The perks afforded to individuals fortunate enough to reach the pinnacle of corporate success are plentiful, and being a chief executive officer (CEO) is the epitome of corporate rise. Unfortunately, and perhaps understandably, many CEOs become so wedded to their positions that they fail to develop and implement an effective CEO succession plan.
The most enlightened chief executives understand and embrace the need for a viable succession plan. They also know that their board will need guidance in the matter. Succession planning should be conducted in a methodical manner. For an experienced executive, establishing the process, identifying the obvious candidates, and completing the replacement tables are very basic steps of thoughtful planning. However, identifying and developing the CEO’s potential successors inside the corporation are much more difficult tasks. Like athletic coaches, business leaders must master the art of talent identification and development.
Because talent is the key to success, some boards attempt to identify potential CEO candidates very early in their careers and watch them throughout their development. Other boards wait until talented people reach a certain level in the company and then put them on a track for accelerated development. Some boards wait until a small pool of qualified people emerges inside the company and then choose from among them. DuPont, Intel, General Electric, and IBM are among the companies that start the process very, very early by identifying high-potential individuals and then grooming them throughout their career.
Once the succession plan has been established, the board must regularly review and modify it. Succession planning sets the stage for the entire company’s focus on people development. Because an effective succession planning process conveys an attitude throughout the company, the succession plan must be viewed as a dynamic, fluid, living document that changes with the company’s needs.
Building a comprehensive succession plan is not a one-time program, and it is not an annual review of the corporation’s best talent! Successful succession planning is an ongoing process that should become deep-rooted into the corporate ethos and synthesized into every director’s DNA!
A number of critical decisions make up the succession planning process. By perseveringly and methodically following a series of steps, the board can be guided through this process. Here are the steps for developing a succession plan:
- Define the competencies and characteristics the board believes are required for the next CEO. The board should develop a profile that specifically identifies the skills, experiences, and attributes the directors believe will be necessary for the next CEO to have. The board also should define the desired personal leadership skills and individual personal attributes. While developing this profile, the board should use the incumbent CEO as a benchmark for comparison. The board should ask: Does the current CEO have the skills needed to fill the job if it were open today? It might be quite evident that the current CEO would not meet the current requirements. This often is the case, because many company requirements are situation driven and change over time.
- Decide whether an insider or outsider CEO will best serve the long-term interests of shareholders. The answer to this question usually is a function of preparedness and necessity. The succession plan should include a comprehensive evaluation of the talent within the company and also include candidates from outside the company. When the board considers outside candidates, their effort should not be merely perfunctory but an honest and objective assessment of extremely qualified individuals who might be available to fill the CEO position now or in the future.
- The CEO must develop a comprehensive development plan for his or her potential successors. Planning the successor’s personal development is an integral part of the succession planning process and the board must link these plans to clear criteria of what the next CEO will require. Additionally, the personal development plans and personal performance plans should be inextricably coupled.
- Make sure the plan includes a response to an immediate need to replace the CEO. Lessons have been learned from the unfortunate and unexpected deaths of Jerry R. Junkins of Texas Instruments in 1996, Jim Cantalupo of McDonald’s in 2004, and Charlie Bell of McDonald’s in 2005. In both corporations, the next CEO had already been selected and was in the process of being groomed for the CEO position. In both corporations, several candidates were available so that the boards had selection options. These companies had boards who knew how to plan for calamity.
Most succession planning processes are quiet, orderly affairs in which the board goes about developing an appropriate cadre of candidates and then focuses on the few individuals most likely to reach the stage of being groomed for the CEO’s position. However, some firms stage a competition to identify the best candidate in the field. This usually requires informing the competitors that they have been selected as candidates for the position.
Occasionally, the rest of the world gets to witness one of these competitions (at least from a distance) as it is being played out inside a major corporation. This glimpse into corporate life at higher echelons happens because influences on major corporations excite extensive media coverage. The succession planning of General Electric, Coca Cola, and Ford all have been highly publicized.
In many ways, the level of quality and thoroughness of the succession planning process will be a product of the CEO’s self-confidence. The more self-assured the CEO, the more robust the succession planning process will be. An actively engaged CEO definitely will enhance the succession planning process, and the board should inform the incumbent CEO that they expect his active engagement in developing the plan.
However, direction must emanate from the independent members of the board, and the board must set the tone for the CEO. Many CEOs relish the process of cultivating a replacement. The board should expect such a CEO to favor insider candidates. (In most cases, the board also should prefer inside candidates.) However, some CEOs will regard succession planning as a threatening reminder of their own mortality or, perhaps worse, dispensability. In such a case, the CEO might develop a knack for driving off any promising heir, or casting potential successors in an unfavorable light.
The actions taken by some CEOs who feel threatened by the succession process provide ample reasons why boards shouldn’t allow CEOs to take the choose-your-own-successor approach. Starting a minimum of six years in advance, the board should demand that the CEO provide a list of candidates, plus regular briefings on how those candidates’ skills are being tested. Enlightened CEOs value this process to stay deeply engaged with the personal development of his or her team.
Although the board may ask the CEO to lead the effort, it never can abdicate its collective responsibility to own the selection process and deliver the results. As the top contenders emerge, the outside directors have a duty to meet with them alone for open-ended discussions. This is demonstrating responsible board leadership.
And while planning the CEO’s succession certainly is more important to the company than planning succession for any other company position, the board of directors must also consider successors to the group of senior executives from which the next CEO is likely to be selected.
Despite a CEO’s enthusiasm for—or avoidance of—the task of choosing his or her future successor, corporate boards must resolutely and methodically do the work of ensuring that the company will have an effective leader at all times. This requires planning for the CEO’s succession, and it even requires making a plan that delineates the decisions that must be made to complete that plan. The board also bears responsibility for making sure that the company will have a full complement of possible CEO replacements, senior executives, and directors. Active planning and oversight on the part of the board are needed to make sure that all responsible parties in the company are doing their part to develop senior executives and plan for their succession. Personal leadership excellence will be the key to their success.