A Practical Guide to CEO Succession Planning

By Clarke Murphy, Managing Director at Russell Reynolds Associates

In Touch with the Board - Russell Reynolds Associates’ in touch with the Board series addresses best practices in board composition, assessment, succession planning and other critical corporate governance issues.

In this issue, Clarke Murphy and the CEO/Board Services Practice discuss the specific elements and timeline of a successful CEO succession plan, as well as the steps necessary to ensure a smooth transition.

The transition from one CEO to another is a critical moment in a company’s history. A smooth transition is essential to maintain the confidence of investors, business partners, customers and employees and provides the incoming CEO with a solid platform from which to move the company forward. A properly designed and executed succession plan is vital for any successful transition.

CEO vacancies can be planned or unplanned. In either scenario, by the time a succession plan is needed, it is far too late to start building one, and it is incumbent upon the board to make succession planning a priority, even in the face of more immediate and tangible issues. In addition to mitigating risk, succession planning brings with it several beneficial byproducts:

• It provides a framework that drives senior executive development, aligning leadership at the top of the enterprise with the strategic needs of the firm.
• It gives the CEO, through an ongoing analysis of the job requirements, the opportunity to adjust his/her role in light of changing business conditions and strategic imperatives.
• It strengthens the relationship and information flow between the board and senior management through the regular contact that is part of the board’s review of candidates.

Russell Reynolds Associates regularly advises boards and CEOs on chief executive officer succession planning, and, from this experience, we have developed the following practical guide.

Establishing the Foundation

Succession planning usually is directed by the governance or compensation committee or occasionally by a special ad hoc committee. The current CEO’s involvement varies (depending on whether the succession will be planned or unexpected) with primary responsibility being the development of internal candidates. The lead director often acts as the single point of contact between the board and the sitting CEO on succession matters.

Create a written succession plan.
This document should detail how the company’s officers are elected and replaced, how successors are to be chosen, and the respective roles of the CEO, board and various board committees in this process. Emergency succession procedures, in the case of sudden death or vacancy, also are included. Agreeing on these elements before there is a need to implement them helps ensure an orderly, deliberate transition while avoiding uncertainty and destabilizing political maneuvering.

Conduct regular, in-depth reviews.
The entire board, with a senior human resources (HR) executive, should review the succession plan twice a year, including an examination of the relevant bylaws and succession procedures and a review of the baseline capabilities requirements for the next CEO—a working document that summarizes what these requirements would be if the search for a new CEO were held today.

To determine those prerequisites, the board should begin by examining company direction and strategy over a five- to 10-year time period, factoring in the impact of various scenarios such as how the business will be affected by universal business challenges such as continuing globalization or the risks and opportunities brought by changing climate and global health conditions. Looking at the impact of broad trends helps ensure that the company’s next leader will have the capabilities and experience necessary to respond to complex events across numerous fronts. The board also should use this opportunity to observe successful CEOs from both inside and outside the industry and identify traits that have contributed to particular successes.

In our capacity as board advisors, Russell Reynolds Associates helps to distill these considerations and capabilities into a required set of competencies, and our Assessment Framework provides a model for implementation. Based on the company’s situation and strategic direction, some capabilities will be deemed essential and others of secondary importance.

Compare the resulting list of capabilities against the firm’s senior talent pipeline.
While HR manages the day-to-day aspects of measuring development, the board should be briefed annually and have regular exposure to internal candidates through presentations, field observations and site visits. Leadership development plans for each candidate should be reviewed and revised, as needed, to address progress and shortcomings.

Boards can decide to bolster this talent pipeline by recruiting from outside. This necessitates significant advance planning: Bringing in a senior executive who potentially could progress to the CEO role typically requires a three-year lead time so that the candidate will have been fully absorbed into the firm’s culture by the time the elevation takes place.

Narrow the field to two or three finalists.
This process typically occurs two to three years before the planned transition date with input from the board and CEO. The final round of professional development for the candidates should be designed so they are exposed to multiple aspects of the business and are given responsibility for key initiatives that will mirror the complex challenges they would have as CEO while giving the board an opportunity to evaluate each candidate’s performance.

Although there will be plenty of internal and external speculation in the succession process, it is important to defuse any aura of competition that may develop; finalists should not be pitted against each other but given separate domains and the opportunity to build programs that will contribute to the company’s profitability over a sustained period.

