In a rapidly changing and often unpredictable business environment, companies need strong leadership now more than ever. These days, even the best companies with the most innovative strategies will struggle without the right person at the top. Thus, every company must be prepared to deal with leadership changes.
Leadership change is a constant in companies. Research indicates that 10 to 15% of companies announce a new CEO each year due to death, illness, retirement, resignation, or termination. This applies across several industries, from healthcare CEOs and private equity CEOs to manufacturing CEOs, sports team CEOs, and more.
Without the right approach, leadership transitions can make companies vulnerable to uncertainty, creating numerous problems from nosediving stocks declining productivity.
While the majority of companies have some form of succession plan in place, only a few have a formal plan or follow it rigorously. When done right, CEO succession and transition planning can help protect your legacy and install a CEO who will pilot the company’s affairs into a profitable future. On the other hand, when done poorly or neglected, the company’s prospects are left to chance.
However, a company’s next chief executive officer is almost always a difficult question. The conversation can lead to deep mistrust in the C-suite or threaten the authority of the current leadership. Yet, while some boards avoid the question of CEO succession planning, others find ways to lay the groundwork for smooth transitions.
More often than not, a carefully mapped out succession plan can be the difference between sanity and chaos in a company’s leadership ranks. That holds true for nearly any firm — from private equity CEOs and startup CEOs to Fortune 500 CEOs and beyond.
To help you find a better approach to succession planning, we’ve identified seven best practices that can help ease the leadership transition in your company.
A seamless leadership transition doesn’t happen overnight. Therefore, the approach should always be proactive. Succession planning should begin from a position of strength and foresight. Your company should not wait until succession is inevitable and a reactive solution is needed.
Also, starting early allows enough time to plan, assess your candidates thoroughly, and gradually transition, so you don’t leave stakeholders behind. Setting out early also lets your stakeholders deal with emergency transitions better because there is no confusion about the succession plan.
You will need all hands on deck. The board, the directors, the incumbent CEO, and other C-level leaders should all be involved in the process. However, the company must carefully map out each stakeholder’s level of involvement to avoid power tussles and ensure checks and balances.
If an ad-hoc committee of the board oversees the CEO succession plan, it needs to provide the whole board with regular updates, so all directors understand the process, plan, and pipeline.
Once everyone is on board, you must agree on the skills, personal traits, and experience level the CEO will require to fulfill the company’s current and future aspirations. The succession process should not begin until all stakeholders on the board of directors, including the incumbent CEO, agree unanimously or by a majority.
Finding common ground starts with assessing the factors most likely to impact the business over the next few years, such as changing customer demands, cultural shifts, technological advances, and strategies for future success.
A recommended practice is to facilitate conversations on emerging industry, business, and work trends and how they will impact the organization, and by extension, the next CEO. Specifically, this affects where the CEO’s time and attention will need to go and the skills and capabilities the CEO must possess to lead in an increasingly fast-paced and evolving business world.
The result of ironing out your objectives should be a documented CEO succession plan that describes the process as well as the responsibilities and expectations of the new CEO.
The document should also establish a timeline for each step the board or committee will take, from assessing internal candidates and interviewing external candidates to appointing the new CEO and publicly announcing the board’s choice. The plan should also cater to what happens in an emergency departure.
A documented CEO succession plan should contain the process for its review and be reviewed regularly. This allows the company to update the capability requirements for the next CEO as the company’s needs change.
The next important step is to identify potential successors and ensure they receive the proper experience and exposure to assume the position. Identifying, approaching, and selecting likely CEOs is a complex process encompassing a wide range of risks and opportunities. You are essentially looking out for the right mix of technical and leadership skills, personality, and potential.
Naturally, undertaking a comprehensive audit of your existing talent pool comes first. Next, high performers should be funneled into a nurture program, preparing them for senior positions.
It is critical to ensure no disconnect between the type of training provided and the intended effectiveness. One way to invest in the growth and development of these potential leaders is to offer strategic mentoring and leadership coaching programs.
Internally, the leadership development program should provide first-hand experience in the CEO’s functions, including reporting to the board. This also enables the board to know candidates better and evaluate their performance.
Effective CEO succession planning is an exercise in covering all the bases. Therefore, it is also essential to deepen your understanding of the external talent market.
There’s always a risk that your best candidates will leave before time or become unavailable to take up the role. Likewise, your company may find itself on a path that requires a CEO with a new set of skills and experiences.
If you are hiring externally, you must ensure that the external hire understands the company’s ethos and communicates proposed directional changes carefully and after deliberation and consultation.
Best practices require a transition plan that helps the new CEO get up to speed on company goals, strategy, and company culture. Your directors will also need to invest time in listening to and guiding the new CEO.
Also, the board and the incumbent CEO need to promote the successor to lay the groundwork for a successful tenure. Lastly, the media, employees, and other stakeholders should all know that the board fully supports the new executive and will back his decisions.
Succession planning is an arduous process. But when done right, it can make an otherwise stressful transition much smoother. The simple canons include cultivating a high-quality talent pipeline, developing leaders, and regularly assessing fit.
As noted above, many questions need answering about who becomes the next CEO. Answering these questions and consistently applying a succession plan that considers both the organization’s and the candidate’s present and future needs will increase successor and company performance.
Our hands-on executive recruiters have experience working with private, public, pre-IPO, and non-profit organizations. Clients are typically $50 million in revenue to Fortune 1000’s or have assets between $500 million to $15 billion. Successful placements span the entire C-Suite – CEO, Chief Operating Officer, Chief Financial Officer, and include vice president, general counsel, and other director-level leadership roles.
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