Succession Planning Roadmap

How to build a robust succession planning program that aligns current talent development with future leadership needs.

If your CEO has a sudden heart attack, do you know who will take the chief executive's place? What if your top executives are wooed away to another firm? Do you have the next generation of leaders ready to fill those roles? If not, you may end up with an empty C-suite - or worse, under-qualified people moving into leadership roles because there is no one better to take over.

The only way to reduce the effect of lost leadership is through a strong succession planning program that identifies and fosters the next generation of leaders through mentoring, training and stretch assignments, so they are ready to take the helm when the time comes. Research supports sound succession planning. A study some years ago from consulting firm Booz Allen Hamilton concluded that "over their entire tenures, CEOs appointed from the inside tend to outperform outsiders" when it comes to returns to shareholders. Yet many organizations struggle to take their succession planning programs beyond a static list of names slotted for a few top spots.

"Every company has a succession planning document," says David Larcker, a professor in the graduate school of business at Stanford University. "The question you have to ask is, 'Will it be operational?"

This Roadmap offers human resources leaders a framework and advice on how to create a robust succession planning program that aligns talent management with the vision of the company, ensures employees have development opportunities to hone their leadership skills, and guarantees that the organization has a leadership plan in place for success in the future.

Jim Skinner, former CEO of McDonald's Corp., was known to tell managers:

"Give me the names of two people who could succeed you." It was just one way the CEO continued the culture of succession planning at McDonald's.

It was an understandable priority considering Skinner only landed in the role in 2005 after two other CEO's died suddenly over the course of just two years. And when he retired in 2012, Skinner was confident that his successor, Chief Operating Officer Don Thompson, was ready to take over, because he spent much of his seven years mentoring him.

"I basically felt the responsibility to the board of directors to be sure I provided them with someone who could run the company when I'm gone," Skinner told Fortune a year before his retirement. "Until I was capable of doing that, I would not have left."

This kind of leadership level commitment to training and mentoring the next generation is a vital component of succession planning. And while most executives understand the importance of succession planning efforts, few of them believe their organization excels in this category.

A Practical Guide to CEO Succession Planning

Ensuring a Successful Leadership Transition

In this issue, Clarke Murphy and the CEO/Board Services Practice set forth the specific elements and timeline of a successful CEO succession plan, as well as the steps necessary to ensure a smooth transition.

The transition from one CEO to another is a critical moment in a company’s history. A smooth transition is essential to maintain the confidence of investors, business partners, customer and employees, and provides the incoming CEO with a solid platform from which to move the company forward. A properly designed and executed succession plan is at the center of any successful transition.

CEO vacancies can be planned or unplanned; in either scenario, by the time a succession plan is needed it is far too late to start building one. Because of this, it is the responsibility of the board to make succession planning a priority, even in the face of more immediate and tangible issues. In addition to being necessary for risk mitigation, succession planning brings with it several beneficial byproducts:

1. It provides a framework that drives senior executive development, aligning leadership at the top of the enterprise with the strategic needs of the firm.

2. It gives the CEO, through an ongoing analysis of the job requirements, the opportunity to adjust his or her role in light of changing business conditions and strategic imperatives.

3. It strengthens the relationship and information flow between the board and the senior management team through the regular contact that is part of the board’s review of candidates.

 Russell Reynolds Associates regularly advises boards and CEOs on Chief Executive Officer Succession Planning, and from this experience we have developed the following practical guide to the succession planning process.

 

Establishing The Foundation

Succession planning is usually directed by the governance or compensation committees, or occasionally a special ad hoc committee. The current CEO’s involvement varies (depending on whether the succession is planned or unexpected) with primary responsibility being the development of internal candidates. The Lead Director often acts as the single point of contact between the board and the sitting CEO on succession matters.

Succession Planning: How Everyone Does It Wrong - by Stephen A. Miles

CEO transitions are risky times for companies. When the departing chief executive officer has had a strong run, there is worry about his successor’s ability to maintain the momentum. When he has performed poorly, there’s anxiety about whether and how fast his successor will be able correct course.

In the current economic climate, CEO turnover can cause even greater tensions for both internal and external stakeholders–especially if some of them are blaming the existing boss for leading the company down the wrong path.

One reason it’s all so difficult is because transitions historically have not been well done. When there’s an internal succession, too often the outgoing CEO has had the largest–or only–influence on the process. He (or she) has too often made one of two mistakes, either choosing someone in his own likeness when what the company really needed was someone different, or choosing someone of lesser stature to preserve his own legacy. When a board has been able wrest control of the succession from the CEO, it too often has instantly gone outside to recruit someone from another company. That is often an overcorrection. Very able candidates may exist inside. And they may present much less of a risk than an outsider.

This is the first of two articles. Read the second, “Succession Planning: How To Do It Right,” here.

