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1,337 CEOs exited their job in 2021, according to the findings of Challenger, Gray & Christmas, Inc. In their June 2022 Turnover report, 774 CEOs left their jobs in the second quarter of this year. If you've been paying close attention, the rise of CEO departures has coined "The Great CEO Resignation." For this reason, every business needs to create a solid succession plan for their company even before these trying times.
Succession planning is critical for any organization, especially those with a CEO or other executive leaders. These individuals are often the face of the company, and their departure can significantly impact morale, productivity, and, most importantly, the bottom line.
Stanford University and The Institute of Executive Development (IED) completed a survey titled "Senior Executive Succession Planning and Talent Development." it shows only 46% of the respondents have a structured succession planning process in place for CEO roles.
This implies that most businesses wait until an unforeseen event occurs before planning for the succession of their top executive roles, which harms the business' health. A company's future depends on its CEO succession planning and how well prepared the board of directors is for it.
This article outlines the 5 effective steps for CEO succession planning.
Who is responsible for CEO succession planning?
Usually, the board of directors, executive leadership team, or committee is responsible for making CEO succession plans. It's their sole responsibility to ensure that they select the right candidates for top roles in the organization. They identify, interview, and evaluate successors for future roles within and outside the company.
However, with the help of the organization's chief human resource officers, it is easier to plan and implement realistic succession plans.
Why CEO succession planning is important
Companies need to put out succession plans due to several foreseen and unforeseen circumstances, such as the death or illness of an executive, among other reasons. The benefits are inexhaustible, but we will briefly explain the following:
1. A list that includes a wide range of qualified leaders
When the board of directors or leadership team plans for the CEO’s succession, they develop a list of potential leaders to choose from. The strengths, weaknesses, achievements, and objectives of each qualified leader are listed.
Every role in an organization comes with different responsibilities and duties. The qualified leaders are to be trained ahead of time for the role, if necessary.
Having a list of qualified leaders to choose from is crucial for planning.
2. More investment into making quality decisions that impact the direction of the company
With adequate CEO succession planning, quality decisions are made that positively impact the company's growth and development. The process reduces uncertainty and propels the company in the right direction.
It allows the company to focus on its goals and objectives. Shareholders feel more confident about the company's ability to continue running smoothly.
3. Opportunity to enhance employee retention of top talent by signalling an opportunity to move up in the organization
Employees are more likely to stay with an organization when they feel there is potential for growth within the company.
A succession plan signals to employees that there is an opportunity for advancement within the company. This helps to retain top talent and skilled workers within the organization.
Strategies on how to retain and promote top talents within the company are established during planning. The company will create career advancement opportunities for employees to develop their talents through mentorship, training, and retraining.
4. Employee confidence in the organization's ability to grow in the future
Employees want to work in a company that has a bright future and is committed to growth. Lack of motivation often demoralizes the confidence of employees. A CEO succession plan will boost the confidence of employees. When they see others being promoted, they are encouraged to do better.
5. Provides stability, which impacts the company's place in the market
A succession plan provides the stability that shareholders and consumers are always looking for within a company. It shows that the company is prepared for any eventuality and is ready to adapt and change as needed. This helps to maintain the company's place in the market, as well as its reputation.
As one example, a study showed that many companies were unprepared for the sudden death of their CEOs during Covid in 2020. These companies had to scramble to put together contingency plans.
Most common reasons for CEO succession
Though it's difficult for an outsider to find out the exact reason for CEO succession, according to a paper that studied CEO turnover and succession, the most common reasons for CEO succession are:
- Retirement of the current CEO - (40%)
- Death of the current CEO - (1.3%)
- Resignation of the current CEO - (20.7%)
- Dismissal departed, left, separated and no longer at service of the current CEO - (6.3%)
- Transition to a new business model - (2.2%)
Although some of these reasons could be voluntarily or involuntarily, it is quite difficult to tell if the CEO resigned on their own or if the board asked them to step down honorably.
Is it better to have an interim CEO or a permanent successor?
According to the study cited above, it's better to have a permanent CEO ready for the original CEO's departure.
The study argues that,
"The choice of an interim successor is associated with significantly lower stock price in comparison with the other two choices overall long-term measurement windows."
Effective succession planning prevents poor performance and pushes the company to move forward. The board of directors could also put the succession plan to the test by allowing the potential successors to take turns acting in the top executive positions when they take leave or vacation. This will help them choose the best candidate with the needed skills.
5 steps and best practices for CEO succession planning
Succession planning doesn’t have to follow a particular template. The process may look different across organizations. Factors like the organization's culture play a big role.
However, we've identified five steps and best practices to guide the board of directors or leadership teams on successful CEO succession planning.
1. Focus on the long-term success of the company
You might play it wrong if you're not playing the long-term card. The board of directors should always consider the company's long-term success. This means that when planning a succession, they must identify and develop a pool of leaders who can take over and continue to lead the company toward its goals.
Ensure the company maintains a long-term perspective when planning. This gives the company a long-term framework for its future and the business owner. It also helps to guard against unforeseen events and be prepared to take immediate action.
2. Consistently identify and further high potentials
Identifying high-potential leaders should be ongoing, not a one-time event. By consistently reviewing data and performance, you can better understand who is genuinely excelling and has the potential to move up in the company.
High-potential mentorship programs are an effective and common way for leaders to groom potential successors. In these programs, high-potential candidates may take on stretch projects to develop or test certain skills.
3. Form a team responsible for succession planning
Succession planning is a complex process requiring many people's involvement. As such, it's essential to have a team overseeing the process. This team should comprise representatives from different departments and people at different levels within the company.
This team will direct, organize, coordinate, and report the whole process to the board.
4. Prioritize internal mobility
There's no doubt about the effectiveness of a mix of internal and external talent. However, give priority to internal mobility. This is because people who are already familiar with the company culture and values are more likely to be successful in leadership roles.
Furthermore, promoting from within creates a sense of loyalty and motivation for employees as they see opportunities to advance their careers within the company. High-performing individuals within the company are always looking for opportunities to grow; if that need is being met in the workplace, they are less likely to back out.
Prioritizing Internal mobility during CEO succession planning is more cost-effective than hiring from the outside.
5. Promote mentorship from the top down
CEOs should be encouraged to form informal mentoring relationships with their successors. They should regularly engage them to discuss the intricacies of their organization. HR folks should leverage this to encourage mentoring cultures in their organizations. They can do so by starting a formal program.
The challenges of CEO succession planning
Organization struggle today with picking new CEOs due to some of these reasons:
- Board of directors lacks preparedness
- Indecision of whom to promote
- Inability to gather enough information about internal prospects and external candidates
- The inability to accurately evaluate the external executive skill set with their previous roles.
- A limited number of qualified candidates.
- The difference in hiring practices.
- Unfamiliar with the company practices
- The difference in leadership style
Start preparing future leaders today
Succession planning is essential for businesses of all sizes. It ensures that there is always someone qualified and ready to take over if a key employee leaves or is unable to continue working.
It’s never too early to start succession planning. The sooner you start, the better your company will be prepared for the future. And there’s no better way to prepare future leaders than by mentoring them.
Mentorship is an integral part of succession planning. A mentor can help prepare a protégé for a leadership role by providing guidance, support, and advice.
Get started today to ensure that your business has a bright future.
