Serious Gaps Persist in CEO Succession Planning

If you thought Bank of America was one of only a few companies which didn’t have an heir apparent to replace their outgoing CEO, think again. Recent research reveals a majority of the companies do not have a CEO succession plan in place and, should there be an urgent need to replace the departing CEO, they don’t have a mechanism to fill the void.

When BofA’s embattled chief executive Kenneth D. Lewis finally resigned on Sept. 30 after months on the firing line, the bank’s directors appeared woefully unprepared for succession.According to research by Heidrick & Struggles and Stanford University’s Rock Center for Corporate Governance, more than half of companies can’t immediately name a permanent successor to their chief executive should the need arise.

The survey of more than 140 CEOs and board directors of North American public and private companies found that, while 69 percent of respondents think that a CEO successor needs to be “ready now” to step into the shoes of the departing CEO, only 54 percent are grooming an executive for this position.

“This statistic, combined with the finding that more than half couldn’t name a new permanent CEO if the current chief became incapacitated tomorrow, is a total disconnect,” says Stephen A. Miles, vice chairman at leadership advisory firm Heidrick & Struggles and a global expert on succession planning. “It’s hard to imagine that the CEO would be ‘ready now’ if he or she is not being groomed today.”

Miles believes lack of succession planning at some of the biggest public companies poses a serious threat to corporate health—especially as companies struggle toward a recovery. “Not having a truly operational succession plan can have devastating consequences for companies—from tanking stock prices to serious regulatory and reputation impact,” adds Miles.

While corporate boards are increasingly required to chalk out succession plans, experts point out that they are mostly reluctant to come up with one as most of them still want the CEO and his team to take up the job. “We found that this governance lapse stems primarily from a lack of focus: boards of directors just aren’t spending the time that is required to adequately prepare for a succession scenario,” adds Stanford Graduate School of Business Professor David Larcker, a senior faculty member of the Rock Center for Corporate Governance, a joint initiative of Stanford Law School and the Stanford Graduate School of Business.

Board analysts feel there are a number of reasons why boards are performing badly on this issue. Boards tend to give priority to compliance and “dead-line” driven duties, and they are reluctant to be perceived as disloyal to the CEO, the board pundits contend.

According to Alicia Whitaker, a NYC-based human capital management consultant and an expert on succession planning, one of the key risk management responsibilities of the board is insuring effective leadership for the company. “It’s good to be King, so CEOs may have a hard time putting the steps in place for their own exits. Therefore succession planning is primarily a fundamental responsibility of the board,” she reiterates.

Experts argue while succession planning is a critical issue for boards, it is also increasingly on the agenda of investors, analysts and regulators. “The sea change in the regulatory environment globally means that boards need to pay significantly more attention to the issue of leadership excellence as well as CEO succession,” says Whitaker, quoting succession planning guru Bruce J. Sherman in an article with Huffington Post.

“Succession planning is as important as executive compensation, and boards are retaining independent advisors to help them evaluate their company’s processes and key leaders,” she says.

Additionally, boards are also critically lagging on talent management. The Heidrick survey points out that 39 percent of the responding companies say they have “zero” viable internal candidates to be CEO successors. “There is a large communication gap, which can cause retention issues,” remarks Stephen Miles. “Executives who don’t know they are even in the running to be CEO might be easily lured elsewhere, where they believe they have room for advancement.”

Interestingly, another CEO succession study published last year also echoed similar sentiment with the majority of the surveyed publicly traded companies without comprehensive succession plans in place.

Despite mounting evidence illustrating that poorly executed leadership transitions can be costly to companies and their stakeholders—particularly shareholders—corporate directors are not making CEO succession planning a priority on the board agenda, a report in the Financial Post said.

The 2009 survey published by the U.S. Conference Board showed that 51 percent of U.S. public companies surveyed stated they didn’t have a detailed transition blueprint to execute. Yet in the same report, 700 U.S.-based directors surveyed by the National Association of Corporate Directors overwhelmingly—by 90 percent—rated CEO succession planning as critically important. The Conference Board report further revealed that in 2008, of the 1,484 chief executives who left their jobs—a record turnover rate for the past 10 years—46 percent of the successions were unplanned.

However, a recent survey by NYSE and Euronext begs to differ with the Heidrick study. The sixth annual NYSE Euronext CEO Report, titled “Back to Business,” illustrates CEOs of the publicly held companies are increasingly concentrating on preparing a succession plan now. In the wake of the recent economic crisis, the survey released early this month found that CEOs of publicly held companies are progressively focused on succession planning, corporate reputation and brand, and restoring investor confidence.

The NYSE Euronext CEO Report based on interviews with 325 CEOs from companies listed on NYSE Euronext exchanges finds that approximately two-thirds of U.S. companies have formal succession plans for the CEO role compared to 14 percent of European companies.