CEO succession planning best practices
CEO turnover was quelled by Covid-19 as companies chose stability during the global pandemic. However, as the pandemic loosens its grip on society and the corporate world, CEO turnover is escalating at an unprecedented pace. U.S. companies announced 133 CEO changes in April 2021—an increase of 177% from April 2020 when only 48 CEOs left their posts.
Arguably, no factor has a greater impact on a company’s success than the selection of a new CEO yet, according to the Harvard Business Review, only half of U.S. companies have an adequate plan or process for CEO succession.
In this article, we’ll explore what can boards and leadership teams do to ensure an effective CEO succession planning process in three parts:
Setting the stage for success
Appointing a CEO is different from filling any other role in the organization. It’s major strategic initiative that impacts the entire organization and its stakeholders. That’s why the most successful organizations:
Think of CEO succession as a process, not a single event
Identifying and developing potential internal CEO successors is time-consuming and can take years. Ideally, CEO succession is a multifaceted, long-term planning process that starts as soon as a new CEO is appointed. If that didn’t happen, the sooner succession planning starts the better. When developed over time, an effective CEO succession planning process fosters a partnership among directors, management, and potential internal candidates. This also gives the company time to build a complementary and supportive team around one or more favorite CEO candidates.
Make CEO succession planning part of corporate strategy
The board needs to make CEO succession planning a strategic priority. The CEO succession impacts all aspects of an organization, it’s important to include it in your long-term corporate strategy. After all, the capabilities the CEO will need in the future depend on what kind of future is planned. As the vision for the company evolves, keep CEO succession top of mind—adjust the criteria for the future CEO as needed.
Create a culture of development
The vast majority of companies give internal candidates the nod. In 2020, 71% of CEO successors were internal hires in U.S.-based companies. As such, creating a culture of development, not just among the executive team, but two or three levels deep in the organization, sustains a company’s performance at all levels and ensures the retention of key talent. Even if the board goes outside the organization to select the next CEO, a corporate culture that identifies and develops its talent is more likely to have committed, effective, and trusting employees.
Act in a timely manner
Failing to remove a poorly performing CEO can have a disastrous financial impact. According to a BCG study, companies with a successful CEO (with the right profile to tackle the company’s evolving strategic priorities) generate total shareholder return (TSR) that’s three times higher, than companies with a poorly performing CEO. Moreover, in the last 18 months of a poorly performing CEO’s tenure, companies generate TSR that’s only 50% of what they achieved during the rest of the CEO’s tenure with the company.
Define a CEO succession process
Defining and agreeing upon the steps of your succession planning process will help your stakeholders prepare for what’s next and what they’ll need to do. Creating a formal plan streamlines collaboration, fosters alignment, increases efficiency, and mitigates risk.
The succession process: Choosing (or developing) the right candidate
Whether or not your CEO is planning to leave any time soon, creating a formal succession process streamlines collaboration, fosters alignment, increases efficiency, and mitigates risk. Although there is no one way to do CEO succession planning, the Salo Advisory team recommends these steps:
1. Create future CEO criteria
Long before discussing possible CEO candidates, the board and CEO should agree on the essential future CEO capabilities. Gaining alignment among directors on CEO attributes can be a challenge, but it’s worth the effort. The development of future CEO capabilities starts with asking several simple questions such as:
- How will the organization be different in 3-5 years relative to revenue, market positioning, customer set, geographic locations, size, location, and culture?
- What are the CEO capabilities necessary to drive the long-term strategy?
- Which of these capabilities are non-negotiable?
- How strong is the preference to have an internal successor versus an external candidate?
2. Build a talent pipeline
After identifying the CEO criteria, it’s time to identify potential internal CEO candidates and start preparing them for the job. Ideally, the organization can provide a mix of on-the-job learning, relationship building, and formal training—specifically designed to around each candidate’s strengths and weaknesses. For example, the candidates could:
- Be assigned challenging assignments with decision-making authority
- Get exposure to many areas of the organization through collaborative projects/rotations
- Present to members of the organization regularly
- Interact with investors and other outside stakeholders
- Join an external peer organization or attend leadership conferences
- Have 1:1 sessions with c-level executives or mentors.
3. Assess internal candidates
No matter how experienced an internal candidate is, becoming a CEO greatly increases the complexity of their work. Even if the candidate is a known top performer in the organization, it’s important to take time to thoroughly evaluate their ability to take on CEO responsibilities. Performing comprehensive evaluations for internal candidates will help the organization:
- Understand candidate readiness (and what skills they may need to develop),
- Compare the internal resource to other candidates, and
- Eventually allow the board to make a confident decision.
4. Benchmark against external talent
An effective CEO succession process includes external benchmarking to compare external candidates against internal successors. This benchmarking is typically done without notifying candidates to preserve confidentiality. Doing an external benchmarking every two years also helps inform the development of and readiness of internal successors against external candidates. It also helps the organization “keep an eye on” potential external candidates as their careers progress. Then, about six months before a timed succession, external candidates should be considered in earnest—even if the organization has good internal options.
5. Plan for onboarding support
Every new CEO, even those who have been with the company for years, need onboarding help. Whether they’re new to the company or new the role, onboarding is an important part of the process.
CEO onboarding best practices
When a new CEO is chosen, onboarding is critical to their success. Remarkably, 40% of senior leaders fail within 18 months of assignment. This failure is most often due to an inadequate onboarding process without a strong CEO onboarding plan. A solid transition—spanning a full year—will give your new CEO a strong start. Salo Advisory recommends a transition plan that includes four best practices for onboarding a new CEO.
1. Knowledge-sharing with the leadership team
Getting insights from the senior leadership team is crucial for all incoming CEOs, including those who were promoted from within the organization.
Your CEO onboarding plan should include frequent in-depth discussions with the outgoing CEO that provide:
- Coaching and feedback
- Insights on the operating styles, histories, and expectations of board members/senior management
- Expectations of stakeholder constituencies (e.g., investors, creditors, customers, analysts, and regulators)
Additional conversations with members of the senior management team can add extra context and prevent biases.
2. Stakeholder communication
Following a briefing period, the incoming CEO should be introduced to the company’s stakeholders in a series of information-gathering sessions. This allows the outgoing CEO to gracefully pass the baton, while simultaneously building support and goodwill from other constituents—especially stakeholders the incoming CEO has not interacted with before.
3. A robust written plan
Continue your CEO onboarding checklist with a detailed timeline. With the involvement and support of the senior management team, develop a timeline that outlines the orderly transition of roles and responsibilities. If the appointment is an internal promotion, this includes the elevation of the executive who takes over the new CEO’s former position. If the outgoing CEO remains as a chairperson, that role needs to be clearly defined to avoid interference with the new CEO.
4. Board involvement
It’s important that the board sees the new CEO as the new leader—even if the new CEO is already known to the board. The new leader can be phased into board meetings over time. To the extent possible, the outgoing CEO should provide coaching and feedback to his or her successor throughout the board introduction process.
Putting it all together
When planned effectively, CEO succession is more than a changing of the guard—it’s an opportunity for the entire organization to grow and evolve. Developing a succession strategy that incorporates best practices and a clear process will ensure the CEO and the organization advance and thrive together.