A recent study by Korn/Ferry states that fewer than 40% of organizations have a capable chief executive officer waiting in the wings. Why the difficulty? Simply put, senior management has tended to push this responsibility down on the priority list in favor of “more pressing” short-term matters. Much like an individual’s approach to retirement, many incumbents and boards view succession planning as “something to think about in due course.”
Numbers show that boards can no longer ignore the gorilla in the room. There were 1,478 CEO departures in the United States in 2006, according to Challenger, Gray and Christmas - up 12% from a year earlier. Further, the average tenure for a CEO is now just 5.5 years, down from 7 years in 2005.
Given this backdrop, finding a successor for the CEO role is one of the most important activities an organization and its board have to undertake. Despite this, many companies of all shapes and sizes are unprepared to fill the top position upon the CEO’s retirement, or worse, through an unexpected departure.
While some large companies have implemented intensive training programs to identify potential leaders early in their careers and groom them over a multi-year period, many others cannot afford this luxury, are not big enough to have deep bench strength, or have simply failed to practice good governance in this area.
Steps to successful succession
While an increasing number of companies are addressing the issue of succession, more aggressive efforts are needed.
It is highly possible - with proper preparation and execution - to navigate a successful CEO transition. To avoid getting trapped in a CEO succession crisis, companies and their boards of directors may find it helpful to adopt these steps toward building a succession plan.
- However difficult, allocate a set amount of time and resources toward training and developing high-potential employees so that they are ready when a CEO opening becomes available. Consider building this effort into the performance review process.
- Maintain an active and ongoing dialog with high-potential successors by scheduling regular meetings on the calendar. Work to understand the organization’s changing leadership needs and how these correlate to specific CEO requirements. Some corporations will place a succession candidate in a role in the company that allows for frequent CEO and board interface. The potential successor is given external exposure, giving him/her a chance to showcase their potential as a CEO, and presenting an opportunity for investors and stakeholders to test the candidate and confirm approval of the succession plan.
- Be objective. Gather market insight from external sources and test assumptions regarding the company and its relative strengths. Address skill gaps in senior management and development plans to align corporate needs with management capabilities.
- Look outside the company to find potential CEO candidates - and pool them with promising internal choices. If executed correctly, this should not be viewed as a threat to existing management, as it validates internal candidates and ensures the transparency and integrity of the process.
- Take care when transitioning to new leadership. Frequently, a retiring CEO will remain on the board or maintain his/her office at the company. This practice can have many negative implications, the worst of which is the undermining of the new CEO’s authority.
In this environment of transparent leadership and increased regulation, smart companies are recognizing that succession planning is a never-ending process.
Richard Preng is a senior client partner in Korn/Ferry International’s Global Energy Practice, Houston.
