Succession planning is vital to the smooth transition and continued running of a business when the time comes for a CEO to move on.
Nothing planned? Plan for success
While leaving a positive legacy behind scores highly as the motivation for CEOs to plan ahead, there is plenty of anecdotal evidence to suggest that too few think properly about their eventual departure. Many find themselves mired in day-to-day business operations and don’t find the time to invest in planning their succession.
Certainly, too few have a rigorous CEO succession plan in place or keep it as a regular board agenda item. Research by executive search firm Norrie Johnston Recruitment into 127 senior directors in UK companies found that 46% didn’t have a strong succession plan.
Similarly, research into the turnover of CEOs in the 500 largest companies in the US found fewer than 30% considered it to be an area of focus. This is despite robust succession planning being identified as a critical differentiator between the boards of these companies.
Find your best succession planning process
Having the right leader is a high-stakes exercise in ensuring the future success of your business, and it’s important to put in place a process to identify strong candidates. Kit Bingham, Partner in the Board Practice at Odgers Berndtson, says the succession planning process can never start too early.
“CEO succession is a process that should never really stop,” he says. “Before they leave, some outgoing chief executives will work with their chairmen to develop an effective bench of likely successors, tackling the firm’s future leadership options head on during their tenure.” This approach has the benefit of including the incumbent CEO in the process, which most experts believe is important to succession planning.
A major challenge facing many businesses when devising CEO succession plans is identifying the correct process for spotting potential candidates. There is no one-size-fits all method and, as every business is different in terms of size and structure, the best approach will vary from business to business.
This is perhaps even more likely to be the case for mid-market companies, where succession planning may be viewed by some as a process more relevant for large, listed companies. Fast-growing companies may also be more focused on growth than succession.
Shaun O’Callaghan believes that mid-market CEOs should consider a different approach to succession planning from counterparts at large companies.
“You should learn from what large corporates do, but not necessarily follow it yourselves. The plan needs to be bespoke and based on the type of business – whether it’s family-owned, listed or private equity-backed. You have to focus on the right process for the business.”
Talent management and succession planning
Succession planning is often influenced by three elements: pressure from shareholders, an external agency or headhunter, and the HR department, which should be influential in helping to develop existing talent.
According to Tim Bush, Head of Governance and Financial Analysis at corporate governance consultancy PIRC, this third option isn’t used often enough. “In a perfect scenario, as CEO you would bring through your own talent. But that is not always possible at smaller companies, which often need to look elsewhere for the right experience to move forward,” he says.
CEOs should continually be on the look out for potential candidates, but they shouldn’t rush to put an ill-conceived succession plan in place without first assessing the qualities of people already in the business. “Seek out people with a complementary yet diverse set of capabilities to give you more candidates to choose from,” adds O’Callaghan.
While developing people for the CEO role is crucial, so is development of everyone below them if you are to create a sustainable and organic succession plan.
“Make sure you are consistent about developing people in all the right areas all the way through the business,” says Maddie Blanks, People Consulting Lead. “Helping potential future CEOs get a fully rounded progression will enhance their leadership capability.”
By using the Apprenticeship Levy, to provide funds, Blanks says that businesses can train future leaders at little to no cost once they’ve been identified.
The right CEO for future challenges
When planning for CEO succession, the most important benchmark is the challenges your business will face over the coming three, five or 10 years.
This may require your business to break away from the style of leadership it’s become used to. “The notion of continuity is a lovely one, but continuity can present risks if it’s not what a company needs,” says Dr John Mervyn Smith, co-founder of the GC Index, a tool used to improve the impact people have in organisations.
However, appointing a CEO simply because they’re different from you is another common mistake. “We see people promoted to an executive level who don’t have great leadership, teamwork or people skills,” says Blanks, who explains that these tend to be experts in technical areas that the firm wants to develop. The hope is that promoting them into a leadership role will reveal hidden strengths, but this is not always the case and can cause wider problems.
Instead, restructuring teams can often resolve this conflict and allow the business to retain gifted technical individuals. “Creating special roles for those with extreme technical capability but who lack the behavioural or leadership skills not only benefits the business but is likely to be more appealing to the individuals themselves,” says Blanks.
CEO succession planning is not simply about appointing an individual into the hot seat. It includes building a sustainable structure and process that compels people to want to sit in it. It should be seen as an exercise in brand building that strengthens the whole business, rather than just an executive search that happens once every few years.
For advice on how to get your succession planning off the ground, contact our head of restructuring Shaun O’Callaghan.
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