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In the highest total on record since 2002, 1,991 CEOs left their jobs in 2024, according to the findings of Challenger, Gray & Christmas, Inc in their November 2024 CEO exit report. 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.
Executive succession planning is critical for any organization since these individuals are often the face of the company and key decision makers in your organization’s operations. Their departure can significantly impact morale, productivity, and 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 executive or CEO succession planning process in place.
This implies that most businesses wait until an unforeseen event occurs before creating an executive succession plan for their top 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 importance of succession planning, CEO succession planning best practices, and 5 effective steps for CEO succession planning.
Why succession planning is important at the CEO and executive level
Turnover rates in the executive suite are becoming more prevalent, highlighting the importance of succession planning. In such key roles, leadership changes at the top can have a profound impact on your company’s direction, performance, and resilience.
So, why is succession planning important? CEO succession planning is a proactive process that involves identifying and developing future leaders to move into those high level positions—reducing the risks during leadership transitions.
CEO and executive succession planning helps reduce risks such as:
- Loss of company knowledge and expertise
- Disruptions to operations
- Strategic misalignment
- Loss of employee trust and confidence
Following executive and CEO succession planning best practices not only protects your organization’s long-term health but also shows a commitment to employee growth, development, and recognition.
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.
CEO succession best practices and considerations
Companies need to develop an executive or CEO succession plan due to several foreseen and unforeseen circumstances, such as the death or illness of an executive, company restructuring, or other reasons. Strategies for succession planning need to be carefully considered.
Here are five things to consider when preparing your executive succession plans:
1. Build a list that includes a wide range of qualified leaders
When the board of directors or leadership team starts CEO succession planning, they will need to 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. Invest in development of high potential employees
The key consideration of executive and CEO planning should be the impact on company direction and important decisions. Invest time into strategically equipping current, high potential employees with the skills and knowledge to steer your company in the right direction. 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 your company to focus on short and long-term goals and objectives. Shareholders and employees feel more confident about the company's ability to continue running smoothly.
3. Show employees there are opportunities for internal mobility and promotions
Employees are more likely to stay with an organization when they feel there is potential for growth within the company.
An executive succession plan signals to employees that there is an opportunity for advancement within the company. In a way, it is an internal mobility program that helps to retain top talent and skilled workers within the organization.
Strategies on how to retain and promote your top internal talent need to be established during the executive succession planning process. You and your company’s leadership team need to plan and create career advancement opportunities for employees to develop their talents through a mentoring program and upskilling and reskilling initiatives.
4. Improve 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. When employees don’t see the path ahead or see that their leadership team is misaligned, confidence in the company drops and employee engagement suffers for it. An executive and CEO succession plan will help boost the confidence of employees. When they see others being promoted and understand how your company plans for change, they are encouraged to do better and feel more confident in the company’s longevity.
5. Create stability to help solidify your company’s place in the market
An executive succession plan provides the stability that shareholders, customers, and employees are always looking for within a company. It shows that your 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 sudden changes in leadership during Covid in 2020. These companies had to scramble to put together contingency plans, causing significant disruptions.
Succession planning using a talent matrix template
Often called the 9 box talent review, this talent matrix template can help organize employees with potential to move into high-level leadership positions.
By plotting out employees by performance and potential, you have a clearer view of high performers, skill and competency gaps, and opportunities for development. The 9 box review template is a useful tool to incorporate into your CEO and executive succession planning.
💡Learn more about how to use the talent matrix and get your free 9 box grid template download.
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%)
It’s hard to say whether most of these departures were voluntary or involuntary—if the CEO resigned on their own or was asked to step down. Either way, it resulted in CEO succession and these departure reasons need to be planned for.
CEO succession planning: 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 for CEO succession planning
Executive succession planning will look different for every company, but following a CEO succession plan template can give you and your leadership team a starting point. Factors like the organization's team culture, industry, and structure play a big role.
We've identified five steps 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 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 a strong future. 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 executive succession planning
Succession planning is a complex process that involves many people. Because of this, assigning a team to oversee the process and make sure the plan is thorough and actionable is essential. 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 and talk through challenges the company faces. HR folks should leverage this to encourage mentoring cultures in their organizations. They can do so by starting a formal company mentorship program.
The challenges of CEO succession planning
Planning for CEO succession can be challenging. Choosing a new CEO can be challenging due to:
- 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
Executive succession plans are 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 CEO 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.
Professional mentoring programs are an integral part of executive succession planning. A mentor can help prepare a protégé for a leadership role by providing guidance, support, and advice.
Book a demo with Together to learn how our mentorship software can help you create stronger leaders for your succession plans.
