Why succession planning and grooming effort for top leadership needs to be the responsibility of the board

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Updated: March 23, 2018 4:32:57 AM

Succession planning and grooming effort for top leadership needs to be the responsibility of the board

succession planning, HBR, Rock Center for Corporate Governance, North America, europe, Heidrick & StrugglesEben Harrell, in a research on succession planning for HBR, indicated that, in 2015, the turnover of CEOs hit the all-time high of 15%.

Mihir Ajgaonkar

Succession management for CEOs is a hot topic. Investors worldwide are impatient about their RoI, irrespective of the prevailing business environment. This impatience is directed at CEOs if organisations are not able to keep pace with the expectations of investors. Hence the average tenure of CEOs globally has been reduced to 2.5 years from six years, a couple of years ago. So, organisations must have a clear strategy for CEO succession. It seems many CEOs do not share the importance of succession as one of the critical management practices. Ben Dattner and Tomas Chamorro-Premuzic (HBR) have observed the reasons why CEOs may have such an attitude.

*Denial of the need to retire: People may be worried about the major adjustment they need to do in life when they retire. Here, the tendency is to stretch the working life as far as possible.

*Going through the motions of succession planning without ownership: CEOs may pay a lip service and go through the motions of preparing a succession plan while resisting it clandestinely. They may go through the process but delay choosing a successor and come up excuses for not being able to do so. They may keep interviewing candidates and keep coming up with reasons that candidates are “not good enough.” They may choose someone not acceptable to the board or who may not be interested in the position.

*Designating a wrong successor: Strong and narcissist leaders may choose someone who is gullible, less talented as a successor—so that these leaders have the opportunity to pull on until such time the candidate is “getting ready.” Or they still can call the shots while stepping into the non-executive or mentoring role.

*Undermining or discrediting a successor: CEOs may undermine a successor by not offering the right exposure and empowerment or look for opportunities to discredit him so that eventually there is no choice for the board but to continue with them till a new successor is found. Causes of undermining behaviour may also be a tendency to micromanage without allowing a successor to find his or her own way, or an overly sceptical approach that generates negative self-fulfilling prophesies (set-up-to-fail syndrome).

Eben Harrell, in a research on succession planning for HBR, indicated that, in 2015, the turnover of CEOs hit the all-time high of 15%. Yet as per a 2010 survey by Heidrick & Struggles and Stanford’s Rock Center for Corporate Governance, only 54% boards took efforts to develop the successor to a CEO. A study by Booz & Company found the organisations with stock returns in the lowest decile underperformed industry peers by 45% with only 7.5% probability that their CEOs would be forced out, indicating that boards gave more latitude to under-performing CEOs. Management sage Ram Charan has observed that CEOs’ tenure has been sinking as two out of five CEOs have been under-performing, with a credit to poor succession planning.

How to ensure a proper succession planning for CEOs? Who can be entrusted with such responsibilities? Charan has placed the onus on the board if one has to avoid improper CEO succession. Today, most boards spend a lot more time monitoring financial performance than getting the organisation ready for the future. So, typically, new leaders may be plucked from the well-worn Rolodexes of small recruiting oligarchy and appointed by the directors. According to Burson-Marsteller, about 37% of Fortune 1000 companies have been run by external hires. The other approach is to coax former leaders out of retirement to fill the void. Charan calls them “boomerang CEOs.” They may return for a couple of years to restore credibility and put in place proper succession.

In case of a requirement to hire CEOs externally, the task may be assigned to a search agency to bring in an independent and expert perspective. But, in practice, the candidates may be identified based on the perceptions of the headhunters about the competencies that a CEO should have and not on the basis of organisational reality. The dimension of cultural fit may be overlooked in the race to get the resumes of “all and mighty” corporate honchos to the table. At times, due to business considerations, search agencies may push forward candidates who are “available” for obvious reasons and influence the selection panel. A search agency may have tall claims about its internal processes to recommend the right fit so that board members may not spend enough time on assessment.

Internal candidates bring in a deeper understanding of organisational and business complexities than external ones. Booz Allen reported that, in 2003, 55% and 70% of external CEOs in North America and Europe were shown the door compared to 34% and 55% insiders. A well-planned and executed leadership development programme linked to proactive career development and succession planning processes should provide a ready talent pool for organisations to select candidates for CXO positions.

The succession planning and grooming effort for top leadership positions needs to be the direct responsibility of the board. But, at times, there can be an outstanding fit between the external candidate and organisation. Insiders may not be capable to lead a complex business but may sail through the due diligence due to familiarity of the board. Market disruptions may make carefully groomed candidates irrelevant. Or the tarnished reputation of the outgoing CEO identified from the internal pool may warrant the hire of successor externally.

The lack of any leadership development at the senior management may also force the boards to look outside. So, when it comes to selecting a CEO externally, board members must seriously get involved in the recruitment and selection process. They need to drive the search process, instead of headhunters, by clearly defining role specifications and vetting of candidates in terms of a fit with the critical competencies for high performance, role, and cultural and business complexities. Eventually, the choice of a CEO would be from inside or outside, and the board will have to carry the baton of the selection process to secure and not imperil the future of the organisation

Author is Associate professor, People & Performance, SP Jain Institute of Management and Research, Mumbai

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