Studies show listed-company boards struggle with CEO succession. Strategy& calculated the cost of global companies getting the CEO appointment wrong at US$112 billion and McKinsey noted research showing nearly half of all leadership transitions fail.
Although these studies attract headlines – and are fuel for board criticism – care is needed with findings on CEO succession events, boards and firm performance. A CEO who is forced to resign early in his or her tenure might be the sign of a strong board, not one that botched the appointment.
Moreover, CEO succession planning is as much art as science, and relies partly on luck. A company could carefully groom a pool of internal candidates, only to watch that resource dissipate if executives are headhunted or resign suddenly.
Another board could have an extensive succession-planning process, a strong Nomination Committee, skilled Chief Human Resource Officer and a prominent global executive-search firm as an adviser. Yet the board could struggle to find a top replacement because few are available at the time, or may choose a well-credentialled candidate who disappoints in ways unexpected.
Nevertheless, it is worthwhile to understand the complication boards, to varying degrees, face with CEO succession planning and CEO transition events. Here are 15 potential traps:
1. No formal succession-planning process
Remarkably, many organisations still lack strong methodology or tools around succession planning, according to a 2018 Deloitte survey. Smaller commercial and not-for-profit enterprises, in particular, might not view succession planning as a key task.
“Effective succession planning is a continuous process rather than an occasional event, and requires consistent, ongoing focus from boards and executive teams.”
2. Succession planning viewed as an event rather than a process
Some organisations only get serious about succession planning in the lead-up to a CEO transition event. Effective succession planning is a continuous process rather than an occasional event, and requires consistent, ongoing focus from boards and executive teams. Focusing on a CEO transition that might be years away requires discipline in a short-term world.
3. Low or no disclosure of succession-planning practices
Organisations that disclose their broad succession-planning policies and processes to stakeholders tend to achieve better results with succession events, academic research has found. Enterprises that cannot explain their approach to succession planning, or have a secretive approach, are likely to struggle when CEO transition events occur.
4. Over-reliance on outgoing CEO’s opinion
Boards that manage CEO succession planning tend to source a range of opinion on potential successors: from the Nominations Committee, directors, the Chief Human Resources office, executive-search firm and the outgoing CEO. Some boards may over-rely on the opinion of the outgoing CEO, who could have decision-making bias in this area.
5. Poor board/management communication
Succession planning, by its nature, can arouse emotions and if handled poorly may appear threatening or destabilising to management. A CEO who is under pressure might hesitate in discussing succession planning; as could a successful CEO who does not want to signal resignation intentions. Boards that shirk succession-planning conversations with the CEO, fearful of upsetting him or her or damaging board/management relations, are not doing their job.
6. Insufficient information or access to internal candidates
Boards that over-rely on the CEO’s opinion on his or her successor, particularly if he or she has a decision-making bias, might receive “filtered” information on the performance of internal CEO candidates or not have enough data to make decisions. Or the CEO could restrict board exposure to internal candidates, to reduce the profile of potential rivals to the incumbent CEO. Boards can ensure they receive the right information and access to potential successors – principally through board presentations and other interactions – through a structured process.
7. The CEO is a roadblock
A CEO who does not want to step aside, or who prolongs his or her stay in the top job, is arguably the biggest impediment for boards in succession planning. It can be hard for boards to suggest a long-serving, successful CEO needs to step aside, to ensure an orderly CEO transition. If the CEO resists the process, succession planning can become much harder.
8. Juggling internal candidates
Every organisation wants a promising pool of internal candidates for the top job. But the stronger the pool, the more likely that executives will be poached for other CEO roles or become restless. Boards need to consider how the organisation retains top-performing C-level executives through financial incentives, career opportunities and professional development. Talented, ambitious C-level executives who want the top job inevitably seek opportunities elsewhere.
9. Transparent, competitive selection process
Boards risk botching the CEO appointment if they have a closed mind during the selection process. That is, they have already decided on an internal or external candidate and run a CEO selection process mostly for appearances. High-performing boards have an open mind to candidates and rigorously compare internal and external candidates for the job.
Organisations that want an extensive review of internal and external candidates, independent advice through a search firm, and a wider search of domestic and international candidates need to allocate sufficient financial and time resources. International executive searches are costly and boards need to allocate sufficient time to what can be a lengthy, complicated process – which is often appropriate given the immense significance of CEO selection.
11. Internal vs external candidates
Organisations, on average, prefer to source the next CEO internally rather than externally. Both strategies have pros and cons. The internal CEO is known to the board and potentially less disruptive: the external CEO might bring new skills and perspectives to the business. The key is boards understanding which CEO best suits the organisation at the time.
12. Succession beyond the CEO
Another board trap is focusing only on CEO succession and overlooking succession planning for other critical C-level roles, such as the Chief Financial Officer. Or believing C-level succession planning (beyond the CEO) is solely the CEO’s task. Effective boards ensure there are strong succession-planning processes in place for all key executives.
13. Handover part 1: Outgoing and incoming CEOs
The success of a CEO transition does not end when the appointment is made. The board should ensure there is a sufficient handover period and that the new CEO has everything he or she needs to hit the ground running. This can be challenging if the outgoing CEO’s departure is forced and he or she makes the successor’s life difficult.
14. Handover part 2: Board and CEO
Chairs should expect to spend much more time with a new CEO, particularly one recruited externally, in the first six months on the job. Often, they will introduce the new CEO to key investors, customers and other stakeholders, and provide more guidance as needed. Chairs should ensure they have more face-to-face time with the CEO in the early part of his or her tenure.
15. Board skills
Boards should ask if they have sufficient skill and experience in CEO succession planning. If the board consists of directors who have never led a major CEO succession event, new skills may be needed. Few directors of large listed companies have had a career in human resources, so succession planning may not be a skill that is widespread on boards, although many directors will have experienced succession planning in their executive career.