CEO Succession Planning
Selecting your next Chief Executive Officer is one of the most important decisions you will make as a board. Unfortunately, some boards remain ill-equipped regarding succession planning for their next CEO.
All CEOs will inevitably leave office, and countless research studies have long shown that many organisations do not have adequate plans to replace this key leadership role, particularly where there has been an unplanned departure.
A recent survey conducted by Luminary™ revealed that only 46 per cent of boards (down 5 per cent on 2021) were grooming a specific successor, and perhaps more worryingly, more than one-third had not identified a viable candidate who could immediately replace the CEO on an interim basis if the need arose.
So what should boards consider?
When to start planning?
One of the most difficult board decisions regarding succession is when to start planning for your next chief executive.
Ideally, CEO succession is started in agreement with the incumbent CEO, in line with a long-term schedule that allows for extensive search and board decision-making.
Planning for succession should commence no less than six months from a contract conclusion and ideally earlier.
For example, one chairperson we worked with took the innovative step of using the recruitment of a new CEO to lay down the foundations for their future CEO succession.
Unfortunately for many, succession arises out of the unplanned departure of the incumbent or for performance-related issues forcing the hand of the board. This makes planning a difficult task more complicated.
Unnesccaery delays should be avoided when planning for your CEO succession. Delays can and do result in increased staff turnover, a downturn in performance and weakened financial results if action is not taken. In the extreme, it can impact the reputation of the board and the organisation.
You also need to recognise that any potential candidates will need sufficient time for transition and to tidy up their affairs at their previous organisation before taking up a new role. All of this should be factored into your project plan.
We often advise boards to identify the leading indicators (board relationship with the CEO, employee or customer feedback, etcetera) that may signal problems long before you see a decline in performance.
We know of one such organisation where seemingly everyone but the board knew their CEO was heading for the exit door, and yet the board were left flatfooted, scrambling for an interim solution at the worst possible time. It should never come to that.
It is also worth remembering that the traditional linear path to the role of the CEO has shifted significantly in recent times.
Historically, internal CEO appointments have come directly from the Chief Financial or Chief Operations Officer ranks, however just as it’s becoming less common for a leader to stay with the same organisation for ten or more years, it’s less expected that a candidate for CEO will have taken a straight trajectory through the ranks of your organisation to get to the top job.
2. How to start your search
When it comes to the search process itself, many CEO search processes frequently stem from a generalised CEO profile, often targeting candidates within the same industry who may have led organisations of comparable size.
There is nothing wrong with this approach, however, when considering your next CEO, you should also ask what type of CEO you seek.
Is your new leader tasked with plotting a new path? Is this a turnaround, continuation, evolution or transformation of your organisation? Regardless, understanding the organisational context and operating environment remains crucial.
To find a CEO who can lead your organisation to success in the future, it is important to identify the strategic challenges that need to be addressed for the period ahead. Immediately and over the long term.
Only after these strategic challenges are identified is it possible to define the right ‘mandate’ that your future CEO will be tasked with.
Almost all boards will be best served to engage with a specialist search firm to assist them in this exercise. The biggest doesn’t always mean the best, so we’d advise you to do your research and seek recommendations and referrals.
Glossy sales brochures, global reach, and Circular Quay office addresses are fine if you expect your next CEO to come from an ASX top-100 organisation, but it is unlikely to be necessary for most.
If you value local connections, go with a networked firm that knows your market. If you need to tap expertise in a particular industry for your next CEO, you may be better off selecting a specialist with deep industry connections.
Always seek quotes, do reference checks and invite your prospective partners to present their solutions in person. In the same way, we’d never take on an engagement without doing the necessary due diligence - you’d wise to do the same.
3. The CEOs mandate
In simple terms, a mandate is the sum of expectations placed on the CEO by stakeholders towards what will be accomplished, by when, and to what standards.
Essentially, it is the licence you provide your new CEO to deliver on these expectations and with whom he or she is expected to work.
