Succeeding At Succession

Ensuring smooth change at the top is a priority for any board. Here's how to get it right.

Corporate governance analyst Nell Minow echoes that concern. Boards “still defer to the CEO on succession planning, as they do on compensation, acquisitions, strategy and board membership itself,” Minow wrote in her recent post, “Why Can’t Boards Get CEO Succession Right?” Directors naturally tend to defer to the person who appointed them. “Even capable, accomplished executives tend to relinquish authority to the CEO who appoints, informs and compensates them,” she wrote.

A report from The Conference Board analyzing transition events at S&P 500 companies from 2000 to 2014 found that only a small fraction of companies have a dedicated CEO succession committee. Instead, 60 percent assign the responsibility to the full board of directors, 21 percent hand the job to the nominating committee and 15 percent give it to the compensation committee. Only 4 percent create a dedicated succession committee, the study found.

While CEO input is critical, most experts recommend a continuous and collaborative program for succession management, with oversight duties assigned to a board committee and the full board ultimately held accountable. It is often helpful for a lead director or nonexecutive chair to orchestrate the partnership with the incumbent CEO.

FACTORING IN STRATEGIC DIRECTION
A critical first step in the CEO succession process is alignment among board members regarding the company’s strategy and future path, particularly in terms of the specific experience and talents needed in the next CEO, writes RHR International’s Deborah Rubin, senior partner and practice leader co-head, Board & CEO Services.

“Even capable, accomplished executives tend to relinquish authority to the CEO who appoints, informs and compensates them.”

“Ideally, this is done in partnership with the current CEO, but it is ultimately the board’s responsibility,” Rubin wrote in a recent RHR post. “This process requires time, candor and the willingness to surface conflicting agendas, perspectives and risk tolerances. Not all boards take this step, and not all their successions go awry. But sometimes they do.”

A survey conducted last year by the International Institute for Management Development found that only 43 percent of respondents agreed that their board’s succession approach was integrated with their organization’s long-term strategy.

In their Practical Guide to Succession Planning, Clarke Murphy and members of the Board Services Practice at Russell Reynolds Associates recommend that boards begin by examining company direction and strategy over a five- to 15-year period, factoring in the impact of changing scenarios, such as the continuing globalization of supply chains and the risks and opportunities brought by industry disruption.

A sound succession plan calls for boards to consider what the company needs in the near and longer term, keeping in mind that those requirements are dictated by the future business strategy, which may mean looking beyond the success formula of the current CEO and management team. What will propel the company to greater growth and performance?

“If you’re caught in a rut, an outsider often looks at things differently than the existing management team and can do good things for a company in terms of innovation, creativity and growth,” says Trachtman, who speaks and writes about governance issues. He advises bringing in outside candidates early in order to ensure you’re making the right pick. “You want to give people authority and responsibility with projects that are important and that give you a view of how they interact in tougher situations.”

READY FOR THE WORST
While it may be common knowledge that every company must have an emergency succession plan—usually involving a key member of the executive team as successor, at least on an interim basis—it’s far from common practice. Forty percent of directors participating in a 2014 survey conducted by RHR International and Chief Executive magazine said their companies were not prepared for an emergency succession in the event of an unexpected or unplanned departure of the CEO.


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