One of the governing board’s critical responsibilities is to select the CEO for the organization. However, data from a Stanford research initiative reveals the following:
- Only 51% of boards can name the successor CEO
- 39% say they have zero internal candidates
- Only 2 hours per year on average is spent on succession planning
- About 50% of boards state that they know “well” the strengths/weaknesses of potential internal candidates
Because of this underperformance, boards (70%) turn to emergency rather than permanent succession and select candidates they don’t consider viable permanent candidates.
For years now, the governance literature has focused attention on succession planning for the CEO as being a vital or even most important role for a governing board. The CEO turnover rate ranges from 9-14% globally. Let’s examine why and what the board can do.
Impact of No or Poor Succession Planning
A continuing trend in organizational life is that employees are attracted to and stick with an organization because of the worth of the mission, the culture inside or what it feels like to work there and the relationship with co-workers and leadership. Compensation, benefits and the like are now considered almost an ante to get you into the game of attracting the talent you want, rather than what seals the deal.
The practice of leadership will determine whether there is integrity in what you as an organization say you believe in and wish to be. Leadership that is out of integrity significantly impacts attracting and retaining talent. And, increasingly, the state of integrity of leadership is known by potential applicants because of social media and networks.
What does this have to do with succession planning? The failure to plan for succession of your CEO relegates maintaining integrity of organizational culture to a crap game. The risks are too high, with potential impacts including:
- Power struggles among managers vying for the top job eroding cooperation and performance
- Clients losing faith in the business to continue to meet their needs
- Increasing staff turnover as staff seek certainty vs. an unknown future
Models of Succession Planning
A Stanford School of Business research report finds that 80% of new CEO’s are promoted from within. That trend is associated with high performing companies. The report cites four models for succession planning, and the pros and cons of each, as follows:
- External candidate
Pros and cons for conducting your search for a new CEO from outside the organization include:
- Pro: The board is freer to make strategic, operating and cultural changes.
- Con: Disruption of operations and staffing.
- Con: Board unfamiliarity with the new CEO’s performance.
- Con: Leadership style may disrupt a positive culture norm.
- Elevate internal executive (often COO)
Pros and cons for grooming an internal candidate that is selected to fill the CEO role:
- Pro: The candidates performance has been observed by the board, thus requires less risk.
- Pro: Relationships with board and staff are already established.
- Con: The creation of COO position as the “feeder” to the CEO role can create confusion re. decision making.
- Con: Too long in COO role risks turnover.
- Horse race between internal candidates
Pros and cons for opening access to the CEO role to a number of candidates in the organization include:
- Pro: Performance of each candidate can be observed by the board.
- Pro: The board reserves options re. CEO.
- Pro: Good for skill development.
- Con: Creates internal factions associated with candidates.
- Con: Brain drain as losers usually resign.
- Inside-Outside Model
In this model, the board chooses to develop an internal candidate and simultaneously evaluate external candidates. The pros and cons include:
- Pro: Creates a motivator for internal candidate.
- Con: Requires more board planning and oversight.
- Con: Process has potential to erode trust with internal candidate.
Keys to success
There are a few keys to success regardless of which model above that you choose.
- Stay the course: Succession planning requires significant board involvement that can’t be delegated or contracted out. Board-CEO trust is vital to success in all organizations and can only be built over time by working together and communicating.
- Seek current CEO help cautiously: The existing CEO may be able to play a vital role in coaching and mentoring, but this dynamic can be a bit dicey. For example, if the CEO is perceived to be hanging on to his or her position, that can be disruptive to the transition. Or, if the CEO seeks to assure his or her methods and approaches will be maintained going forward, that too can be problematic if the best candidates promote fresh ideas.
- Develop your hiring standards: The board must maintain its own perspective in evaluating candidates vs. relying on the existing CEO to do so.
- Define CEO competencies: The process should include development of a list of core competencies for the CEO position and ongoing evaluation of progress in attaining those competencies.
The Path Forward
The Stanford Research findings are validated by our own findings in working with organizations. Board’s need to evaluate their own performance on succession planning and take the following steps if they have not already done so:
- Consider your CEO succession planning as a vital part of risk management for the organization
- Establish a committee of willing and available directors to put in the time to develop and manage the succession effort
- Decide on which method you wish to pursue
- Define the competencies needed in your CEO
- Make maintaining a consistent healthy organizational culture a key consideration
- Get to know the strengths/weaknesses of management team members below the CEO
- Either research or get outside consulting help to design and execute your succession planning program
 “CEO Succession Planning”, Larker, D. & Tayan,B., Stanford Business Corporate Governance Research Initiative