CEO succession planning is widely acknowledged to be one of the board’s key responsibilities, a point driven home in recent years by one governance expert after another. Yet, it is a fact of corporate life that a thorough and well-considered CEO succession process is still not being implemented in as rigorous and reliable a fashion as it should be at many companies.
But the Securities and Exchange Commission (SEC) Staff Bulletin—No. 14E (CF) to be precise—issued late last year may prove to be the game-changer required to elevate CEO succession planning to the position it deserves on the board’s list of priorities.
According to this guidance from the SEC, succession is no longer considered part of “ordinary business matters,” the details of which the board does not have to disclose. Instead, succession is now recognized as a fundamental duty, and part of the larger risk-management picture, with serious repercussions if it is not handled correctly. Further, the bulletin recommends greater transparency and shareholder disclosure about the management of succession risk “so that the company is not adversely affected due to a vacancy in leadership.” With access to this board-performance metric, how well boards handle succession is now increasingly a criterion that the investment community will have access to as they evaluate boards.
Addressing the Disconnect
According to Korn/Ferry International’s 34th Annual Board of Directors Study of Fortune 1000 organizations, 84 percent of directors surveyed believe the importance of having a CEO succession plan has increased, but only about half actually have one in place. Why the disconnect and, more importantly, what can be done to resolve it?
This sizable gap between awareness of the importance of succession planning and follow-through did not come as a great surprise to us. Our day-to-day conversations with CEOs and directors reinforce the fact that they get it: Succession planning is crucial; it will now be subject to greater outside scrutiny; adhering to best practices will protect the company’s reputation and value; and the board will be able to defend key leadership decisions, if need be, with solid data.
But the roadblock to implementation of succession planning persists on many boards, a result of several factors that must be addressed, including:
HABIT Succession at most companies was traditionally a process managed mainly by the CEO, with little involvement from the board.
HUMAN NATURE Succession entails dealing with real psychological factors, such as confronting one’s mortality and sensitive leadership choices where there are perceived “winners” and “losers.”
HOW-TO? Boards may not know where to start, what best practices are and how they can learn from boards that do it well.
Now is the time to take action and overcome whatever is standing in the way of implementing a succession practice. Because there is more than one approach, each succession plan needs to be thoughtfully adapted to a particular company and its board.
Start With a Vision
Effective succession planning starts with a mindset, rather than a checklist. It’s not simply about finding someone to replace the CEO, though that is of critical importance. Best-in-class boards start with a broad vision of succession and specific goals that stretch well beyond the boundaries of the corner office.
Properly implemented, succession is an ongoing leadership development process in which CEO succession is a subset. It is designed to provide talent options for key leadership positions at every level. Companies that achieve this goal not only score points in governance and investor circles, they attract the best talent when they become known as academies of leadership development.
Boards that master succession planning don’t have to worry about the prospect of a leadership crisis that could derail plans and progress, subject them to public criticism and potentially have long-term, negative repercussions for the company and shareholder value. They can instead focus on their business assured that regardless of circumstances— an emergency replacement required, short-timed departure or planned retirement—the bases are covered.
When the objective is to establish a world-class succession process, boards must first make succession a priority in word and deed. That means ensuring that succession-related discussions are on the board’s agenda at least once a quarter and, ideally and increasingly with many boards, at every board meeting. Because succession and leadership development, generally, are such complex, multi-faceted topics, board meetings often don’t provide adequate time to examine and discuss succession thoroughly. That is why most leading boards now have an annual or semi-annual off-site meeting devoted to succession discussions, much the way boards have focused on strategy.
ADDITIONAL STORIES IN THE DIRECTOR’S GUIDE TO CEO SUCCESSION:
The Ins and Outs of Successful CEO Transitions
Expect the Unexpected Before the Crisis Calls
Overcoming Resistance to Succession
Executive Compensation Programs Can Help or Hurt CEO Succession
To design and implement a succession process that ensures the most capable leadership is guiding the company, the place to start is with the strategy. Aligning directors on the strategy is an important first step because succession, specifically the key competencies—and their order of priority—that will be required in the leadership team are driven by the strategy. A company guided by a strategy that details growth by acquisitions, for example, will seek very different qualities in a CEO than a company determined to focus on growing existing businesses. The former will seek a future CEO with M&A experience, including post-merger integration, while the latter will emphasize industry-specific experience and a successful track-record running operations.
