Board directors agree that their most important role is the appointment of the CEO, and many CEOs will have succession planning for their role as one of their top KPIs.
Understanding the drivers, process and risks of CEO succession is useful for both CEOs and CEOs-in-waiting. How effectively the CEO and Chair work together will determine the success or otherwise of CEO succession.
Every CEO succession is different as the process — and the candidates — are highly individual. There are risks inherent in any CEO succession, and the quality of the selection and ease of the transition will depend on how the process is managed.
Securing a smooth CEO succession is more than good governance; it makes sound business sense. News of a departing CEO often impacts a company’s value; when CEOs change, investors are more than twice as likely to sell shares in a company as they are to buy them, according to research by FTI consulting. A poorly executed CEO exit coupled with a clumsy replacement process invariably wreaks collateral damage; the departure of other executive talent, diminished shareholder value, a drop in market confidence and, lasting brand damage. It also sets up a difficult start for the new CEO.
Last year Korn Ferry published The risky business of CEO succession, a collections of interviews with Chairs, non-executive directors and CEOs. Most of the business leaders who participated in this report acknowledged that there are risks inherent to the process of changing CEOs.
The 4 biggest risks in CEO succession:
1. Commencing the process without agreeing the strategy:
Searching for a CEO without first settling the strategic direction of the company will affect every part of the process: writing the job description; nominating a long list of potential CEOs; interviewing candidates; and selecting the successor. Board members may assume they are on the same page, but if they haven’t explicitly discussed strategy and how it dictates the leadership needed, the succession process can fall apart. Boards can reduce this risk by conducting a strategic alignment exercise before embarking on a search or leadership development process for the next CEO.
2. Starting the process too late.
This risk was nominated by most of the respondents and stimulated conversations about when is the appropriate time for the Chairman to start succession conversations with the incumbent CEO.
3. CEO involvement
In choosing successor including considering the feelings of the incumbent CEO to the detriment of the process. Many companies have a structured leadership development program, of which CEO succession is a part. However, this doesn’t always accurately communicate how involved the board actually wants or expects the CEO to be in his or her own succession. Our interviewees — Chairs, NEDs and CEOs — generally agreed that the CEO should not choose the successor. There were differing views, however, on how much involvement and influence the incumbent CEO should have in the process.
4. Unsuccessful candidates leaving the organisation
An ideal CEO succession process will have identified two or more internal candidates who have already served in executive roles integral to the company’s success. Quite often, one of these people will leave if they aren’t named CEO. Boards want all candidates to have a positive experience and the Chairman must be prepared to have timely, constructive, and above all, honest conversations with those who don’t ascend to CEO. Retaining the executive may involve providing a different career path with new stimuli and experiences. If he or she isn’t persuaded to stay, manage the exit generously and respectfully. Just in case, successors for such internal candidates should be identified so someone is ready to step into the role.
Succession won’t be the first topic a Chairman broaches with a new CEO, but it will most likely be raised during the first year. Their shared understanding of the process and how well they work together will set the tone for the board and management team.