Global CEO turnover is at an all-time high. During the COVID-19 pandemic, the world saw historically low CEO turnover rates in a bid to provide some stability during unprecedented times. But as countries moved past the pandemic, many organisations seemed to regain their risk appetite. Alongside this, there was an increase in global CEO turnover, reaching a high of 11.2% in 2022.1 This trend continued in 2023, and doesn’t appear to be slowing down as we enter 2024. Despite this, many boards may not be prepared for the level of CEO succession planning required to ensure that whoever takes up the mantle next is the right person for the job.
CEO succession planning is more than a changing of the guard. One of the board’s core responsibilities, it can become a powerful catalyst for business transformation and growth when done right – and disastrous when executed poorly. In this article, we’ll delve into the intricacies of CEO succession planning, including understanding what it entails, as well as the best practices for a successful result.
What is a CEO succession plan?
CEO succession planning is a strategy to determine who could replace the current CEO of an organisation once they resign or retire (and when those future leaders would be ready for the role). Having a solid plan in place is crucial for continuity as it helps to maintain a company’s profitability, values, longevity and reputation.
CEO succession planning involves several key steps:
- Define and align board expectations: What traits and qualities are most sought after in the future CEO? How may these differ to the current CEO given the strategic direction of the organisation?
- Candidate identification and selection: Use a data-driven evaluation process to reach alignment on the things that matter most in your next CEO.
- Preparation and onboarding: How can the board ensure a smooth welcome and efficient onboarding process for the incoming CEO?
- Long-term sustainability: Have a plan in place to communicate well and often with the current CEO and key stakeholders to maintain strong relationships and alignment.
The difference between a CEO succession plan and a CEO search
While a CEO search is a component of succession planning, it’s often related to emergency situations, such as a sudden departure. In this scenario, a search is conducted within a tight timeframe and can produce varied results. A successful succession plan is an ongoing process, where boards are regularly reviewing candidates. While it will most likely include a search, it’s conducted over a longer period of time, and typically also includes internal candidates.
The importance of a solid CEO succession plan
Planning for who the company’s next leader will be is arguably the most important responsibility of the board. Without the right person steering the ship, even established companies with solid business models and innovative strategies may struggle.
The current landscape, marked by unprecedented disruptions and accelerated digitalisation necessitates a fundamental re-evaluation of the skills and attributes a CEO needs today. Boards must proactively rethink and recalibrate the skills they seek for long-term viability and growth. A solid CEO succession plan helps the board to align on their thinking, be comfortable with the trade-offs, and have a roadmap for success.
Considerations relating to tenure
According to a report by Harvard Law, median CEO tenure has decreased 20% from six years in 2013 to 4.8 years in 2022 amongst the S&P 500.2 This highlights the need to start succession planning early in a CEO’s tenure. Even when CEOs are performing well over extended periods of time, boards may choose to consider limited CEO tenure. While long tenure may bring some advantages, it can also lead to an increased number of risks, including:
- Becoming detached from changed environments
- Complacency
- Lack of learning and development
- Favouring avoiding losses over pursuing gains
To avoid these risks, boards may consider limiting CEO tenure, in turn making CEO succession planning fundamental.
Best practices for CEO succession planning
When it comes to planning for the next CEO, there are a number of best practices that should be followed. These include:
Start early
Initiate the succession planning as soon as the new CEO is hired. It’s recommended to include the CEO in the process and communicate well and often to ensure that strong relationships are maintained throughout.
Create a succession pipeline
Have a bench of candidates with different capabilities who can step into the CEO position at least as an interim, in the case the CEO leaves unexpectedly or is incapacitated.
Review both internal and external candidates
While external candidates shouldn’t be discounted, focusing on internal talent is valuable as it allows the organisation to foster continuity and develop leadership pathways and retain top talent.
Prioritise executive development
Creating a normal cadence around executive development increases the chances that multiple strong internal candidates will be identified, assessed and given specific development opportunities. At least once every two years, the board should have a discussion about the forward-looking leadership requirements and update the CEO criteria as appropriate in response to changing circumstances.
Purpose-built software for CEO succession planning
BoardOutlook offers a flexible tool designed for the board to use upfront in the CEO succession planning process. It can serve as:
- A checklist for board discussion
- An assessment of internal candidates
- The foundation for an external search brief
The core idea behind this framework is it encourages alignment between the board and key stakeholders on the areas that matter most, forcing deep thinking given the current strategy of the organisation and the opportunities moving forward. The framework has specific sections covering key priorities, gateway experience and constraints and competencies.
Key priorities
What key priorities are going to be important for the CEO? This section reviews strategic opportunities and challenges facing the organisation, both overall and within strategy, operations, people and stakeholders.
Key areas for focus may include:
- Identifying three to five important challenges facing the organisation at the current point in time.
- The single most important strategic question that the board and any new CEO need to agree on.
- Identifying areas of opportunity for short-term impact (next 12-18 months) as well as long-term legacy (five to ten years) for the organisation.
Gateway experience and constraints
What gateway experiences must an individual satisfy to be considered for the CEO role? In this section, business leadership, strategy leadership and people leadership experience are considered.
Key areas for focus may include:
- International leadership experience
- Sector and/or channel experience
- Capital spend experience (including acquisitions) and/or P&L leadership
Competencies
What level of competency must an individual satisfy to be considered for the CEO role? In this section, the areas a new CEO must be exceptional in are reviewed.
Key areas for focus may include:
- Strategic insight - can they build a roadmap to the future
- Digital enablement - can they drive digital transformation across company value chain
- Market understanding - do they have a deep understanding of the past and future of the industry
When should the board change the CEO?
One of the most difficult decisions related to CEO succession planning is knowing when to start discussing the idea of a new CEO. Ideally, CEO succession is started in agreement with the incumbent CEO, however it often arises out of frustration with the current CEO’s performance, or a desire to redirect the strategy of the organisation.
Unnecessary time pressures should be avoided as much as possible. This can occur when decisions are delayed and the performance of an organisation has already deteriorated substantially. Boards are advised to identify leading indicators that may signal problems in order to initiate a change of the CEO. Succession planning as well as regular formal CEO performance reviews can support this process.
Start planning today
CEO succession planning is a critical component of effective corporate governance. Boards must embrace the process, focus on internal talent development and make use of the tools available to them to ensure a smooth transition. In a business landscape shaped by rapid changes and uncertainties, a well-executed CEO succession plan becomes a cornerstone for organisational resilience and sustained growth.
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