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Where to start with CEO succession planning?
I read an article that discussed a recent Stanford Business School survey. The findings showed that more than 50% of the companies they studied could not name a successor to their CEO if they had to. That got me thinking about our small organization - our CEO started the company and has been here 6 years. At some point he will leave, and we need to have a plan. Where does one start with CEO succession planning? How would you bring this conversation up to your CEO? We don't anticipate him leaving, but we need a back up plan just in case.
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9 Answers
This is an absolutely critical question for both large and small business. Whether it's a well planned transition (e.g., Microsoft), result of a tragedy (McDonald's, twice), or an externally driven event (AIG), knowing what process will be used is vital for business.
In some cases, the CEO is the face of the brand and the driving force behind the business (e.g., Apple, Berkshire Hathaway, and almost all small businesses). There are a handful of large companies where an iconic CEO (Bill Gates) transitioned smoothly and successfully with a well identified successor, but more that did not (e.g., Lee Iacocca, Michael Eisner). Small business CEOs possess more of the iconic role, as Mark correctly noted.
Whether the transition is foreseen or resultant from an unexpected event, having a process in place that has identified the effective role and required characteristics of an incoming CEO is critical. That may not be the same skill set as the incumbent, particularly in a small, growing business. The skills of the founder may not be what is needed to continue to grow the company.
A second element is to plan for the possibility that the CEO is incapicitated for an extended time. This may require the interim leadership of an identified senior executive or a member of the board with the requisite skills.
Do not try to anticipate the event that creates the need to implement your succession plan. The critical element is the vacancy and its immediacy, not what created it. I've seen too many companies get hung up on if this, then that only to end up not doing anything effectively.
One of the regular tasks of the board in reviewing the succession plan is to evaluate whether there is an internal candidate or whether the firm will need to look outside. I worked with a company in the past that had a vacancy and began looking internally only to have several executives decide they didn't want to be CEO and finally land on the wrong person. If the company must look outside, what timeframe will be necessary, what expenses are involved, and how will a search be conducted. I've consulted with organizations that would use a search firm as well as Fortune 500 company that annually scans for qualified #2s in potential acquisition targets and industries with similar leadership issues. For small and emerging businesses, the issue is often more financial since almost none reserve budget for a succession search and dollars may be harder to find.
From experience, raising the subject may well be less intimidating than you may think. He/She will quite likely be pleased to learn that you are thinking about the future health of the company. Keep in mind that part of his/her legacy will be to hand off a healthy company some day.
I'm not sure that you need to succession plan for a CEO, if they are doing their job properly they are there for "big picture" not nitty gritty and thus knowledge transfer is not as vital as it is in more technical jobs. One of the joys of changing CEO is that the new guy/girl is supposed to bring fresh ideas and revitalise an organisation. As long as the existing CEO has a decent notice period in his contract, you should be able to engage an executive search team to bring in a replacement in plenty of time to replace him, and most former CEO's will conduct a handover before leaving anyway.
Liz:
I think you should have a succession plan in place for all key executives. People leave, they get ill, things change and you want to be proactive not reactive. I believe that one of a CEO's key job requirements should be to participate in developing the succession strategy.
The strategy should be about key attributes and competencies not as rigid as a job description. I think it is perfectly OK to include people who are not currently in the organization, either have never been employed or have left.
The CEO succession strategy should also not be a "replicate" necessarily of your current CEO. Businesses change and go through evolutions, you want to match leadership to your current needs.
In small businesses your CEO may also be your "chief relationship officer", their sudden departure can wreck a business.
I had a client where the relatively young CEO died in a tragic accident and the business foundered.
I like the idea of using a model like the military or large corporations of indentifying multiple successor candidates and "refreshing" your list periodically.
I also like to begin "training" CEO candidates ten years out and rotating them functional areas. They won't all make it to the top seat, but is sure is nice to have choices....
Liz, I'd have to agree with Marks comments.
Research findings over the past six or seven years have been surprisingly consistent; in one survey after another—most recently, the National Association of Corporate Directors 2008 Public Company Governance Survey—board members rate CEO succession as one of their most crucial responsibilities, as well as one of the areas where they are least effective.
In the latest survey, only 11% said their companies were highly effective in this area, while 51% described their efforts as somewhat or less than effective.
Many CEO's will be reluctant to discuss succession planning, it's the boards responsibility to take a proactive approach to this problem.
You have three issues at play.
Rational
• Identifying job requirements based on company strategy
• Searching diligently for the best candidate
• Assessing candidates using multiple methods and raters
• Selecting the best candidate for the job, regardless of
personal loyalties
Political
• Dealing with factions within the board
• Avoiding destructive internal politics
• Balancing needs of external constituencies
Emotional
• Coping with personal emotions
• Helping those not selected adjust
• Creating support for the new CEO
• Moving on
Rational
Political Emotional
Here are some best practices to consider:
Board/CEO discussions on long-term succession
planning should begin three to five years prior
to the time a CEO transition is expected.
n The full board should be involved.
n Open and ongoing dialogue should occur between
the CEO and the board on the topic of
succession planning, including a formal annual
discussion of at least half a day.
n Criteria for the new CEO should be developed
consistent with the company’s future strategic
needs; ensure that the board and the CEO are
aligned on these criteria.
n Formal assessment processes should be used to
give board members a better quality of information
to assess candidates.
Board members should be given ongoing opportunities
to interact with internal candidates
in various settings.
n The succession should be staged, but horse races
should be avoided.
n Developing internal candidates is typically preferable
to external recruitment.
n The outgoing CEO should either leave the board
immediately or stay on as chairman for a transitional
period of six to 18 months.
n A comprehensive emergency CEO succession
plan should be in place at all times and reviewed at least annually.
I think that this subject should not be painfull at all, any CEO should take the responsibility to assist the business in identifying his/her successors.
In our company, successionplanning is a regularly scheduled agenda item and all key positions are reviewed, including the position of the CEO. Not only internal candidates are trained to step up the ladder when the time comes, also external candidates are discussed and shortlisted. If something would happen, we will always be prepared and we will have an up-to-date list of possible successors available.
You need to get the "buy-in" from the current CEO before you begin to plan anything else.
A sound job description must be in place that you can work with identifying qualifications and education requirements.
Based on the job description, an education plan can be put in place. Succession training can take years but will be worth it in the end when your CEO needs to be replaced.
In my past experience, there were usually individuals who were identified from a performance and experience standpoint. They were interviewed by the existing Senior Level team after which two individuals were chosen by the same team to put through the education process. Once this is complete, the two individuals are assigned "CEO" related work at the CEO's discretion.
As final training, when the CEO sets his retirement date, a final interview occurs of the two individuals and one is chosen. This individual "shadows" the current CEO for 6 months to one year before the reigns are handed over.
From the moment you pick up the gun Liz.
Taking my tongue out of my cheek, I would also pose the question, what kind of planning is being done in Sole Proprietorship businesses to ensure the continuation of business should an accident befall the owner?
Personally I have an encrypted full record of all my business dealings in excel format and my will contains a location and password for my executor who will step in and continue the business.
What's your advice for Apple and their situation with Steve Jobs?
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