CEO succession is becoming a higher priority for board consideration. The fact that CEO tenures are reducing in time, that economic cycles are ‘turning’ faster requiring different leadership orientation and that internal aspirants need to be managed more sensitively heighten the need for greater board oversight.
Increasingly Sheffield is supporting boards to plan around these realities. Active and regular market mapping that builds greater knowledge of the potential talent pool, the planful development of internal talent and the consistent alignment (through recruitment and promotion) of leadership capability to business strategy are all options available to boards through Sheffield’s Services.
- Ian Taylor, Managing Director Sheffield North Island
As part of DDI's CEO Succession Planning Conversations Series, this article looks in to the conversations that need to take place in order to identify potential successors.
Why you need to start having CEO succession planning conversations right now
Boards often put off CEO succession conversations until there’s a pressing need to begin the process (the CEO mentions retirement or company performance takes an unexpected turn). But research shows why that’s a problem:
- Boards are caught on their heels
A Stanford University study on CEO turnover showed that in a third of CEO departures, boards are not prepared to name a successor.
- Boards are forced to look externally, which increases the likelihood of failure
In line with the lack of preparedness, data from Challenger, Gray, & Christmas reports that in 2022, 52% of companies had to replace a departing CEO with an external hire, indicating that no one was ready internally.
- Shareholders are getting anxious
A third of companies say they are seeing an increase in the frequency with which investors are asking about their company’s succession plans.
- Board members are nervous
The same study showed that only about half of board members say they are very or extremely confident that their board’s succession plans are effective.
What’s the timeline for CEO succession planning?
Experience (the best teacher) makes it clear that haste is the enemy in CEO succession. If your CEO is likely to step down in less than two years and you have yet to begin formal succession efforts, you are late and should begin work with urgency.
It is far better to establish the process as permanent and ongoing, as opposed to one that starts and stops as CEO tenure dictates. This need not be time and resource intensive. In fact, our experience is that long-range CEO succession is far more efficient and manageable than the more urgent decision scenarios (which are also far more prone to risk and poor decisions).
Boards and CEOs should always know (or have a plan to identify and get to know) the strongest internal candidates for CEO. This doesn’t mean having ready-now CEO successors. It means building a small but strong slate of leaders with the strength and potential to take on the CEO role.
Who are potential CEO successors?
With board intent on the table, it’s time to take action. The CEO and CHRO must arrive at what process they will put in place, and even more fundamentally, who will be the participants in that process.
This triggers dialog about the profiles, experiences, and qualifications for potential successors and how current executives stack up.
- Succession timing and risk horizon: While the CEO may not be ready to name an exact date, they need to have a candid discussion with the CHRO about what a succession timeline might look like. It is worth calling out the obvious that this requires a great deal of trust and candor between the CEO and CHRO. The strength of this relationship is crucial at numerous junctures in the CEO succession process, as we will discuss.
- Strategy, culture, ESG, and DEI priorities: Getting started also requires a careful look at the business and cultural agenda and what strategies or initiatives might be affected by the leadership change. What are the key business priorities over the next three to five years? How will the CEO change affect the senior team and their ability to maintain and progress on ESG and DEI priorities? How will these changes alter the success profile for the new CEO as well as other C-suite members?
- The CEO success profile: What experiences, skills, and personality characteristics will make a future CEO successful, whether similar or different from the current CEO? Who in the current organisation might have potential to fit this future model? How can you be careful not to try to replicate the profile of the current CEO (an impossible task), and instead consider how the profiles of new/different CEO candidates might interact with strategic priorities?
- Performance and career history: This might seem obvious, but an often-overlooked necessity is to rely on demonstrable evidence of objective results. Long histories of success in prior eras are often (accidentally) viewed as proxies for relevant evidence of capabilities to lead into the future. Tangible evidence of performance in relation to future demands is essential.
- Culture and engagement data: What do you know about the cultural impact of potential successors? Has their success been based on how they’ve brought out the best in others, or have they steamrolled their agendas at the expense of critical talent?
- Motivations and aspirations: While more about motivation will be discussed later in our series, it is essential for the CEO and CHRO to discuss and perhaps reach out to learn more about the actual motivations of potential successor candidates. Hint: The person who has the ideal motivations to lead the organisation may not be the one who most visibly aspires to the role.
- Performance is not potential: Past performance is important, but readiness for the CEO role will demand much more. In addition to the results leaders have produced, it’s essential to consider how they handle uncertainty, how they learn from hardships and mistakes, how they grow and build new skills, how they engage people, etc. These future-oriented factors must be considered alongside the track records that built the reputations of successors.
- Succession is about preparation and growth, not decision making: This is the foundational succession dynamic. At this point, the board, CHRO, and CEO all have to be committed to succession as a growth process over time, which will prepare them to make the right decisions down the road. It is not a time to simply seek the name of a successor who can be documented on a page. This is the time to commit to growth.