Sudden exits, such as the recent departure of Equifax CEO Richard Smith, underscore the need for the board to always have a plan in place, says Michael Peregrine, a partner at law firm McDermott Will & Emery, who deals with governance issues. “Boards are probably tired of hearing about how important succession and emergency succession planning is,” he says.
“They get it all the time from the search consultants, and they are also loath to rock the boat with a popular CEO [by bringing up the issue]. But this one should shake people up [because] until recently, Smith was celebrated for his successful tenure and significant accomplishments.”
Emergency, short-term and longer-term succession plans all need to be part of the board’s arsenal. Though prevailing wisdom suggests CEO succession should begin the moment a new CEO takes over, Lowry, the chairman of Capital Power, says that’s rarely realistic.
“Boards have only so much time,” says Lowry. “But I think more thoughtful boards have a continuous radar screen that looks out at what, beyond the emergency plan, is the likely tenure you would live with on the short-, mid- and long-term basis with your CEO? And how does that synchronize with other critical positions within the organization?”
“Insiders often have limited transparency into the succession process, which can lead to a lack of clarity about the timeline and uncertainty about their value to the organization.”
Such forward thinking can help mitigate the kind of unexpected surprises that can derail a smooth transition, such as having two key players leave at once.
IDENTIFYING TALENT
Advisers at Spencer Stuart warn of hidden CEO succession risks and how to avoid them, including losing your best internal candidates and allowing insufficient time to close the developmental gaps of internal candidates. “Losing a strong internal candidate is a greater risk than many boards appreciate,” Cathy Anterasian, head of CEO Succession Services, North America wrote in an article released last year. “Insiders often have limited transparency into the succession process, which can lead to a lack of clarity about the timeline and uncertainty about their value to the organization.”
One of the most important things the board can do is establish an open line of communication by creating opportunities for executives to interact with the board directly. This allows directors and executives the chance to know each other better and will eventually help directors both with their decision making and their ability to convince runners up who are critical to the success of the business of their value to the company, increasing the chance they will be willing to stay.
By doing so, directors also won’t be surprised by developmental gaps in capabilities or experience or a lack of readiness for internal candidates to step into the top role. Anterasian says most candidates need a minimum of one year to make meaningful and sustained progress in key developmental areas, while even more time is needed to close gaps in experience.
Murphy and the Russell Reynolds team note that boards can bolster their talent pipeline by recruiting from the outside, but warn that this requires significant advanced planning as it typically means a three-year lead time for a senior executive who could potentially fill the CEO role to become fully absorbed into the company’s culture.
COMMUNICATING THE PROCESS
Gone are the days of blanketing succession moves under a veil of secrecy—and with good reason. Public companies don’t want a sudden change in leadership to rattle the market and cause a precipitous drop in stock price, or for leaked plans about an unannounced transition to pique an activist investor’s interest. A better bet? Be transparent and explain your plans, even if the change is not imminent.