The practice of vetting and selecting potential successors has come a long way in recent decades. Cases of a departing CEO anointing his own hand-picked successor used to be common; they’re now very much the exception, except when the CEO is the company’s founder. Succession has come to be seen as a board of directors’ most critical responsibility, with the CEO just one participant in the process (although handling his role can be a sensitive issue).

Of course, having a succession plan is easy, and few companies in the era of the Sarbanes-Oxley Act of 2002, with its detailing of board responsibilities, would acknowledge they lack one. The challenge is to have a plan adaptable to the dynamic nature of the succession process and the shifting demands on the CEO position. And as with any other sort of plan, the hard part is actually executing it.

At the 1,000 largest American companies (by revenue) in 2008, 80 new CEOs were appointed, and only 44 of them–55%–were promoted from within. If you view a board’s having to go outside to hire a CEO as a failure in succession planning, that represents a breakdown in the system. A failure rate of 45% means that far too many plans aren’t working.

 Why aren’t they working? In my experience, board members too often fear they can’t find a truly viable successor inside the company. This can result from a lack of exposure to internal candidates and a subsequent lack of true understanding of what those candidates are capable of. The board may simply be unfamiliar with anyone not close to the CEO’s office. The CEO may be optimistic about a successor he’s grooming while the board hasn’t had the chance to develop confidence.

These observations point to a critical area where succession planning practices can and should be improved: The CEO and the board need to get and stay on the same page when it comes to the true readiness of internal succession candidates and making sure of their preparation.

Furthermore, CEOs and boards need to overcome the following myths about succession planning.

– External candidates are more exciting and promising. There is a paradox in succession planning: Internal successors are in many ways lower risk than outsiders, yet surprisingly few promotions are awarded internally. That appears to be because boards often prefer the devil they don’t know to the devil they do. Also, some find it difficult to imagine someone at the top after seeing him operate in a lesser role for years. Meanwhile internal candidates hear over and over that they are still just a year or two away from being ready.

– The successor has to be ready now. The concept of the “ready now” executive is not useful and should be stricken from the business lexicon. If a company did manage to make a “ready now” successor, the only way it would know would be after the fact–perhaps when that candidate was running a competitor because he tired of waiting. Such executives often end up doing very well somewhere else, proving that there actually was a viable candidate all along that the company was ignoring.

Just how “ready” each executive needs to be depends in part on certain characteristics of the rest of the top management team. One client of ours, a very large business, was looking externally for a new chief financial officer but ultimately decided on a young internal candidate, in his early forties, who had never served as CFO at a public company. The risk that the candidate would not appear “ready” was lessened by the facts that the current CEO was a former CFO and there were a world-class treasurer and controller already in place. In the end, the particular context of a leadership situation goes a long way toward determining how “ready” the successor needs to be and, consequently, how much risk the decision-makers may want to accept.

  

– CEO succession planning is single-person event. When boards take on succession planning, they often focus on the CEO role–the role that gets the most attention in the media and in the marketplace–to the exclusion of other positions. But the best succession planning really involves a constant assembly and reassembly of a leadership puzzle with many pieces. In fact, the pieces themselves aren’t of constant shape or size. As each piece is selected–from CEO, CFO and COO to sales and marketing chiefs and other C-level officers–the shape of the remaining pieces becomes clearer. And external factors such as company strategy, economic conditions and the like also affect the way the puzzle is solved.

The choice of the best candidate will depend partly on the team surrounding him or her and how all their skill sets complement one another. A trend we are seeing develop in the best managed companies is that boards aren’t satisfied with an externally calibrated view of just the CEO and his or her direct reports. Now boards want a similarly detailed measure of all the executives one or two levels below to see who’s on deck and how deep the talent bench is. That greatly helps in succession planning, as executives gain exposure to the board much earlier.

– What worked in the past will work in the future. When a board is planning to replace a legendary, or even merely successful, CEO there is a strong danger in framing the process by looking in the rearview mirror. What a company needs in the next six months and beyond may be drastically different from what was needed even in the last quarter. An individual who sees the company and its industry through a new set of lenses may be best prepared to recognize and seize new opportunities. Jamie Dimon was markedly different from Bill Harrison at JPMorgan Chase , as was Marius Kloppers from Charles Goodyear at BHP Billiton . All four leaders have been successful–but each successor was quite unlike his predecessor.

It is critical that boards define the skill sets, expertise and character required for the next CEO by taking into consideration today’s company needs. This is particularly relevant in the current market, which will test the succession plans of just about every company. The preferred candidate of six months ago may no longer be such, given a dramatically different business environment.

– We have a great internal candidate. We don’t need to look outside. As I mentioned earlier, some companies automatically view external candidates as more attractive. But others remain myopically focused on their own people. Having a viable internal candidate doesn’t ever excuse the succession planning process from looking outside to ensure that the best candidates for the job are considered. Boards increasingly run inside and outside searches concurrently. It is simply good governance, and shareholders should mandate it.

