No single event in the life of a company has a greater impact on culture, strategy, productivity and profitability than transitioning to a new chief executive. A smooth change of power is vital to securing the confidence of shareholders, customers and employees, while giving the incoming CEO solid footing from which to lead the company forward.
It’s also among the most difficult things for many boards to do well. Recent research by the University of South Carolina’s Center for Executive Succession (CES) at the Darla Moore School of Business found 44 percent of chief human resource officers said they had no successor candidates who could immediately step into the CEO role, while 37 percent said they had just one candidate.
In terms of successor candidates who might be ready within the next six months, 51 percent indicated they had no one lined up, and 30 percent had only a single person in mind. Even further out, in the six- to 24-month time frame, 25 percent indicated they had no potential successors in the pipeline.
That’s a startling gap in preparation, especially when you consider that the average tenure of CEOs is about nine years, with a 13.9 percent average annual turnover rate, according to The Conference Board. Most directors will deal with succession at some point during their board service. To be a good board, you must get this right.
“hiring and firing a CEO and responding to activists are probably the two most important things boards do.”
KEEPING IT ON THE AGENDA
Yet, studies and surveys suggest succession gets scant attention in the boardroom. Boards spend only about two hours per year on succession planning, according to a 2010 Stanford research initiative. In a 2012 Heidrick & Struggles survey of North American directors, the majority of respondents reported discussing CEO succession annually, or at most several times a year. Nearly a third said the topic did not come up regularly, and only 8 percent indicated succession was discussed at each meeting.
A 2009 change in Securities and Exchange Commission guidance said CEO succession planning raises a significant policy issue regarding the governance of the corporation “that transcends the day-to-day business matter of managing the workforce.” That moved CEO succession from the operational to strategic bucket and made it part of the board’s mandate.
Don Lowry, chairman of Capital Power and a director for Stantec and Hydrogenics, says succession should always have been a strategic issue but the events in 2009 heightened the importance by introducing structural and legal requirements that forced succession onto agendas. Now, “hiring and firing a CEO and responding to activists are probably the two most important things boards do,” he says.
Despite this, CEOs remain a big part of the problem, according to USC’s research. For one thing, decision-makers tend to reach early conclusions regarding their favorite candidate and then tilt the process in favor of the predetermined successor.
And while HR leaders assign similar levels of responsibility for succession to the board and the sitting chief executive, the CES survey results suggest CEOs often take greater control of the process than their boards.
That situation can easily backfi re, says former tech company CEO Les Trachtman. “You have to be careful,” he says. “When boards don’t get in front of this and take on the role of creating the succession strategy early enough, they often end up succumbing to the CEO’s handpicked successor, [who] could end up being satisfactory to the CEO, but not necessarily satisfactory to the board and the company.”