Posted: 26 Apr. 2024 4 min.

CEO succession and the role of the board: Planning starts the moment your new CEO is appointed

Topic: Board & Executive Matters

Succession planning is one of the most critical tasks for boards to manage today. And also one of the most challenging. According to Deloitte’s global report, ‘Time to rethink talent in the boardroom’, only one in three board members and C-levels surveyed believe their board’s workforce and talent-related discussions are adequate to meet their organisation’s needs. With AI becoming a bigger part of the agenda and resulting in an even longer list of competing priorities, the report underscores the importance of boards taking ownership and responsibility for leading CEO succession planning. 

When studied closely, it becomes clear that CEO succession is a delicate and high-stakes process. It not only requires a firm grasp of the company's strategy, but it also calls for a deep understanding of the organisation’s culture and talent. And it places additional demands on the board’s judgement and discipline when it comes to envisioning future business leaders.

Time is not in your favour
The board’s task of building and maintaining a CEO pipeline has never been more pressing. A study referenced in the Harvard Law School Forum on Corporate Governance shows a 20% reduction in the median tenure of CEOs in S&P 500 companies, shrinking from 6 years to 4.8 years between 2013 and 2022. The succession planning runway is getting shorter.

According to a Harvard Business Review article, The High Cost of Poor Succession Planning, from 2021, neglecting CEO succession costs no less than $1 trillion a year among S&P 1500 companies alone. This oversight not only results in financial losses. It also erodes trust among stakeholders and can lead to suboptimal performance, carrying potentially long-term implications.

So, what are these implications? For one, appointing the wrong CEO can impact the company’s ability to execute its strategy. Merely choosing another tried and tested CEO might seem a safe bet. But it’s not.

The Spencer Stuart article, Predicting CEO Success: When Potential Outperforms Experience, shows that 70% of S&P 500 CEOs who had previously served as CEOs elsewhere performed better in their first tenure than their subsequent ones. Not good odds for boards who look to grow and develop their company.

Take control
In my two decades of advising on executive succession, I have come to appreciate just how sensitive the topic is, and that it is not merely a question of “a search”. It’s a test of a board’s ability to navigate and prepare for one of the most sensitive and critical leadership transitions.

For boards, the key imperative is to take control. Boards need to get more directly involved and take full ownership of proactive succession planning. The task should be delegated to specific board members, and a full review of the CEO pipeline must be on the board’s agenda at regular intervals. Once a year is a good rule of thumb. Regardless of past procedures, the frequency of reviews should go up as the median CEO tenure goes down.

Focus on future challenges and opportunities
When working on succession planning, it is common to start by looking at the traits and responsibilities of the current CEO. This should be avoided. The current CEO was hired in a different context, and the skill sets required of the executive back then have most likely evolved. Additionally, the new CEO should not be picked exclusively based on how the company is led today. Instead, the board should start by asking: what will tomorrow look like?

The board must develop and maintain an up-to-date future CEO role specification addressing purpose, vision, priorities and key leadership requirements. It is akin to the IMD concept of Future Readiness and forces the board to work actively with scenarios and ensure that the role specification is aligned with the challenges of tomorrow and not of today.

Meet your talent
As I have alluded to earlier, research indicates that internal CEO candidates have a higher success rate, as they know more about the company’s culture, customers, and people. This shows how important it is for companies to develop their own rising stars. Consequently, boards must know and engage with talents across the organisation. Overseeing assessment of skills and potential, and ideally meeting them in person. And not necessarily just once.

If you are looking for best practices regarding executive talent development, bigger is not necessarily better. In the article The High Cost of Poor Succession Planning, the authors state that “large companies' excessive tendency to hire leaders from outside is one of the biggest problems with succession practices.” There is merit to knowing and meeting your best talent.

Control the narrative
Boards should not only take control of succession planning, they must also control the communication. Any unintentional disclosure or unclear messaging regarding succession planning can create uncertainty and undermine trust and stability within the board, the executive team and the broader organisation. As such, the board must exercise the utmost diligence in managing the succession process. In fact, keeping the details and the messaging within the plan completely airtight until the intended announcement.

Accelerate the transition
Whether the next CEO is an internal talent, or a leader handpicked from the outside, boards should plan for effective onboarding. It is hazardous to assume that a new CEO, experienced or first-timer, knows how to navigate the transition into their new position. Every context is different and the board should take an active role in accelerating the transition and supporting the CEO in creating a future-proof playbook.

The authors of The High Cost of Poor Succession Planning summarise their findings succinctly by stating that “CEO succession planning should start the moment a new CEO is appointed.” This may sound exaggerated. But in an uncertain and fast-paced world, I find it to be a sound piece of advice.

The board’s most essential responsibility has never been more important.

Forfatter spotlight

Michael Vad

Michael Vad

Partner, CEO and Board Services Leader

Michael comes with more than 20 years of experience as a board Advisory Partner and has specialised in board evaluation and board advisory having worked with both Danish and global companies, also on individual competence mapping and board culture assessments. Spørg mig om: Bestyrelses- og topledelsesrådgivning Michael Vad har i to årtier arbejdet med international bestyrelses- og topledelsesrådgivning for børsnoterede, familie- og kapitalfondsejede selskaber. Hos Deloitte leder Michael vores nordiske Board & Executive advisory-forretning med fokus på bestyrelsesrådgivning, CEO succession og talent management.

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