For more than a year, 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 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. Is your organization ready?
So, what can boards and leadership teams do to ensure an effective CEO succession planning process? 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 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 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.
Need help with your succession planning effort? Salo Advisory can help you succeed—whether you’re just starting a succession planning process or you’re stuck somewhere in the middle. We have the experience, tools, and processes to get you to the right candidate for your organization’s future. Contact us to learn more.