Is now the time to rethink your CEO succession planning? Do you have the leadership required to guarantee your organisations future success?

As the saying goes, “never let a good crisis go to waste”, and CEO succession planning is a delicate but necessary conversation that could not be timelier today as we slowly emerge from the pandemic.

In any normal year, several thousand Australian companies change their chief executives, normally as part of an orderly retirement, because the incumbent CEO takes up another role, unexpectedly leaves, or because the board opts to refresh leadership due to concerns with their CEO’s performance.

All CEOs will inevitably leave office, yet our research has long shown that many organisations are ill-prepared to replace them. Every year, almost 15 percent of Australian organisations must appoint a new chief executive.

In 2019, turnover among global CEOs hit a 15-year high. Activist investors increasingly forcing out leaders they deem underperforming. Yet in 2020 this trend was reversed. Early data shows 2020 is likely to be a record-low year for CEO turnover, with boards opting for continuity.

The Russell 3000 Index - a benchmark of the entire U.S stock market - reports a decline of 11.3 percent on the average turnover of CEO’s compared to 2018 and 2019. If this holds true, 2020 will be a record low for CEO turnover of US-listed companies, suggesting boards hit the pause button on change.

Yet despite longer-term trends, some boards remain unprepared to replace their chief executives.

Last year was not a normal year, and 2021 is already shaping up to present leaders with similar challenges to overcome. From dealing with one of the biggest crises we’ve ever had to face to suddenly shifting businesses completely remote, the pandemic has challenged many chief executives like never before.

The majority rising to the challenge, impressively leading their organisations through uncharted waters. Sadly some have not – as was the case with a chairperson I met with recently who believes the crisis has underlined significant deficiencies in their leadership which could no longer go ignored such is the impact on their organisation.

A recent 2020 survey conducted by Luminary revealed that only 51 percent of boards 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 if the need arose.

The current pandemic and recession will cause many boards to rethink their plans.

The succession planning process for a chief executive would normally take years for most boards, a process for some which will now be condensed into months. The pressure to choose the right successor as the next chief executive is perhaps more important today than at any other time.

Even before COVID, CEO’s had to contend with the disruptive forces of technology, challenging conventional business models, and growth plans. This pandemic is unlikely to be the last crisis leaders will face in the years to come.

At a recent Luminary boardroom lunch event “Will the pandemic change your CEO succession plans for 2021?” we asked 18 directors the following questions – adapted from HBR Study - Your CEO Succession Can't Wait – in relation to their succession planning for their chief executive. 

• Who was leading during the pandemic?

• How did the pandemic change the company?

• What did the board learn from the crisis and the early recovery of late 2020?

• And, as part of your CEO succession planning, when should an external successor join the company?

Looking back at the last crisis – the Global Financial Crisis – the 18 months period from January 2008 to June 2009 saw more than 2,000 CEOs of US publicly-listed companies being replaced – according to statistics published in Harvard Business Review. Of course, some of these changes were long-planned, however, others resulted from boards deciding that new leadership was required to deal with the new challenges their organisation faced to rebuild after the recession.

Will we see the same change after the COVID crisis?

The truth is, transitions continue – even during times of crisis. In fact, it is also true that challenging times lead to an increase in the rate of executive turnover. And guess what, here we are in 2021 having exactly the same debate.

Some of the boards we are talking with do not believe their current leadership reacted to the challenges (and opportunities) presented during the pandemic. This has accelerated their thinking that change is needed at the top, bringing forward their chief executive succession planning.

Are you fully equipped for change at the top?

With state borders reopening, only to close weeks later, rolling lockdowns, hotspot virus outbreaks, and for the full effect of the winding back of federal stimulus packages to be felt, at this point, it is too early to predict what our economic recovery looks like.

For many of us, having recently returned from our summer holidays it is easy to feel as though we have made it through the crisis. Certainly for those of us living and working in Queensland. But isn’t that just a little bit premature? What will the impact of border restriction be on the economy? How many ‘zombie companies’ have been kept alive on JobKeeper only to fail in 2021? Will variant strains of COVID prove to be vaccine-resistant? And, will our luck run out? Will our winter months see further lockdowns and outbreaks of COVID which will further sap fragile business confidence?

These are just some of the issues boards and CEO’s will need to consider as they plan for the year ahead. As boards debate these and other complex issues, answers to four questions may help set you on the right path.

1. Who was leading during the crisis?

For many boards and chief executives, the pandemic saw the exiting CEO remain at the helm, steering the organisation through the lockdown and remote working. Where succession was planned, it was often deferred or postponed indefinitely. We saw many planned changes delayed as boards hit the pause button.

This is understandable, even if the succession process is in its late stages and an offer is close, it’s usually better for the sitting CEO to remain at the helm, assuming she or he still has the confidence of the board and the organisations.

With incumbency, you are likely to have processes in place to maintain stability, manage “crisis” communications, and retain the teams. Other studies have found that during times of high stress, employees prefer to be led by someone familiar, providing them with confidence until normalcy returns.

But once the crisis has passed – as is the case with my dear friends’ business – you will need to rethink your leadership. There will be little doubt that employees and executives will have already seen that change is necessary, perhaps long before the pandemic, and will be seeking action from the board now the time is right.