  

The tricky part of it all is communication, particularly with the internal candidates. Not being transparent about opening up the search for a successor to both outside and inside parties can do damage internally; people need to be informed upfront of how the process will run. Active management and communication of the whole effort is critical, and when done well it can leave the internal, if selected, feeling they were the very best candidate, period.

What the best companies do is first conduct an external market scan that identifies the key candidates within the industry, then find the adjacent and best athletes across industries, and finally roughly compare all those candidates to their internal ones, using the same forward-looking skills and experience criteria. Most often we see selection committees narrow the list to two or three external candidates that they engage and interview. If the external candidates are not dramatically better than the internal ones, companies take into account a certain transition risk, the external process is stopped, and the selection is completed internally.

Succession Planning: How To Do It Right

In an earlier article I discussed how most companies go about the business of succession planning at the top all wrong. Here I describe how to do it right. It’s mainly a matter of developing a disciplined methodology that results in something more meaningful than names in boxes on an organizational chart. Here are four basic steps to take to move from those names in boxes to something truly operational.

Step 1: Fully engage your stakeholders. There are many stakeholders in succession planning, and it is important that each be brought into the process in a timely manner.

Instead of the chief executive officer and head of human resources presenting their succession plan to the board once a year, I suggest that the process start by engaging the board in the development of a forward-looking skills-and-experience profile for the CEO. The profile should be a living document refreshed as necessary to take changes in strategy or market conditions into consideration. It should also go beyond the traditional position description and delve deeply into both the competencies and experiences required for the next leader. It can then be translated into a dashboard for grading succession candidates in an objective manner.

By engaging the board first in setting the criteria and then in refreshing them each year, you create buy-in and alignment in the eyes of the jury who will select the next leader. You force that decision-making body to think long and hard about what the requirements are for the company’s next leader; often they are different from those for the incumbent. You need a fresh look at the company by a board that is engaged and leading the process year in and year out, not just when a crisis requires it to spring into action.

Step 2: Assess your internal candidates. Once your criteria are established, you should get a baseline assessment of your internal candidates. I recommend that the board look wide and deep. The entire top team should go through the executive assessment process first–ideally by an outside firm–so that you don’t single out favorites and start a destructive horse race. The next layer of management should also be assessed–or, in very large companies, a pool of high potentials from that next layer down, where a dark-horse candidate can often emerge. Looking at these different layers also exposes the board to its C+2 and maybe even C+3 executives. In some instances this helps boards realize how shallow or deep the talent bench is and provides the impetus to respond accordingly.

Step 3: Conduct a stress test and simulation. As in much in life, practice makes perfect when it comes to executing succession plans. Once the criteria for the next CEO have been developed, it is important that you measure your internal candidates against them across two time frames: a short-term emergency time frame and a more planned succession in the medium or long term.

Here are the kinds of questions you must have answers for: First, is there an emergency candidate who can take the reins for a time if the CEO were to leave tomorrow? This is often the CFO, COO or a board member. Second, whom do we have to invest in today so that he or she will be prepared tomorrow? Third, has the company developed a team strong enough to ease the transition to a new CEO? And finally, is there in place a seasoned chairman or lead director who is willing to coach and mentor a new CEO?

In some cases, it may become apparent there are no internal candidates about whom the stakeholders are optimistic. Then the task becomes quite different. Now there is obviously real risk to the company, and a plan for recruitment and development needs to quickly be put in place. Boards faced with this dilemma are advised to go out and recruit new bench strength below the CEO level. Bringing in a potential new CEO at a lower level allows the board to view him or her at work for a period of time.

Should such an individual prove capable as a successor, his or her tenure in the company reduces the riskiness of the transition.

Step 4: On-board the successor. The most neglected step when it comes to succession planning is preparing for what happens after the successor is named. Making succession a sink-or-swim shock is simply too risky to endure. As I wrote in my previous article, “Succession Planning: How Everyone Does It Wrong,” there is no such thing as a “ready now” candidate. Anyone named as a successor has learning to do and mistakes to recover from. Part of the succession-planning process must be to take advantage of the time between the announcement and the acceptance of the top job so that the leadership can address as many needs as possible.

Crucial support must be provided–a good team, wise and accessible mentors, executive coaching and a feedback-rich environment–to create a setting in which the new CEO can be the most effective.

Boards can–and really must–play an important role in succession planning. Directors must be aggressive and unwavering in their efforts to make the process as real as possible.

Honest external evaluation of current talent and a system to develop a rich talent pipeline are just two of the areas where diligent board involvement can make a big difference. In this effort, directors have to remember that the search for a “ready now” candidate is a fool’s errand.

Similarly, what is most critical is creating and continually refocusing succession on the moving target of the knowledge, skills and abilities the next CEO will need in order to effectively lead. Finally, directors need to design their succession planning not just to choose the new executive but also to provide support as he or she finds his or her legs in the new role.

Stephen A. Miles is a vice chairman and the managing partner of leadership advisory in the Leadership Consulting Practice at the executive search firm Heidrick & Struggles.