CEO Succession: Who is minding the ship?

CEO changes, particularly unexpected ones, are an expensive proposition. The abrupt and unforeseen departure of HP CEO Mark Hurd triggered a share price drop of over 9% immediately following his resignation. Given the business and financial risks, one would think that all publicly traded corporations have comprehensive plans in place to manage CEO transitions, especially in times of crisis. The reality, however, is much different. New research out of Stanford’s Rock Center for Corporate Governance and recruiting firm Heidrick & Struggles point to a significant lack of preparedness on the issue of CEO succession. In a 2010 survey of 140 CEOs and board directors of North American public and private companies, more than half of companies today cannot immediately name a successor to their CEO should the need arise. This gap poses a major risk to corporate health and shareholder value, especially for firms challenged by the current economic climate and those poised for significant growth. Responsibility for this situation is fairly obvious. Poor succession preparedness traces to neglect on the part of Boards and the senior leadership team. According to one of the researchers, “…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.”

Other research findings include:

While 69% of respondents think that a CEO successor needs to be “ready now” to step into the shoes of the departing CEO, only 54% are grooming an executive for this position. Furthermore, 65% of firms have not asked internal candidates whether they want the CEO job, or, if offered, whether they would accept.

The lack of Board attention is fairly common. The average Board spends only 2 hours per year on succession planning. Moreover, only 50% of Boards have a written document detailing the skills required for the next CEO, suggesting that many Directors may not understand what it takes to run the company.

A full 39% of respondents cited that they have “zero” viable internal candidates. This worrisome finding has negative implications on a firm’s leadership development program as well as the Board’s ongoing exposure with potential internal CEO candidates.

While 71% of internal candidates know they are in the formal talent development pool, only 50% of these executives are in regular contact (typically yearly or bi-yearly) with the Board. This communications gap could have a negative impact on executive retention as qualified executives may choose to leave the firm without understanding their potential career path.

Only 50% of companies provide on-boarding or transition support for new CEOs. This finding magnifies the odds of organizational instability as even designated heirs may struggle without support systems. Ironically, shareholders might not be too concerned about succession risk if there were formal mechanisms to on-board new CEOs.

What can Boards do now to reduce the risk of hasty or unplanned CEO exits?

  1. Direct more attention and resources in the areas of succession planning and leadership development.
  2. Immediately review and ‘stress test’ existing succession plans against current environmental, personnel and business challenges.
  3. Where no formal plan is in existence, develop a practical succession program that fits the operational and organizational realities of the enterprise.
  4. Pay attention to the supporting leadership of the firm, including having regular exposure to a short-list of viable candidates.

 For more information on our services and work, please visit the Quanta Consulting Inc. web site.


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