Five Reasons to Plan for CEO Succession

Earmarking successors for the role of CEO should never be something that’s left to the last minute and boards that persist in skirting around the issue are failing in their duties to stakeholders. Likewise, CEOs who are passionate about a business should be fast tracking the brightest talent so ready-made replacements exist when the time comes to move on.

The reasons for having a CEO succession plan are simple:

The tenure of the CEO is getting shorter;
It better prepares a business to communicate change at the top;
This is now a key part of the chairman’s role;
Done properly, it harnesses talent and promotes ambition;
It is in the long-term interests of the business.
In short, this is not something to be ignored or put on the back burner. Brendan Hynes, CEO of the soft drinks business Nichols, says: “This is one of the most critical issues on the board agenda, particularly for public companies. For a Plc, how well succession is handled can significantly impact on the investment decision for existing and potential shareholders.”

The responsibility for finding a successor falls squarely on the shoulders of the chairman. If the board has enough confidence in the CEO, then they too can be involved in the process, in an advisory capacity, as they know the role better than anybody else and it should be in their interests for their heir apparent to take an organisation forward.

Mike Tye, CEO of Spirit Pub Company, says: “It is a critical role for the chairman, but almost more so for the CEO to be creating their own successor. Part of the measure of the incumbent CEO is their ability to employ great talent that is good enough to succeed them… [and it requires] having a really high calibre executive board team and, just as importantly, the level below that too.”

That approach is also supported by Ian Toal, CEO of the cheese company Adams Foods, a division of the Irish Dairy Board which functions as a co-operative and therefore does not have a traditional chairman. An expert in turnarounds, Ian joined in July last year and has had to use his experience to streamline operations, cutting some £5 million of costs out of the business to put it on a profitable footing.

“When I leave in a year or so, the business will be in a very different situation as it will be fairly stable, and it will need someone to manage [operations] rather than to create masses of change,” he says, adding that his focus is very much on trying to groom internal candidates, each of which possesses different skills and styles, so they have a chance of taking on the CEO role once he departs.

Time and effort

Succession matters for both public and private companies. As everyone knows, the shelf life of CEOs is decreasing (and good ones are being poached) so the other side of this is that possessing a plan B falls under plain old best practice. Sir Brian Bender, Chairman of the London Metal Exchange, says: “A good company board will review HR issues periodically, perhaps even once a year, including recruitment, retention and succession planning for the most senior posts.”

Yvonne Sell, Director and Head of Leadership and Talent at consultancy firm Hay Group, says: “A CEO’s tenure is getting shorter while more regulation is demanding that boards keep closer tabs on performance. People know CEOs change but if you do treat it as business-as-usual, and you have planned for succession, with a CEO elect working closely with the incumbent some 18 months before the handover, it shouldn’t be too disruptive. If events do call for a rapid change, you need communication around why you are doing it.”

This is where it’s easy to make mistakes. Brendan says: “My view on succession planning is that it needs handling very carefully indeed. A regime change at the CEO level sends a very important signal to the market and it is vital that the correct message is conveyed when announcing a change. Ideally, this should be planned well in advance, with the reasons for the change clearly spelled out.”

There are no hard and fast rules about whether a candidate should be internal or external. Richard Ackroyd, Chief Executive of Scottish Water, says: “The important thing is that for every key role in an organisation you’ve got some possibilities for succession and ideally you’d like a good proportion of those to be internal, but there’s nothing wrong with external succession at the right time and in the right context.”

The primary driver is to find the best person for the job, but within the business there will be ambitious and talented individuals who expect a shot at the title. This is where diplomacy and tact is required because it’s easy to lose good people at this stage as, like Yvonne warns,“something has gone wrong internally when you have the scenario of the CFO assuming they’ll get the job and then they don’t”.

Ian says that, for him, continuity in the organisation matters for his succession planning at Adams. “The candidates are all ambitious and very good at their functional roles; I haven’t set them against each other. I’ve made [the process] competitive but not political or divisive. I’ve been quite deliberate in making sure that they are very close and that they interact with each other, but I’ve been clear that I haven’t made my mind up about which way this could go. There isn’t a timescale for my departure, which also generates a bit of hunger.”

According to Mike, it presents a great opportunity to shake things up. “Disruption can be a natural consequence of the succession process. Done the right way, highlighting possible successors can create healthy competition and high-charged performance. By contrast, if done in an insensitive way it can be potentially destructive.

“It’s important to be very straight with each candidate therefore and stress that their behaviour, in the way they vie for the top job, is critical. If you have a set of leadership behaviours they should be adhered to – either get it right or count yourself out of the race. You can’t avoid the internal challenge, but there is constructive and destructive competition.”

Alison Carnwath, Chairman of Land Securities Group, comments: “You should always do a job spec and discuss this with the nominations committee. The most important quality is leadership and a proven verifiable track record; a candidate should have a great desire to listen and learn as well as preach and direct.

“Integrity and hard work are always staple requirements, as is a stable home environment. If possible, a pleasant personality and appropriate board experience should also be sought as they will help to smooth the integration process – at least initially.”

There are no excuses for allowing a leadership vacuum to exist in a business. Besides, as Brendan says, “succession planning should be a core process for the whole business, not just the CEO role”.

Mike adds: “You can’t start this process too early either. If it’s planned succession, it should be anywhere between 18 and 24 months. Sadly, it can’t always be planned, so it’s a mistake to be unaware of the succession issues on an ongoing basis.

“And while one can’t always have an instant successor, to have identified who the successors are internally, and to have development plans for at least a couple of people, seems sensible.”

The way circumstances change so swiftly in business today, anything else would be reckless.

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