In fact, failing to plan for succession costs companies an average of $1.8 billion in shareholder value in comparison with companies whose boards have solid succession plans, according to the 15th annual study of CEOs, Governance and Success by Strategy&.
“In terms of succession planning, boards are ignoring the requirements of corporate governance, in which the board is theoretically the paramount governing body,” said Per-Ola Karlsson, report co-author and a Strategy& senior partner. “Boards should treat succession as a core critical issue, and take back the responsibility—and accountability—for choosing the next leader.”
Here are four questions that boards should ask to get succession planning right, according to Strategy&.
- Does the board control the succession process, or the current CEO? Although the incumbent CEO should weigh in, delegating the choice of the next boss entirely to the current one is a mistake, due to the conflicts of interest inherent in identifying and grooming potential successors. Consider listing succession as a standing item on strategic agendas, and to include a CEO-free session during board meetings to keep discussion open and candid.
- Does the board have a plan today, and has it kept it private? Sometimes the unexpected happens: a CEO can become unfit or unable to do her job, or simply decide to retire immediately. As such, it behooves board members to have a “secret envelope” summarizing the succession plan and the names of the leaders, including many from inside the organization that they believe are capable of leading the company at any given moment.
- Is the board involved in developing future generations of leaders? Boards must approach CEO succession as a process that will be years in the making, and ensure that the company’s leadership development process is preparing successors for the CEO spot—as well as other top positions.
- Is the company’s succession planning approach backward-looking or forward-looking? Choosing a CEO’s successor often starts with executives’ track records, which are tangible and easy to compare. But track records look toward past performance; as a result, boards tend to choose candidates who have thrived under the business model of the past. Many companies today are facing significant shake-ups when it comes to their established business models, and past excellence may not be sufficient to guide a company through the changes of the future.
Strategy& noted that “even if it is discussed openly and frequently, the topic of succession will always cause some discomfort within boards. It’s a reality to be prepared for. And good succession planning requires significant investments of time and resources. But the investment is worth it, since the cost of failure is in the billions.”