CEO Succession Planning: What matters most and how to do it

Memory Nguwi / Posted On: 19 May 2022 / Updated On: 2 December 2022 / Organisational Development / 584

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CEO Succession Planning: What matters most and how to do it



When it comes to CEO succession planning, companies often overlook the importance of grooming the next generation of leaders. While many executives have a plan for when they will retire or leave their company, few have a strategy for who will succeed them. Instead, most companies approach succession planning as a top-down endeavor, with CEO and board members determining who will be the next C-suite executive and moving forward without considering who will be the company's leader in the future. As a result, companies often find themselves in a position where they no longer have a clear vision or leadership direction, which can have a negative impact on the company's ability to innovate and grow.

 

The biggest challenge for many organizations today is finding a replacement for the CEO. When a CEO departs, the organization must find a new leader, often at a critical time. It's critical, then, to have a CEO succession plan in place to ensure the right leader is in place when the CEO steps down.

 

Ideally, CEO succession planning should collaborate between the corporate leaders and the Board of directors. The Board of directors is often the group responsible for ensuring that the succession plan is in place and updated as the CEO's tenure continues.

 

Related: My advice to Chief Executive Officers

 

 


The Challenges with CEO Succession

Good practices for managing CEO succession include starting the process early and correctly defining the role's specifications. When it comes to successfully managing CEO succession, best practices include getting an early start and accurately identifying the role's requirements. Researchers interviewed 22 members of Fortune 200 boards about their experiences with CEO succession. In interviews with board members, many of them described unsuccessful chief executive officers as having huge egos and failing to listen to others.

 

The Board, not the CEO, is the one driving the process. Therefore, the CEO needs to get used to the idea that the Board is in charge. It is important for CEOs to constantly remind themselves not to exert excessive pressure on a specific candidate. Depending on the level of preparedness displayed by the candidates for the role, the Board may decide to quicken or slow down the process to accommodate such hurdles.

 

One of the most significant roles that a board must fulfill is the process of succession planning for the company's leadership. The majority of board members believe that there is room for improvement in the organization's CEO succession strategy. Even the most successful businesses are doomed to fail if they do not have the right person in charge.

 

Related: How to Select the right CEO to Upscale Your Business

 

CEO Succession: Does CEO turnover play a part?

The terrain for CEO replacement is shifting significantly. It is reported that in 2020, 56 S & P CEO resigned. 20% of these quit under pressure. In the same year, in 2020, 29% of S& P 500 companies hired an outsider when they were replacing their CEO. Research has also shown that CEO tenure is becoming shorter and shorter. These trends alone are enough to pressure the Board to think about successful CEO succession.

 

CEO Succession Essentials

 

How do you develop a succession plan for a CEO?

The best CEO succession plans are those that are developed collaboratively. For many organizations, the CEO is the leader who sets the vision and strategy for the company. The CEO must be directly involved in developing the plan. This ensures that the leader is on board with the plan and that the leader is invested in ensuring the plan is successful. The leader is best positioned to identify the strengths and weaknesses of the organization and the people in it and can use that insight to develop a plan that will best position the organization for the future.

 

The Board of directors can help the CEO in the process of creating and updating the succession plan. The Board should meet with the CEO to discuss the plan and ensure it is in place. The Board should also review the plan to ensure that it is updated as needed and to ensure that it is on track. The Board must also give the CEO the support needed to ensure that the plan is successful.

 

The second step is to identify the succession candidates. What background, experience, and skill set are needed for the next CEO? The Board and the CEO must work together to identify the right candidates for the job and determine the best timing for their entry into the organization. Who are the external candidates that could be brought in to head the organization? Who are the internal leaders who could potentially take over the CEO role?

 

The next step is to identify possible candidates for the role. This can be accomplished through a variety of means, including a formal search process, a review of the internal pipeline of candidates, or a combination of the two. The Board should vet and interview candidates to ensure that they are the best fit for the job. The Board should also work with the CEO to identify candidates who could serve as strong potential successors.

