The importance of having in place an effective CEO succession strategy

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By Amanda Peters – Amanda.Peters@EthicalBoardroom.com

CEO succession is a critical decision for a company. A smooth changeover and succession strategy is essential to maintaining the confidence of shareholders, investors, business partners, customers and employees. Additionally, an effective strategy provides the incoming CEO with a clear starting point from which to drive the company forward. A thoroughly planned and executed succession plan is the key to a successful transition in leadership. Successful enterprises manage this process in advance with a defined set of milestones. A well-defined strategy will have a list of highly capable candidates ready to assume the CEO position whether through a planned or unplanned CEO departure. Success or failure of a CEO transition is influenced by many factors, which can often be of a social and psychological nature. How these factors are managed can have a lasting impact on the performance and status of the company. Whether a planned or unplanned CEO vacancy arises, in either case a succession plan should be in place before it is actually needed. It is the responsibility of the board to prioritise succession planning as a key measure of risk mitigation. Furthermore, succession strategy planning brings with it several beneficial and important by products. 

An effective CEO succession has many benefits such as ensuring the board and company leadership are clear on the strategy of the company and expectations of the new CEO going forward. A properly formed CEO succession strategy can also provide a framework that drives senior executive development and aligns the leadership at the top of the company with the strategic needs of the business. Additionally, by having a plan in place before the need arises, an effective CEO shortlist will be in place with sufficient candidates in the pipeline (both internal and external) to manage unexpected changes. A well-managed CEO succession strategy will also minimise the many risks that can arise from CEO transition. A clear strategy gives the CEO, through an ongoing analysis of the job requirements, the opportunity to adjust his or her role in light of changing business conditions and strategic imperatives. It is also important for the company that there is stakeholder consensus that the succession process is fair, well executed, and results in a good succession decision. Also a proper plan will ensure that highly talented people are retained – even those who were unsuccessful candidates for the CEO position and also that plans for a succession emergency are in place. By putting in place these strategies the relationship and information flow between the board and the senior management team will be strengthened – especially if regular contact and discussion of needs is part of the board’s review of candidates. 

Changing the CEO will impact company culture, board-CEO relations, and perceptions of interested parties both inside and outside the business. The disruption that occurs from a change in CEO can impact performance in a number of positive, neutral or negative ways. It is vital that a step by step plan is in place. This plan should be multistage – beginning with the board and leadership of the company establishing the needs and foundations of what the company requires in a CEO as well as in a succession plan. A step-by-step set of planned and unplanned contingencies and competency requirements should be documented. Also, a consideration and plan should be made for whether an internal or external candidate would be required and what challenges each would bring to the company and how these challenges will be tackled. 

A thoughtfully planned and well executed strategy for CEO succession offers a company both a clear transition for its leader whilst enabling the organisation to explore new opportunities for growth, and strengthen processes and systems throughout the enterprise. The costs of poorly planned CEO succession can be enormous and can cause long lasting damage to a company. The costs to the company may be both obvious and subtle and can also be both immediate and long lasting. The risks involved in CEO succession can be reduced by applying expertise and forethought in the governance process and organisational behaviour and with a plan being applied with rigour and independence. The time, effort and expense invested in creating and applying a stable CEO succession plan is an investment that will yield valuable returns to a company for years to come.

 

Attribution – Photo by World Economic Forum