Boards understand the need for succession planning, but all too often they just don't do it very well. In surveys, directors consistently rank succession planning as one of the most important duties. However many boards don't give themselves strong marks for planning for a chief executive officer change and evidence suggests that's an accurate assessment. Even today only about half of public and private corporate boards have CEO succession plans in place, according to a recent survey by the Center for Board Leadership. The National Association of Corporate directors says just 16% of directors reported that their board is effective at CEO succession planning.
A comprehensive, objective, and ongoing succession-planning process is not merely good governance—in today's business environment, selecting the right CEO is critical to performance and sustainability. Management succession should be a continuous process in any company and should begin the day a CEO starts in that role.
Why do boards have difficulty with succession planning? In part because at the heart of succession lie personality, ego, power, and, most important, mortality. And there are several other, more concrete, obstacles to corporate succession planning, such as:
• Poor CEO/board dynamics;
• The lack of a well-defined process;
• Poorly defined "ownership" of succession planning responsibilities;
• Scarcity of internal, CEO-ready talent;
• Inability to assess objectively any potential internal candidates
Three Types of Sucession Planning
While in the past it was unclear who was responsible for CEO succession planning—the board or the CEO—in this Sarbanes-Oxley era the board now has ultimate responsibility while the CEO's role should be that of counselor. Indeed, the stakes are higher than ever for boards to select the right leadership for their companies, given highly visible dismissals of CEOs, critical attention directed to CEO compensation, and increasing pressure on performance.
In fact there are three types of succession planning, and boards tend to do two of them well, but frequently have difficulty with the third. The first is the so-called "name in the envelope"—the person the board has waiting in the wings if the CEO is incapacitated or dies suddenly, as happened at McDonalds (MCD) in April, 2004. The second is the "targeted retirement," where a CEO makes known to the board his or her date for departure, allowing the board to start an orderly process to find a successor.
The third type—and the most fraught with uncertainty—is the "deteriorating situation." In our experience, many boards are less capable of handling succession when it becomes clear over a period of months they must change CEOs sooner than planned because businesses are faltering. In general, boards do not pay enough attention to this increasingly common scenario.
Knowing Your Leaders
One reason boards might not handle deteriorating situations well is their insufficient knowledge of the talent inside companies they govern and within industries in which their companies compete. Boards are only recently grasping the significance of the "talent imperative"—the need to know who future leaders of their companies might be. For many years the talent imperative had been overshadowed by other fiduciary and governance responsibilities.
Now, however, boards understand they must gain deeper knowledge of senior leaders in their organizations. More than that, they realize they need a richer understanding of external executives in order to identify the best possible future leadership for their organizations well before such new leadership is needed. The talent imperative does not require directors to become talent managers. It does require boards to take responsibility for ensuring that the right processes for talent management are in place and that they have the appropriate knowledge of potential leadership.
What it comes down to is, directors should be experts in talent from a 1,000-foot level, and there are three ways to do this.
Benchmarking as Talent-Spotting
The first is to ensure a board has more than cursory exposure to its company's senior management. Directors should get to know the senior leadership well through presentations in the boardroom and regular meetings outside of it. The era when CEOs shielded directors from managers is long gone. CEOs are no longer sole conduits of information to directors, especially with new fiduciary responsibilities imposed on boards by Sarbanes-Oxley, such as oversight for financial reporting.
Secondly, boards should benchmark potential leadership. Benchmarking puts a continuous talent-spotting process in place that includes collecting information about potential successors, but it doesn't normally include approaching executives directly. Benchmarking provides boards with in-depth profiles of potential leaders, putting the board in a better position to assemble quickly a list of potential CEO candidates.
Because benchmarking requires a wide network of contacts and insight into skills and interests, boards often give the task to executive search firms. In the last year and a half Spencer Stuart has seen a dramatic increase in demand for benchmarking services from boards and has completed a dozen such assignments in just the last six months.
Moving Into the Future
Third, whether a board considers internal or external candidates or both, its starting point should be a specification for a CEO who reflects the strategy and context of a company's future, not its present, especially if the company has been successful with its present strategy and there is bias toward maintaining the status quo. The specification should reflect the best characteristics of world-class leaders in the company's business segment, including those of leaders in competitive companies.
This strategy requires strategic consensus on the board about future growth and a vision of where the company should be in five years. It is easier to ride the coattails of a successful departing CEO than to pursue an evolution or change in direction for a company. However a board that does this is often stuck in the past and not moving into the future.
Leadership changes are not easy, nor are they stamped from a mold. Each company is unique due to its strategy, situation, history, and culture. A highly skilled leader might not always be the best fit for an organization, given the organization's values, its way of operating, and its position in the marketplace. Boards should think carefully about fit because one of the biggest risks of bringing in an outside CEO is a poor cultural response.
Organizations Are Dynamic
An outsider can create ruinous clashes in a company by trying to impose systems the company rejects. On the other hand, some organizations need cultural transformation and "glass-breaking" CEOs, and boards should be prepared to stand by them until the CEOs get the hard work done. We have seen boards that do this well. They have stated publicly they expect radical change and, in so doing, they have helped deflect criticism.
Because organizations and marketplaces are dynamic, succession plans shouldn't be static. Boards need to update their plans and executive knowledge regularly. Things change far too quickly for a succession plan to be mothballed and remain unexamined. Boards must embrace the reality that few things matter more to an organization than having the right leaders in place today and in mind for tomorrow—while recognizing tomorrow can arrive at any time.