Laws of succession

As recruiters identify unprecedented interest in C-Suite executive movements, this refresher for directors on succession planning, best practice and major trends includes the view through the NFP lens.

Part one

Part two will be available on the AICD website in November.

Choosing a CEO is a decision that will affect the company, its strategic direction and workforce for years into the future. Yet against the backdrop of ongoing turbulence created by COVID-19, aside from orderly leadership transitions, many organisations have witnessed several shock CEO departures in recent months.

In March this year, Deloitte Australia CEO Richard Deutsch abruptly left barely halfway through his four-year term, citing the undisclosed “personal cost” associated with his position. In April, AGL Energy CEO Brett Redman GAICD quit, leaving the board of the electricity retailer scrambling to find a successor and execute its demerger. In June, Sony Music Australia CEO Denis Handlin was forced out amid workplace culture concerns.

Gregory Robinson, managing partner with executive search and board advisory firm Blenheim Partners, recently noted a significant increase in CEO and CFO appointments in the past year — an “unprecedented” level of interest by executives in current and future opportunities and the signs of a skill shortage at the top.

“It’s as if everyone has drunk a potion that makes them reflect on what’s important, the purpose of their work and the question: ‘Am I confident that existing leadership is equipped for the world of tomorrow’,” he wrote in June.

Getting it right

Robinson says substantial scope exists in most Australian organisations to refine succession- planning processes. “Whilst many attempt to undertake the process in the right spirit, the professionalism, engagement and outcomes can certainly be improved.”

Often, succession planning was viewed “in its narrowest sense” — that is, being limited to the CEO — without sufficient consideration being given to the other strategically important roles around them.

“It’s often a reactive, rather than a proactive, exercise [which] reduces the opportunity to evaluate and potentially introduce candidates from adjacent and diverse pools,” says Robinson. “This is ironic, bearing in mind the persistent discussions around the need for greater diversity and the limited thinking by conducting the process with an antiquated mindset to achieve a modern result.”

Robinson points out that while succession planning is often framed in the confines of looking within, it should consider the external market. However, in the NFP space, there were sound reasons why internal candidates were often preferred, says Naseema Sparks AM FAICD, chair of Sydney Living Museums (Historic Houses Trust of NSW), Homart Pharmaceuticals and OpenMarkets Group. “In a not-for-profit, a new CEO is often better coming from internal [talent], because they already know the culture and the stakeholders — and have bought into the overall purpose,” she says.

“Given that one of the big functions of NFPs is to raise funding, it is helpful for a new a CEO to know some of the key funders, whether it be government, benefactors, high net worth philanthropists, or others. It’s much easier to get that knowledge base and run down a learning curve if you have been in the organisation.”

NFPs were just as affected by pandemic-related disruption as their corporate counterparts, with many reporting constraints on operations, loss of funding sources and a scattering of much-needed volunteer support. COVID-19 fatigue has also contributed to a reshuffle of managerial staff within some NFPs — such as the recent decision by Perth’s Barking Gecko Theatre Company to terminate the role of CEO Helen Hristofski.

Take the time to plan

Formal succession planning was less of a focus with NFPs for a range of reasons, including thinner layers of management, says Sparks.

“Even though there are solid governance overlays in the NFP space, these companies tend to be more geared to achieving a specific purpose. Unless things are going wrong, the CEO intends to step aside at some stage or has found another job — it’s not something a board will look at consistently.”

When the winds of change began to blow, organisations needed to consider whether they were seeking to forge straight ahead or change course, she adds. “If you’re holding direction, then it’s more likely the CEO can be recruited internally because they’re aware of the organisation and its priorities.”

However, boards seeking a shift in direction may need to look externally because if new elements were being considered as part of a bigger strategy, those skill sets were unlikely to be in the organisation already. Discussions around the delicate subject of succession planning needed to occur on a regular basis rather than when a problem arose.

“If a chair handles succession well, they should be having this conversation with their CEO every year, to say: ‘Obviously, we don’t want to see you go, but sometime in the next five years, you might be thinking about it’ — so the CEO is not threatened by the topic,” says Sparks. “In my experience, a board can need one to two years to think about the type of CEO the company requires and complete a search, because CEOs in both NFP and for-profit roles can take a long time to replace.”

She notes that CEOs planning their exit would be wise to suggest one or two internal candidates, which the board can include on a shortlist. “It’s not essential, but it’s much less disruptive for the company, for stakeholders and for everyone else. If you’ve got a culture and vibe in an organisation that’s productive, then you want to keep that culture. [But] someone new into a role, particularly at senior level, can change that culture.”

The nature of the company determined the ease with which a CEO could be replaced, says Sparks.

“If it’s a well-known NFP, there shouldn’t be an issue, but if it’s not very well-known, it may be more difficult. Of course, there’s always someone who’s going to want a gig somewhere, but it’s [whether] you get your best fit or your second-best fit.”

Installing an interim candidate while conducting the executive search is often necessary, and it may well turn out that this person is best suited to the position. Boards sometimes make the mistake of trying to replace an outgoing CEO with an exact replica of that person’s skill set, but “no two pairs of shoes are the same”, says Sparks.

“The right person will reflect the overall strategic direction and boards should have flexibility for that individual to be themselves.”