Written By: Jamie Ferguson, Vice President of US and Latin America, Maxwell Drummond International
One of the most commonly overlooked responsibilities by Boards of Directors is a strategically planned and executed succession plan. Surprisingly, as governance is one of the board’s most crucial responsibilities, 60 percent of large US companies’ HR Directors said their firms have no CEO succession plans in place. The board has a responsibility to assure stakeholders that a solid strategy is in place to transition the company through changes in corporate leadership. Once both the CEO and board understand the importance of succession planning, the following key practices can be built into a plan.
Understand the Challenge
Directors must look into the future of their company and ask themselves not “What do we need in a CEO”? but, “What will we need in a CEO”? Developing an in-depth forecast of what the future will hold for both the company and the industry over the next three to seven years will allow them to determine what skill sets and experiences the successor must possess to successfully lead the company through the imminent challenges ahead.
Analyze The Organization’s Human Capital
According to a global study, only 15 percent of companies in North America believe they have enough qualified successors for key positions. Due to this number, board members must begin to analyze their potential candidates several years before a likely retirement date for the CEO. This should begin with an in-depth review of the management team that reports directly to the Chief Executive. A thorough review will give insight into the bench strength of an organization as well as identify internal candidates who have the skills and experiences to address the company’s forecasted challenges in the CEO role. These individuals can then be developed over the next several years.
A second step in this exercise is to identify external candidates who can enter the company through alternate positions and be developed in preparation of CEO succession. This allows the Board to bring a new dimension and set of skills and experience to an organization that it may lack, while entering another future executive into the pipeline. These external candidates can be identified with the aid of an executive search firm, as they will likely be in the high priority pool of their current companies. A word to the wise- while this method is favored by HR directors, it is not always the most successful choice. The guidelines the board sets for these individuals is not completely in line with estimating their level of leadership performance. Boards must focus their attention on evaluating these individuals’ leadership capabilities and decision making skills.
Many studies have been conducted to determine if the most successful leaders come from internal or external appointments. Across the spectrum, both insiders and outsiders have performed similarly-both falling into the top and bottom of performance charts. Much of the outcomes depend heavily on the state of the company at the time of the transition. An interesting yet successful trend is Board Members filling the CEO role. They have a blend of insider company knowledge including financials and expectations, and still have an outsider status as they aren’t part of day-to-day operations.
Whoever the candidates may be, the boards still must put an active effort into development. This may include appointing potential leaders at roles with increasing responsibility, giving these individuals the opportunity to manage across many sectors and locations of the business, mentoring them and aiding them in building a track record of delivering while building long term results. This whole process deters companies from the “ready now” mentality that hinders their ability to place the absolute right candidate to transition the company into its future.
Measure Implementation and Outcome
Those organizations that do develop succession plan strategies too often let them slip through the cracks when it comes time to execute. Boards must invest in high quality HR leadership to see that their plans are carried through and goals are being set and met. Executives respond to measured successes. In working with senior management to set goals, the board will gain support for succession planning and establish ownership for leadership development programs. Establishing measurable goals will also allow the board to reward those who execute, keeping the problem of uneven execution in check. A potential measure could include goals such as the ratio of internal hires vs. external hires for executive level roles or the number of promotions from a company’s high potential list. Whatever goals a board sets, it is important to keep it simple. Complex performance criteria could deter those managing the process from executing.
A succession plan must be developed and executed at least six months before the CEO is ready to step down. This will allow a smooth and effective transition of the candidate’s responsibilities. The board and the entrant must agree on the first year plan, including key performance indicators and milestones and communicating these milestones to the entire leadership team. The new CEO must then spend time building effective relationships. Communication is key in building trust in the new team and the team building trust in the Chief Executive’s leadership capabilities.
These practices can be applied to any organization’s succession plan strategy and should give directors the ammo to gain support from within their company’s senior management and HR departments to execute. The handover of one CEO to the next puts the company in a vulnerable state, so a well-crafted and smoothly executed plan is essential to the board delivering on their governance responsibility to stakeholders.