not giving enough importance to the matter of executive CEO succession planning. The SEC views succession planning as a significant policy issue — so much so that they require boards to entertain shareholder proposals on succession planning.
According to a report by the Stanford Graduate School of Business, global turnover of executive CEOs is 9% to 14%. Just how unprepared are corporations for an executive CEO turnover? The National Association of Corporate Directors did a survey that showed that 44% of corporations don’t have any form of executive CEO transition plan. In addition, it showed that 43% of large-cap company CEO successions were unplanned. A mere 17% of board directors responded that they felt they were highly effective at succession planning.
Being unprepared for executive succession also affects investors and rating agencies. Investors were twice as likely to sell shares during times of CEO resignations and transitions. Rating agencies consider CEO transition times to be a vulnerable time that is reflected in their ratings.
Boards that fail to outline a plan for executive CEO succession and revisit it on an ongoing basis carry a high level of risk, as they will be held accountable for transitions that manifest poorly.
Board directors may be tempted to put off developing an executive CEO succession plan because they feel uncomfortable with it. It’s easy to make excuses (e.g., there are other pressing matters to deal with or the board agenda is full). Some directors may worry that the current CEO will go into a lame-duck mentality and slack off. Succession planning requires trust between the board and the CEO. In today’s corporate world, boards must make succession planning an urgent matter.
Best Practices for Executive CEO Succession Planning
We can look to several companies that do executive CEO planning well to know just how well it can work. Apple, Disney, General Electric, Microsoft and McDonald’s all have firm executive CEO succession plans in place. They reap the benefits in gaining investor confidence. In fact, McDonald’s not only keeps up-to-date summaries on current CEO candidates, but also profiles of rising leaders.
Forbes outlines a four-phase succession planning process, as follows:
Let’s break it down. The analysis phase should get started immediately and be ongoing. Boards will need to revisit the succession plans minimally every six months, as the needs of the corporation are ever-changing.
While boards may be tempted to look back, it’s much more important to look forward, delving into their strategic planning process to identify what competencies their CEOs need to fulfill their plans. Board directors will need to anticipate the needs of the organization over the next four to six years, and view potential candidates with the needed competencies in mind.
As with most time-consuming board activities, board directors will probably want to delegate succession planning to an ad hoc, nominating or special committee due to the time needed for the task. Boards may find it helpful to enlist the help of their human resources departments to consistently identify a pipeline of internal and external candidates.
The development of the plan should include internal and external candidates. The tide is changing on the search for candidates in recent years. In the 1970s and 1980s, boards strongly favored internal candidates — they hired outside the corporation only 8% to 10% of the time. In 2013, 20% to 30% of boards chose external candidates to fill the CEO position.
Either way, assessments should be highly analytical and process-driven, with a focus on the competencies the corporation needs most. Succession planning should include a timetable for the process, generally from three to five years, unless there is a sudden CEO departure.
As part of strategic planning, boards may decide that certain leaders should be primed for executive spots, so there’s a ready cadre of talent to fill the pool. Talented individuals are always targets for headhunters, so there is a risk in training them too well and then not selecting them when there is an opening. However, some corporations solve that problem by creating a new position with more responsibilities and opportunities for leadership development in hopes of retaining them until a future leadership opportunity opens up.
Executive search firms can be of significant help in locating CEO candidates with the right skillset.
Executive CEO planning should also include a plan for designating an interim CEO if the current CEO’s departure is sudden or unexpected. Interim plans need to include a strategy for a temporary reassignment of managerial duties and delegation of authority.
The best time to start the selection process is about one year before the transition takes place. Give internal candidates a chance to update their evaluations and résumés. Review the corporation’s needed competencies and pull out the best candidates from the list. Conduct focused interviews with an all-around perspective that includes superiors, industry peers, colleagues and direct reports. Many boards find that psychometric testing is a valuable tool that aids in the selection process.
Whenever possible, it’s important to allow a 12-month transition time for the outgoing CEO to onboard and mentor the new CEO. During this time, the new CEO builds relationships with board directors and gets up to speed with the needs and expectations of the job.
During the transition time, boards will need to clarify and put in writing the role and responsibilities for the outgoing CEO so that he or she doesn’t overstep the authority of the new CEO.
Finally, transition planning should include either a formal or an informal recognition for the outgoing CEO to show appreciation for dedicated service. The new CEO should receive a warm welcome with a press release and some type of formal introduction internally and with the media.
In closing, it’s worth mentioning that some CEOs will not push for succession planning so they can keep their jobs longer. For this reason, it’s helpful to have current and former CEOs on the board who are familiar with how to hire and manage executives and invoke the needed trust to make it happen.