Implementing the Plan

Assess the finalist candidates.
Approximately one year before the planned transition, the full board should meet to implement the succession plan. A final review of the CEO competency list should be completed and revised as necessary. The board then should implement a thorough assessment of the finalist candidates, including:
• In-depth competency-focused interviews that probe for the skills and talents essential for the role
• 360° referencing that provides added insight from superiors, industry peers, colleagues and direct reports
• Online psychometric testing, interpreted by an Executive Assessment psychologist, which gives shape to intangible qualities

CEO Competencies and Success Factors
Vision and Strategy
• Demonstrates agility in challenging, complex or ambiguous situations and is able to integrate material from a wide range of learning and thinking
• Develops a “core” understanding of issues that challenges assumptions and the superfluous and distills the complex
• Displays both optimism (expects success, frequently identifies potential/opportunity, never feels a victim and takes calculated risks) and realism (is practical and assertive, evaluates the situation and clearly identifies problems)
• Anticipates problems and opportunities and is both reflective (considers multiple “angles” and understands the short- and long-term ramifications of decisions/actions) and decisive

Ensuring Tactical Success
• Manages situations and teams appropriately—in a hands-on or hands-off manner, depending on the situation
• Sets high standards for self and others; competes with self
• Actively manages performance, drives execution by clarifying priorities, and confronts problems and problem performers
• Hires, develops and retains excellent talent

Relationships and Communication
• Applies experience and insight regarding others
• Demonstrates empathy and effective listening
• Communicates effectively with internal/external constituencies

Motivation
• Demonstrates desire and motivation to be CEO; willingness to put in time and effort

Business
• Created and maximized success in more than one business entity
• Demonstrated ability to sustain commercial value in a business
• Raised the profile of his/her previous business entity
• Established reputation leading to credibility with board and investors/owners

Fit to Situation
• Fit to current and upcoming business stage/scope/scale strategies and tactics
• Fit to current and aspired organizational culture
• Fit to and/or actual experience in industry/market

Measure internal candidates against peers at other firms.
This will ensure the company is choosing the best CEO available rather than merely the best choice from within its own ranks. The customary approach is to utilize independent senior search consultants to identify the most appropriate candidates in the marketplace. This list often includes peers from within the industry in question but also those from adjacent industries to ensure that the best candidates are being considered.

On the basis of this information and the other data points amassed during the assessment period, internal and external candidates are given numerical rankings across the required competencies. With the assistance of outside independent search and assessment consultants, the board’s governance committee produces a detailed written evaluation as well.
The board deliberates and makes its final decision.

If the board cannot come to an agreement on an internal candidate, it will need to conduct an external search to widen the pool. However, the foundation for an external search, including identified competencies and the list of external benchmark candidates, is already in place.

The Successful Transition

Once a final candidate has been selected, it is critical that a thorough transition plan be developed so the new CEO has a strong start. A solid transition spans a full year and contains five phases (developed in conjunction with Russell Reynolds Associates’ Board Services team and Jack O’Kelley of Katzenbach Partners):

1. Begin intensive knowledge sharing.
The outgoing CEO and the incoming CEO meet frequently for in-depth discussions regarding the operating styles, histories and expectations of board members and senior management, as well as other stakeholder constituencies. At various points, individual members of senior management are included in discussions. Third-party interviews can help prevent the biasing of information.

2. Communicate with stakeholders.
Following this briefing period, the incoming CEO should be introduced to the company’s stakeholders in a series of information-gathering sessions. This allows the outgoing CEO to gracefully pass the baton and the incoming CEO to build support and goodwill with various key players, especially those he/she has not dealt with before.

3. Develop a written transition plan.
With the involvement and support of senior management, a detailed timeline is developed to provide the orderly transition of roles and responsibilities. If the appointment is an internal promotion, this includes the elevation of the executive who takes over the new CEO’s former position. If the outgoing CEO is remaining as chairman, that role needs to be clearly defined so as not to interfere with the new CEO’s role.

4. Share the transition plan.
The plan needs to be effectively communicated internally and externally to project a sense of stability and positive perspective. Appropriate recognition of the outgoing CEO is an important component; failing to show appreciation for an outgoing leader’s legitimate accomplishments risks alienating his/her supporters in the company and on the board.

5. Strengthen relationships with the board.
Even if the new CEO is known to the board, it is important that the board begin to relate to him/her in the new role through one-on-one meetings. If the new CEO is appointed from within, he/she can be phased into board meetings over a period of time. To the extent possible, the lead director should provide coaching and feedback to the new CEO throughout the process.

The Board’s Ultimate Responsibility

Managing the CEO succession process is a board’s ultimate responsibility. A regularly reviewed and closely followed succession plan is essential to successfully exercise that responsibility. The costs of shortchanging this process can be high if an organization is caught off-guard; but, conversely, the reward for planning also is high, resulting in continued momentum as it moves from one leader to the next. In addition, ongoing succession planning helps the board to be better informed and aligns the development of senior management with the strategic needs of the company. Beyond its keyhole in risk mitigation, CEO succession planning contributes to the successful governance and management of the firm long before and after a successor is needed and chosen.

Author

Clarke Murphy is a Managing Director at Russell Reynolds Associates and leads the firm’s global CEO/Board Services Practice. Clarke has 20 years of experience advising boards and recruiting board directors, CEOs and senior-level executives for leading global corporations.

About Russell Reynolds Associates

Russell Reynolds Associates is a leading global executive search and assessment firm with more than 300 consultants based in 39 offices worldwide. We take a consultive and collaborative approach to senior-level search and leadership and cultural assessment, drawing on our international network of sector and functional experts to ensure that our clients secure extraordinary leadership teams. www.russellreynolds.com