The CEO mandate sets the direction and boundaries for the CEO’s action and will depend on the degree of change and the required pace and time scale of that change.
Once the mandate is defined, the board can then develop a ‘CEO success profile’ that fits not only the organisation in general terms but also the context and the specific strategic challenges over the years to come.
The mandate becomes the basis for all future success. Consider it in the same way as if a builder is laying the foundations for the building to come.
4. Your CEO success profile
The CEO success profile will vary based on the degree of change you require and the time horizon. Typically, four broad classes of CEO mandates can be distinguished: continuation, evolution, transformation and turnaround.
A quick summary of each:
Continuation - is the most common choice, where the board favours the existing strategic direction and the implementation of the existing strategy with minimal changes over the immediate time horizon.
Evolution – as a board, you will choose this option when you desire gradual adjustments to the strategy over a longer period or you seek changes in how such a strategy is being implemented.
Transformation – is becoming increasingly commonplace, especially post-COVID, adopted when there is a fundamental change in your strategic direction, your operating model, structure or culture over a longer period is required.
Turnaround - when you recognise that large-scale strategic changes are needed, and your new CEO must take drastic action to turn your organisation around in a short timeframe. This is the most drastic of profiles.
5. CEO assessment
Next, you must consider what attributes your CEO will need to have.
In times of increasing uncertainty, your CEO must demonstrate a broad range of skills.
In addition to having the critical thinking skills to solve complex problems, they need advanced people skills to create an inspiring workplace.
Building upon the CEO mandate, our evidence-based approach highlights six dimensions for your focus and assessment:
Context - does the organisation require a “strategic leader”, someone capable of taking the team on a different path, setting and building an inspiring culture and workplace in the process? Alternatively, the company may be on the right path, in which case a leader whose strength is in setting and building a strong culture is preferable.
Risk - the board need to determine what attitude towards risk is desirable in your new CEO. Does the board want an executive who thinks about risk in an entrepreneurial way? Or does the board want someone who takes a more systematic and pragmatic approach?
CulturalAdd™ - thirdly, the board needs to consider cultural fit, or as we prefer to frame it, CulturalAdd™, what can your new leader bring to the organisation that will lift the culture beyond its existing state?
Hire for emotional intelligence (EQ) – assessing the degree to which your leader demonstrates empathy, compassion and care for their people and customers are increasingly important. If COVID has taught us anything, it is that CEOs need to connect on a human level with their people, internally and externally. You can use various scientific and proven psychological assessment tools to complement a well-constructed competency-based interview process to assess EQ.
Character and commitment - does the executive you are considering have the intellectual framework to analyse problems and develop your strategy? Do they understand your business and the sector you operate in?
Adaptability - lastly, we’d encourage you to look for evidence of resolve and resilience. Where has your new CEO had to overcome adversity? How have they overcome failure, and what did they learn along the way? As technology develops, industries change new unforeseen events emerge, your new CEO will need to be able to adapt to these changes quickly and have the resolve to keep your organisation current.
In addition, today’s CEOs need to be able to effectively lead from a distance as they navigate the new normal of virtual and hybrid workforces.
Mastery of leading in a virtual work environment is a new skill for many.
With skills shortages biting across the Australian economy and your current and future employees looking for greater flexibility, the ability to lead both in person and remotely will continue to be a critical lever for CEOs.
They also need to set the standard, encouraging their people to balance work and home life.
A focus on diversity, equity, inclusion and fairness should also be considered throughout your recruitment process. Upfront at the planning stage, and tested throughout the execution of your recruitment strategy and lastly with the reporting ahead of your new appointment.
In addition to having adequate succession plans, you must ensure that your CEO search, recruitment and assessment process is robust and considers data drawn from multiple sources.
Your assessment process should identify quality leaders with the right skills and competencies to help your people thrive through disruption, balanced with alignment and motivation to your purpose and strategy.
Lastly, you need to articulate your cultural code to assess for CulturalAdd™.
Boards should keep these trends in mind as they strategise their CEO succession.
Good luck!