2. How did the pandemic change the organisation? 

The longer the crisis lasts, the more challenges the organisation will face as a result of it. As we leave and re-enter lockdowns, as has been our recent experience, that means the attributes, characteristics, skills, experiences, and behaviour in a chief executive successor will have changed from pre-pandemic specifications.

For example, I can think of one large Government organisation, that was performing well prior to the crisis, who was seeking a new leader, the board’s objective at that time might have been to find an executive to lead the organsiation into new markets. Now, with a significantly reduced budget, and new priorities the opportunity to take such risks need to be carefully considered within the new context we are operating within. This scenario requires a different leader than the one the board had been envisioning just twelve months ago.

One chairperson of a company that is searching for their next chief executive told me last week that her board was divided on whether to make an offer to their previously preferred candidate and get her aboard as soon as possible or to instead pause and wait until the crisis ends to take stock of where things stand – especially as their “interim CEO” had held the fort so well in recent months.

When I asked if the board has considered moving forward but with new  expectations for their next chief executive because the crisis had changed operating conditions, she said: “We haven’t really considered that, however, that’s probably something we now need to talk about.”

3. What did the board learn from the crisis?

If you have identified internal successors as candidates for your next chief executive, the crisis should have presented you with an important test of their leadership capacity. How did they conduct themselves during the crisis? How did they deal with ambiguity and uncertainty? Were they able to make tough choices and stay calm under pressure? Did they help their executive peers and rally the troops to go the extra mile? Did they show empathy and compassion for what your front-line workers were going through?

In his book Succession, Noel Tichy, a Professor at the Ross School of Business at the University of Michigan, argues that by putting potential successors in charge of new projects, companies can accelerate change while also testing candidates’ suitability for the top spot. A not too dissimilar scenario to our crisis event.

For external candidates being considered, the same sorts of questions should be considered and evaluated as part of your interview and selection process, This should be probed in references and other background checking.

Boards often fail to grasp the complex nature of succession.

4. As part of your CEO succession planning, when should an external successor join the company?

Whether your new chief executive is hired from the outside or promoted from within, you should be aware of one daunting statistic: One-third to one-half of new CEO’s fail within their first 18 months, according to some studies.

Some of these failures can be attributed to poor strategic decisions choices by the new CEO, and some result when the board makes an imperfect choice – overestimating a candidate’s abilities and potential, cultural misalignment, or hiring a leader whose skill set doesn’t fit the current context, as will be the case for many in 2021.

When a succession fails, the responsibility is almost always shared. Sometimes the new executive is responsible, and other times the board will be at fault. Regardless, the closer you look it’s rarely as simple as one of the other.

The research on succession is quite clear about the importance of the period after accepting an offer and before day one on the job. The successor must use this time to become prepared for their start, and the outgoing CEO must ensure that the organisation is ready for their successor.

A CEO transition is not the same as onboarding, which is a formal, short-term, agenda-driven orientation program of briefings and meetings. We like to incorporate an onboarding plan into our recruitment services, to accelerate the transition process. Handled correctly, the process will begin when the board’s choice accepts the position and will last for months, and sometimes into the second year of the new chief executive’s tenure.

Boards need to recognise that an external CEO successor will likely increase the risk of other changes. More often than not, a new CEO will want to build their own team. Additionally, passed-over executives are likely to leave. During a crisis, you will need to consider if the timing is right for such disruption.

Prior to finalisation of the process, we would recommend that it is preferable for the board, new CEO, and outgoing CEO to agree on a plan which ensures stability and retention of key executives and managers, and so that they remain 100% engaged. In my experience, this often includes board committee chairs shoring up working relationships with key executives, checking in with them, and reporting back to the CEO / chair. In some instances, retention packages are an appropriate measure to keep key staff in place until the transition has successfully concluded.

The selection of a new CEO is a delicate and difficult challenge in the most stable of times. When these transitions occur during a crisis event – and like a year we’ve just experienced – the degree of difficulty increases.

Lastly, CEO succession planning takes time. It shouldn’t be rushed.

Research shows, that when planned well, in a considered and careful way, boards can use the succession planning process to increase the quality of leadership, both in the chief executive and across the organisation for immediate and future success.

Michael Useem, a professor of management at the University of Pennsylvania’s Wharton School, believes a shortage of directors with experience in hiring top executives can contribute to poor succession planning. He advocates for more current and former CEOs on boards. “People who know how to hire and manage top executives will better understand what a company needs in executive talent and which of the final candidates best brings that to the table,” he says.

To help you further, here are six succession-planning tips for busy directors:

1. Start early, ideally the moment a new CEO takes charge.

2. Create clear performance metrics and a process for evaluating your CEO against them.

3. Identify and develop potential successors within your organisation and then benchmark them against external talent.

4. Look externally to widen the pool of candidates, through executive search firms that don’t use contingency arrangements or charge percentage fees (which I believe create perverse incentives).

5. Require the board to conduct periodic emergency succession drills.

6. Put in place an extensive transition process to help with onboarding - which is especially important given that almost 80 percent of all CEO appointees have never served in a chief executive role before.

If you need further advice about your chief executive succession planning, we are a quick call away. Please feel free to contact any of our experts who would be happy to help.