The CEO, supported by the board, steers the organization in the right direction, ensuring a seamless implementation and execution of business strategy. A good CEO is therefore critical to the success of every company’s operations. This then makes CEO succession planning key to maintaining long-term operational effectiveness. But how do organizations get it right?
What Is CEO Succession Planning?
CEO succession planning describes the steps necessary for the board to take to maintain the same level of CEO leadership long-term under different leaders. Furthermore, it is an ongoing process.
Although CEO succession planning is considered the board’s responsibility, the incumbent CEO, especially their insight, is an important element that influences the plan.
Why Is CEO Succession Planning Critical to Company Operations?
Average CEO tenure globally tends to decline, resulting in an increase in CEO successions at companies. Having a plan how to appoint adept CEOs aids in maintaining a steady level of growth and response to crises.
A well-prepared CEO succession plan helps companies transition smoothly from one executive to the next, without disrupting operations. On the other hand, the lack of such a plan results in an ill-organized transition and consequently, a negative impact on employees, shareholders, and other members of senior management.
CEO succession planning determines a company’s short- and long-term outcomes.
With so much at stake, boards need to recognize the importance of CEO succession planning to the well-being of their companies.
Best Practices to CEO Succession Planning
1. Integrate Succession Planning into Long-Term Business Strategy
CEO succession planning should be integrated into long-term business strategy to facilitate alignment between sought-after CEO qualities and actual leadership needs. In fact, changes and goals in the strategy can be translated into the skill requirements of future CEOs.
By analyzing what could be the biggest impact on company operations near- and long-term, the board can identify the skills and experience necessary for a successor CEO to possess. For example, digital transformation has become a prerequisite for growth for many companies across industries. Keeping that in mind, boards should include considerable experience in digital innovation in their CEO-candidate profiles.
2. Build a Documented Plan with a Timeline
Just like a business continuity plan needs to be written down to be easily accessible and transparent to all, a CEO succession plan, should also be documented.
A detailed CEO succession plan includes:
- Goals necessary to complete the succession
- Timeframe for assessing, interviewing, and appointing CEO candidates
- Timeframe for CEO succession planning inclusion on board meetings
- Responsibilities and skills of the CEO
- List of possible candidates
The succession plan and criteria for a new CEO need to be adapted annually to the changes that occur in the company. This ensures the candidates have the capacity to implement the strategies prepared by the board.
Since it is an ongoing process, CEO talent management should be adaptive, corresponding with the strategy and direction a company is following.
3. Include the CEO in Succession Planning
Boards of directors are often reluctant to discuss the matters of succession with incumbent CEOs. One of the reasons is fear that CEOs might misunderstand such conversations. For example, the CEO might think the board wants a replacement. Or, the board might fear a discussion on succession could detract the CEO’s focus.
But even when the CEO is performing well, the succession discussion should be a routine occurrence between the CEO and the board. It’s good practice to regularly discuss succession with the incumbent CEO even from day one of their tenure.
The CEO should actively participate in the identification of potential internal CEO candidates and their preparation for the role. The incumbent CEO has insider knowledge of the many valuable qualities necessary for the job.
4. Develop a Pipeline for Internal Leadership Candidates
The development of a talent pipeline is an ongoing process that involves the active preparation of internal candidates and benchmarking the necessary skills and experience with external candidates. A strong pipeline for internal leadership candidates helps expose the candidates to first-hand experience in the role of CEO.
We recommend that boards build reliable pipelines with at least two to three candidates. This helps maintain continuity in case there’s a need for one of the candidates to assume the role of CEO.
5. Create an Emergency Succession Plan
The board should actively seek out and groom other senior management leaders as potential CEO candidates (e.g., the COO or CFO). In case of an emergency CEO departure, there will always be a suitable, if only temporary, CEO replacement.
The emergency candidates must know the responsibilities and how to manage operations to be able to act in the role quickly and effectively. It’s not uncommon for one of the directors to become an interim CEO.
CEO Succession Planning Is the Core of Effective Long-Term Company Strategy
CEO succession planning should be embedded in a secure and regular conversation between the CEO and the board to facilitate transition when an incumbent CEO becomes unavailable. Having a solid succession plan lets companies move forward without risking that a sudden loss of the CEO disrupts operations.