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.