Seven Steps to Successful CEO Succession
December 11, 2023 – The market for qualified, motivated, and innovative CEOs is rapidly shifting. The external risks of 2020 and 2021 saw CEO departures fall each quarter. Then, in 2022, global CEO turnover hit a five-year high. And the trend of significant turnover at the top continues, creating a supply imbalance for great CEOs. This is making isolated CEO searches even more costly and risky, according to a recent report from Russell Reynolds Associates. A study from Harvard Business Review found that a lack of effective succession practices destroys almost $1 trillion of value each year among the S&P 1500 alone. The solution? Robust, multi-year CEO succession planning.
It’s the most effective way for boards to de-risk CEO transition and position the organization for ongoing success. Russell Reynolds’ research shows that multi-year succession planning enables organizations to identify, develop, and retain top talent, raise team performance, strengthen culture, increase value creation, and achieve their strategy. Yet just 25 percent of all leaders say they proactively engage in it.
“Multi-year CEO succession planning begins with defining the vision for the future of the organization,” the Russell Reynolds report said. “It then invests in the development of internal candidates and often includes external strategic sourcing and mapping. Best-in-class planning integrates strategy, culture, assessment, development, and team effectiveness, all aligned to a clear vision.” The firm says that the steps below can and should overlap in a multi-year succession planning process.
Phase 1: Create a Forward-Looking Strategy and Success Profile.
Thoughtful succession planning results in marked financial returns, generating clear value for companies and shareholders. Currently, Russell Reynolds found that only 25 percent of leaders say their organizations have proactive succession plans. That’s despite the highest performing and most progressive boards starting to think about their next succession as soon as they select the current CEO.
“Developing a robust planning process and succession strategy, including a forward-looking CEO success profile, helps future-proof the organization,” the report said. “It uncovers opportunities for cultural transformation and shows the type of leader who will be able to motivate the organization toward its next phase of growth. Driving an inclusive and efficient process means engaging the right stakeholders early and often.”
Phase 2: Assess Internal Leaders.
Russell Reynolds’ Global Leadership Monitor has uncovered that, while psychometric assessment is best practice when evaluating potential CEOs, only 20 percent of organizations routinely include it in their succession planning. The firm explains that by adding scientific rigor to the assessment process, truer and often less obvious potential successors can emerge, improving leadership diversity and organizational performance.
Related: Changing the Focus in Succession Planning
A McKinsey study found that companies in the top quartile for ethnic diversity in management are 35 percent more likely to have financial returns above their industry mean, and those in the top quartile for gender diversity are 15 percent more likely to have returns above the industry mean.
Phase 3: Develop and Coach Potential Successors.
Leaders who don’t receive effective coaching and development are 6.5 times more likely to say they would leave their organization. Succession planning gives an opportunity to develop and nurture leaders with diverse backgrounds, ensuring they have the skills they’ll need to be successful if they step into the CEO role.
How to Develop Effective Leadership Succession Planning
Poor succession planning processes stemming from a lack of leadership development and assessment can be extremely costly. Harvard Business Review, in fact, has found that this problem costs an estimated $1 trillion across the S&P 1500 annually. When employees feel engaged, valued, and supported through development opportunities, they are more likely to stay with a company for the long term and drive value creation, according to a study from GeniusMesh’s Neerja Bharti. As a result, “organizations will be able to collect data on employee strengths and development opportunities during the leadership development process so they can build comprehensive and objective succession plans,” she said.
Tailored leadership development offerings provide the unique opportunity to develop multiple potential CEO successors in line with an organization’s cultural and strategic goals. Expanding potential successors’ knowledge and capabilities by rotating and expanding the scope of their roles gives them new perspectives to prepare them for managing all functions and geographies.
Phase 4: Align Culture to Organizational Strategy.
A recent SHRM report found that poor work place culture accounted for $223 billion in risk and turnover costs over just five years. “As the forward-looking strategy highlights the desired organizational culture and the organization prepares its successors for a potential step up, the entire leadership team will become more aligned to and more strongly demonstrate the culture,” the Russell Reynolds report said. “And when the new CEO takes the helm, they’ll embody a culture the whole organization can recognize and support during a time of transition. Leadership is the most important lever when it comes to changing corporate culture.”
Yet only 56 percent of executives say their executive leadership team is role modeling the right culture and behaviors. When MIT Sloan Management Review studied nearly 700 US companies, they found little to no correlation between stated company values and employee perceptions of the organization, highlighting the pervasive gap. Russell Reynolds notes to help leadership understand and embrace its company culture, align cultural changes with the company strategy, and take steps towards improving it, including incorporating culture into executive recruitment.
Phase 5: Enhance Top Team Effectiveness.
Having supported thousands of successions over more than 50 years, Russell Reynolds know high-performing organizations understand that top team effectiveness leads to revenue and EBITDA growth. A large part of an incoming CEO’s success comes from having a team that is already high functioning. Yet approximately 40 percent of leaders don’t believe their executive leadership teams have the right capabilities to lead their organization successfully.
Related: Enhancing CEO Succession Planning
“If there’s no harmony at the top, none can exist in the rest of the organization,” the Russell Reynolds report said. “Alongside their core role in setting strategic priorities and mobilizing their people for the next inflection point, C-suites serve as a model for vision, purpose, and culture. When top teams overcome challenges, they make a measurable impact. On average, high-performing teams are 27 percent better at ensuring the organization’s future readiness.
Phase 6: Benchmark the External CEO Market and Run Selection-Oriented Assessments, Including Contextual Immersion.
Russell Reynolds found that 11 percent of externally recruited CEOs leave within two years, compared to 6.9 percent of CEOs who have gone through an internal succession process. “Yet it’s best practice to have a full understanding of the external talent landscape as you go through your CEO succession process,” the firm said. “Conducting confidential strategic sourcing exercises of the global talent pool helps benchmark internal successors against external candidates to ensure you choose the best option for your next CEO.”
Finalist CEO candidates (both internal and external) should undergo a selection-oriented assessment that includes a contextual immersion, according to the report. “Contextual immersions are CEO-specific assessments that showcase the leadership behaviors candidates use in situations which are unique to the top role, often involving pressure and ambiguity,” it said. “This unique experience allows the board to select the candidate who is the best fit for the organization’s forward-looking strategy.”
Phase 7: Appoint a New CEO and Provide Support With a Tailored Transition Plan.
Under performance of externally recruited CEOs decreases total shareholder return by about half a percentage point, costing investors in the S&P 1500 approximately $182 billion each year, according to Harvard Business Review. Where companies do promote CEOs from within but fail to properly prepare them to take over, organizations lose an additional 0.3 percent, or $109 billion across the S&P 1500.
McKinsey found that 75 percent of executives consider themselves unprepared for a position because of inadequate onboarding processes. Revenue grows 2.5 times when there is an effective onboarding program.
“Building an integrated transition plan, complemented by expert advice, and establishing clear metrics of success will help new CEOs create confidence, decrease time to productivity, and increase their chances of a long-term tenure,” the Russell Reynolds report said. “By tailoring the transition plan and adding experienced external advisors, we can reduce the time to productivity by up to two months.”
Related: Top Five Mistakes Companies Make with Succession Planning
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Executive Editor; Lily Fauver, Senior Editor – Hunt Scanlon Media
