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Reshaping Succession Management

It makes sense. Even as the churn rates for top leaders rise to record levels, succession management itself is churning. In fact, two-thirds of organizations with formal succession planning programs intend to change them in coming years, according to a recent survey of 799 organizations. A mere 9% say they have no plans to make changes, and a quarter aren’t sure what they’re going to do.

Most of the planned changes boil down to three factors: integration, technology, and objectivity. The survey, which was sent to members of the Human Resource Institute (now co-branded as the Institute for Corporate Productivity – i4cp) and HR.com in August 2006, found that among organizations that intend to change their programs, fully three-quarters cite the need to “integrate succession management with other talent management processes.” Over half (55%) plan to use new technologies, and 52% want to make evaluations more objective.

Managers are aiming these changes at specific deficiencies. For example, only half of responding companies with formal programs have already integrated succession with other business processes. And, when asked to identify difficulties with succession programs, over two-thirds pointed to a “lack of a robust development plan.”

The concern with development plans is, no doubt, tied to the fact that a majority of respondents with succession programs say they suffer from the lack of qualified candidates. Organizations want to more effectively integrate succession planning with development programs in order to boost the number of skilled candidates in the succession pipeline.

About half of respondents also point to a lack of good ways to track high potentials or to share, sort, and update data. This is where new technologies, if used correctly, could be of great help. By integrating succession planning with performance management and leadership development databases, organizations can become much better at tracking high-potential employees.

But none of these changes can improve the system if the information itself is faulty, which is why many organizations want to make evaluations more objective. By ensuring that the succession process is more impartial, employers simultaneously improve the quality of succession planning, boost the level of trust that employees have in the system, and reduce the age-old impression that promotions are often based more on “who you know” than “what you know.”

The i4cp/HR.com survey shows that adopting a formal succession process is driven, first and foremost, by the need to “identify and prepare future leaders,” cited by 85% of respondents. The same is likely true for organizations that are working to improve existing systems. Almost two-thirds of respondents also cite the need for business continuity, and nearly as many point to “retention” and the need to create “opportunities for internal advancement” as reasons for adopting a formal process.

Even this data, however, probably understates the growing need for excellent succession management, especially at the top of organizations. In 2005, CEO turnover reached new highs, according to Booz Allen Hamilton’s annual study. And over a third of CEOs who left were forced out due to performance shortfalls (Lucier, Kocourek, and Habbel, 2006). What’s more, the problem of CEO churn is likely to grow even worse. The tenure of departing CEOs continues to grow shorter, and KiplingerForecasts.com reports that in 2007 a record number of CEOs will leave their positions (Mogul, 2007).

There are multiple and complex reasons for this trend, ranging from the emergence of high-pressure corporate governance rules to a rash of mergers to unhappy stockholders. Also, on behalf of shareholders, boards of directors have become more active, making it more likely they’ll force out poor-performing CEOs.

These trends make one of the findings of the i4cp/HR.com survey especially interesting: companies are somewhat more likely to have formal succession management programs for their directors (62% of surveyed firms with formal programs) and their vice presidents (61%) than for their chief executive officers (58%) or CFOs (57%). The survey doesn’t delve into the reasons for this, but it could be a growing cause for concern. After all, an inability to replace a CEO in a timely and effective manner generally has far greater consequences for an organization than being unable to replace a vice president. In fact, the i4cp/HR.com survey shows that CEOs are much more likely to be covered by key-person insurance than are any other organizational members.

In general, succession programs will probably become more integrated and high-tech in coming years. They’ll also rely, to a growing degree, on more objective—or at least multidimensional—performance and potential measures. Succession management, moreover, is likely to become as much about developing talent as it is about tracking and selecting it; that is, the “cultivation of talent” could become as important as or more important than the so-called war for talent.

Documents referenced in this TrendWatcher include the following:

Lucier, Chuck, Paul Kocourek, and Rolf Habbel. “CEO Succession 2005: The Crest of the Wave.” strategy+business (Summer 2006).

Mogul, Matthew. “More Chief Executives Heading for the Door.” KiplingerForecasts.com. February 5, 2007.