 

Related: About transition planning and transition management

 

The Havard Law School Forum lists seven practices they recommend as the best in handling CEO succession. I list them below:

  1.  Agree on the KSAO (Knowledge, Skills, Abilities, and Other Characteristics): The Board can then decide what abilities and experience the new CEO will need to meet the company's goals. The Board's selection of critical CEO qualities must be dynamic since market conditions change frequently. Boards can't know what they need in a CEO without regularly reassessing what it takes to lead. Knowledge, Skills, Abilities, and Other Characteristics) required to lead the business successfully. The Board can then decide what abilities and experience the new CEO will need to meet the company's goals. The Board's selection of critical CEO qualities must be dynamic since market conditions change frequently. Boards can't know what they need in a CEO without regularly reassessing what it takes to lead.
  2. Designate an authority to take charge of the succession planning process: A board committee overseeing CEO succession must update the full Board on the process, plan, and pipeline. The CEO's involvement varies. The board chair or lead director usually leads succession planning conversations with the CEO.
  3. There is an approved plan and clear timelines -The directors are responsible for outlining the process's intended outcomes and the tempo for discussion. They should also find out how frequently CEO succession planning is brought up at board meetings. The strategy may also include the establishment of a timetable for each step that the Board will follow, beginning with the interviewing of candidates and ending with the appointment of the new CEO.
  4. Emergency Response Succession Plan - Too many boards, have no idea how they would react if their CEO suddenly left. Developing an emergency succession plan requires identifying excellent interim candidates. A director might act as CEO while the Board hunts for a permanent successor.
  5. The CEO is involved in the succession from the beginning- The Chief Executive Officer is primarily responsible for locating possible successors throughout the process of succession planning. According to Simon Tisdale of PwC, directors should make it a point to ask for regular reports on their progress in selecting internal candidates.
  6. A strong talent pipeline is a must-have -Directors view the development of a robust talent pool for CEO-level positions as the most difficult problem they face. If your pipeline isn't strong, you can find yourself scrambling to find someone to fill the post, or you might end up with a candidate who isn't quite ready for the assignment. Directors also have a responsibility to consider how their decisions could affect the organization's culture.
  7. Onboarding new CEO is crucial: The best boards make sure there is a transition plan that assists the new CEO in becoming acquainted with the company's objectives, strategy, and culture as quickly as possible. The Board of directors also has to make an effort to listen to and direct their newly appointed CEO. To preserve openness, boards of directors may choose to detail their CEO succession process inside the business proxy statement. 

 

Related: Succession planning metrics you should know

 

Why CEO Succession may fail

The best-laid plans often go astray when it comes to leadership transitions. We've seen several examples where succession plans took surprising turns or even failed altogether in the past several years. The reason? No matter how carefully you think through your succession plan, several challenges are difficult to anticipate — and even harder to address.

 

For example, even if you have a clear successor in mind, you may have to intervene when they can't get the job done. This can happen for a variety of reasons — they're not up to the job, they're not delivering results, or they've become a liability due to scandal or controversy. You may need to fire them and find a new successor in some cases. Other times, you may need to serve as a "surrogate CEO" to ensure that the right people are in place to deliver results.

 

External factors often complicate the challenges of CEO succession. A fast-moving business environment means that you have to respond to unexpected events, sometimes at a moment's notice. This can mean that you have to make difficult decisions about your successor — such as when to promote someone to a senior leadership position or when to make a leadership change. It can also mean that your succession plan has to be more flexible than you might like so that you can respond to the unexpected.

 

The challenges of CEO succession go far beyond simply finding and grooming the right successor. You also need to make sure they have the right support and company strategy to deliver results.

 

Related: 5 Mistakes to avoid if you are a new CEO

 

Conclusion

As we have seen, good CEO succession planning is a key element of good governance, and good governance is an important driver of long-term performance. At the same time, CEO succession is one of the most critical determinants of long-term performance.

 

Succession planning is identifying and developing the best internal and external candidates to succeed the current CEO in the future. This is a complex and ongoing process that requires the Board of directors and the CEO to come together and discuss the skills, experiences, and attributes they are looking for in the future CEO. This process aims to create a pipeline of potential candidates so that when the time comes, the Board has a variety of excellent options to choose from.

 

Memory Nguwi is an Occupational Psychologist, Data Scientist, Speaker, & Managing Consultant- Industrial Psychology Consultants (Pvt) Ltd, a management and human resources consulting firm.Email:[email protected] or visit our websites https://www.thehumancapitalhub.com/ and  www.ipcconsultants.com


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