CEO Succession: It’s a Process, Not a Plan

A smooth transition from one CEO to the next is essential in maintaining the confidence of stakeholders, particularly during a time of vulnerability. Smooth succession, or lack of it, has increasingly been a litmus test for a strong board. Effective planning allows momentum to continue and changes to be made swiftly. Additionally, it results in greater employee confidence and retention of senior talent. As proven by Apple, Microsoft and GE, life goes on.

McDonald’s has long been an example of successful CEO succession planning. The board was able to quickly and decisively replace two CEOs within eight months of one another—Jim Cantalupo and Charlie Bell—who both departing unexpectedly. Years later, the board employed a structured plan to replace outgoing CEO, James A. Skinner, who announced his sudden retirement, with then President and COO, Don Thompson. This ability to seamlessly transition under unforeseen circumstances hinged on the company’s ongoing practice of maintaining a robust succession process.

Conversely, the financial crisis illustrated that numerous financial institutions had flawed succession plans. Several banks’ boards drew harsh criticism for lack of preparation and for having no immediate succession solutions. The lesson learned is that having a long-term succession plan is important, but even more important is an ongoing succession process that allows a board to make quick and informed decisions in the event of a crisis. Today, companies are seemingly revisiting the issue in light of increased shareholder activism.

The Process
Succession planning should begin the day after a new CEO starts and should be a recurring topic on the board agenda. It is imperative that all understand the required competencies of the future CEO and that they align to the corporate strategic plan.

After thorough assessment, viable internal candidates should be identified according to those competencies and should be provided detailed development plans. Additionally, interaction between those internal candidates and the board should increase, providing the board first-hand visibility and experience. Benchmarking internal candidates against the market is critical and may result in recruiting externally to strengthen the bench. If this information is consistently reviewed, the board is able to act quickly and confidently in the event of an unanticipated transition.

Defined Roles
Several people, and groups of people, play critical roles in the CEO succession process. The Nominating/Governance Committee is responsible for managing the overall process. With a planned succession, the board and CEO share responsibility until one year from the anticipated transition, at which point the board assumes sole responsibility. At the appropriate times, the HR, Legal and Communications departments play key roles in candidate assessment and development, regulatory filings and announcements, respectively.

The bottom line is, transitioning from one CEO to the next is a complex matter, particularly when a board is faced with unpredictable circumstances such as McDonald’s. An ongoing process, starting immediately after a new CEO is appointed and reviewed every six months, will benefit an organization immensely. Effective succession planning is no longer expected, it is required.

As recent history proves, boards will be held publicly accountable for succession success or failure. The board’s ability to calmly and quickly appoint the right successor will propel the company forward with confidence.