One word of caution: Never assume that a future CEO will be a carbon copy of the current CEO, no matter how effective a leader he or she has been. The key is to peer into the future via the strategy and create a profile for the CEO who will be best equipped to implement it.
In our experience, it is not unusual for directors on the same board to hold widely differing views of the strategy and what the company should focus on. An important part of the process is assessing where these views diverge and align, so that directors can come together as a team with a shared view of where the company is headed, as well as the resources required to get them there. Succession, like strategy, is forward-looking and dynamic. Shifts in the strategy resulting from changes in market conditions, economic factors, political circumstances, and a host of other variables, may necessitate shifts in the leadership competencies required.
Addressing Human Nature
Effective succession planning requires continual conversation and collaboration between the board and the CEO. Institutionalizing the process so it is regularly an agenda item enables the board to stay ahead of changing conditions that may affect the standing of potential candidates on a priority list. In addition, revisiting succession routinely will lessen some of the “human nature” concerns that can hinder succession planning, such as associations with mortality and internal competition. Handling succession in a transparent, matter-of-fact fashion—using a process that is perceived by all as fair—can ameliorate the personal sting felt by those being assessed. And establishing succession as a crucial but routine matter obviates the need for “the big talk” among directors and the CEO, increasing everyone’s focus and comfort level.
There are a couple of key areas in succession planning where it is wise, indeed considered a best practice, to engage a third party to work with the board.
One area in which outside, expert counsel is valuable is in helping the board to coalesce as a team around the strategy, which is crucial to effective succession planning and all of the work the board needs to accomplish as a close-knit group. Involving consultants experienced in assessing individual director views, highlighting areas of agreement and disagreement, and facilitating productive discussion on crucial areas of concern will help ensure that the board is focused on the right work at the right level and using its valuable time to good advantage. Concerns or questions about the strategy are far better aired in the appropriate forum, when they can be safely dealt with, than while making an important decision under time constraints, when differences can lead to a divided board and poor choices.
Partnering with a third party for the succession-planning process itself is also an established best practice with distinct advantages, akin to a governance “seal of approval.” With what was once considered the board’s own business now open for all to see, third-party involvement—including exposure to best practices—helps ensure a rigorous, objective process. This will be increasingly important to boards as the shareholder community evaluates how well succession planning is handled and adds that metric to other investment criteria. And in the event that leadership choices are challenged, boards will have the data to establish that they followed the right steps in executing the succession process.
Also critical, particularly to retain inside talent, is the perception that the process is fair and transparent at every turn. Even those who may be unhappy at being passed over for a desirable leadership position are more likely to accept decisions emerging from a process that they perceive as objective and based on fair selection criteria—and less likely to head for the exit.
Pull and Push
Developing and retaining talent—the leadership pipeline—is a critical element of the leadership development process. Hiring talent from the outside is always the back-up choice, unless the company is facing major change (such as a vastly different strategy or significant shifts in its industry) and those in line for succession do not possess needed skills and experience. Even when insiders top the list of successors, however, gaining an outside perspective is crucial to developing the best talent and making the best choices.
Leading boards often gain that external view with the help of a third party who can provide a deep and broad perspective across industries on best practices for succession. A third party will craft a benchmarking process that can be difficult for companies to undertake on their own on a regular basis. Benchmarking data enables companies to assess their own talent against the best outside talent, employing whatever screens they wish, including industry, company size and others. The benchmarking data can also serve as a useful check on succession planning, suggesting gaps in candidates’ skills and experience that will need to be filled if they are to succeed to particular positions.
Boards are increasingly feeling the push-pull of implementing a thoughtfully designed, well-executed succession process. The push? The ability of the investing public to now view and “grade” a process which, if there even was one, was historically handled behind closed doors. No board wants to be scrutinized only to come up short and be exposed as lacking in the leadership development arena. Ensuring a steady flow of capable leadership is essential and safeguards a company’s future by quelling any investor uncertainty about proper stewardship.
But the pull is just as important as the push. More boards are now focused on succession planning, not just because they have to do it, but because they recognize the advantages they gain, long-term, when they get it right. Demonstrating a rigorous succession process, based on established best practices, can have a positive impact on company reputation and value. That can translate into elevating the company’s status as a desirable place to invest as well as an attractive place for talented people to build a career.It is not unusual for directors on the same board to hold widely differing views of the strategy and what the company should focus on. An important part of the process is assessing where these views diverge and align.
Joe Griesedieck is vice chairman and managing director of Board and CEO Services at Korn/Ferry International.