A CEO succession is one of the most important and sensitive moments in the life of an organisation. The investment by the board and a range of key stakeholders in selecting a new CEO is substantial and yet the rate of unexpected CEO turnover is surprisingly high.
A recent Russell Reynolds Associates analysis of S&P 500 companies revealed that in recent years, one in seven newly appointed CEOs left their position before the third anniversary of their appointment. That high failure rate may stem from the fact that few organisations understand the complexity of conducting a sophisticated and dynamic CEO succession planning exercise. Even among the best boards, fewer than 30 per cent consider it a primary focus area, according to our 2019 Global Board Culture and Director Behaviours Survey.
To help mitigate the risk of excessive CEO turnover, it is essential that boards support CEO successions with a thoughtful planning process that begins a full three to five years ahead of an anticipated change. As a first step, we encourage boards to take a forward-looking approach to strategy and reflect on context and how the company’s opportunities and challenges may evolve in the coming years. Some questions to help spur this discussion would be: how are megatrends impacting the ecosystem and the industry?; what is the most desirable future for the company for the next five years and the nature of the transformation required?; is the organisation adapted to these future challenges?; and do we have the leadership that is required to execute on this strategy successfully? By crystallising the company’s future environment, key stakeholders can then craft and align on the most relevant succession profile for the future CEO.
This forward-looking CEO succession profile is key to helping the organisation define the right talent pool to consider for its next CEO. Indeed, there should be a set of internal candidates that the board would put forward in any scenario, including key P&L business leaders, the CFO, the COO and the deputy CEO. In the context of a long-term transition horizon, however, we would recommend broadening the pool, albeit the development of the internal options is key. With the fast pace of disruption, there is a good chance that the current executive committee does not include someone who possesses the right mix of skills to lead through tomorrow’s challenges. The most promising talent may well be one or two layers below the executive committee.
Uncovering multiple layers of talent can create multiple benefits. For one, it mitigates risks by expanding the candidate pool and allowing for a deeper understanding of internal talent and the strengths and gaps that may exist. It also serves as an opportunity to invest in talent development and increase employee engagement.’
ORGANISATIONS THAT EMBED LEADERSHIP DEVELOPMENT INTO THEIR CEO SUCCESSION PLANNING PROCESS GENERALLY REDUCE THE NEED FOR AN EXTERNAL HIRE WHEN IT IS TIME TO SELECT A NEW LEADER’
By thoroughly assessing high-potential talent, we are able to identify the expertise, experiences and exposure each executive needs to prepare for consideration as a CEO candidate. Leading organisations then use these assessments to craft tailored, immersive and externally-focused development plans, which the board can regularly monitor with the help of the CHRO (and, in some cases, the current CEO). This investment in talent development means:
1. Future candidates focus on the right development activities to suit the firm’s needs
2. Executive development aligns with the firm’s strategy
3. The board has visibility into how the talent is evolving and can make adjustments over time
In our work with clients, we have supported many such top-talent development programmes as part of their CEO succession planning. Almost invariably, we find that this specialised and focussed investment drives a boost in the confidence, engagement and retention of the executives involved (see Figure 1).
Organisations that embed leadership development into their CEO succession planning process generally reduce the need for an external hire when it is time to select a new leader.
Nevertheless, it is important for boards to broaden their horizons by understanding the external market for CEO talent. Boards should approach this from two angles:
1. Market intelligence: understanding what is happening and what is changing at competitors, partners and in other geographies
2. Talent intelligence: having a specific view on external executives who could bring new and necessary capabilities to the organisation and who fit the requirements of the success profile
With this information, boards will be prepared to make a data-rich decision about which leader will best serve the organisation in the future, rather than defaulting to a presumptive nominee.
However, selecting a new CEO is not the end of the succession process. To best prepare and support the future CEO, it is essential for boards to think carefully about the process of the CEO’s transition. This process identifies the organisational stakeholders, risks and strategic goals while setting out a clear programme for the transition and broader organisational impact. Supporting the transition of an incoming CEO can significantly reduce the risks of failure or derailment, decrease the time from potential to performance and improve confidence internally and externally. We recommend starting this transition support as soon as the CEO is identified (usually three to nine months prior to public announcement) and extending it through the CEO’s first year in the job.
CEO transitions are inevitably complex and unpredictable. Yet, by planning ahead and taking new perspectives on the process and the candidate pool, boards can help protect their organisations from risks – and set up their future CEOs for maximum success.
