CEO Succession Planning.

CEO succession is the process of transitioning an organisation from the leadership of one Chief Executive Officer (CEO) to the next. It is a key component of corporate governance for boards.

CEO succession planning is a board-driven activity where the organisation identifies, develops and ultimately decides on who the best internal options are to replace the current CEO once they leave.

Success planning starts with the board defining the profile of their ideal CEO for the future. Potential CEO successors are then assessed and developed to be as close to the ideal CEO profile as they can be. The board will also search outside the company for external succession options, before choosing the right candidate from the shortlisted internal and external candidates.

It takes two years of preparation for an executive to build the skills to competently take on the CEO role immediately upon promotion. If an executive is promoted without preparation, the organisation risks them derailing in the role and eroding significant value. Therefore, boards need to prepare internal CEO candidates for both unplanned short-term succession solutions and for building long-term capability and credible succession options.

The most common reasons are:

• The board lacks maturity and understanding of the importance of CEO succession planning.
• The board relies on naive or biased advice for the design of CEO succession planning, resulting in inadequate preparation.
• The board is too busy and distracted to initiate effective CEO succession planning at the right time.

Research shows that internal CEO candidates have significantly better outcomes in terms of performance and longevity in the role compared to external hires. Internal hires have longer average tenure (8.7 years vs 7.3 years) and are less likely to be terminated than their external counterparts (24% vs 30%). Additionally, promoting internally boosts employee morale and retention throughout the organisation, and has a positive effect on how staff view the company.

External hires are usually more expensive (+18–20% salary), require longer onboarding periods and have higher exit rates and lower performance evaluations in the first two years, in particular.

One exception where an external CEO candidate may be beneficial is when there is a need to make large changes to the organisation. Typically, this is easier to achieve with an outsider. However, in most other cases, an internal candidate is advantageous due to their existing relationships, inside knowledge of the company, and lower costs and time to onboard effectively.

A number of risks can arise if the CEO succession process isn't managed well:

• Without proper development of internal candidate options, boards can be left with a weak bench. This may force them to choose an external CEO successor, despite it being less effective in most circumstances.
• Candidates may engage in competitive behaviour that leads to a breakdown in the organisation's function. This needs to be managed proactively through the process.
• Not all leadership assessments are created equal. The wrong assessment method can provide information that isn't actually predictive of performance in the CEO role. This can distract the board from the factors that do matter and lead to poor decisions.
• It can be challenging to retain internal candidates who are not successful, especially if the process isn't managed well.

CEOs should not be involved in board planning or decision-making for CEO succession. If boards allow CEOs to contribute to the succession plan, they create the conditions for an insecure or incapable CEO to limit the opportunity for development, growth and exposure of potential candidates. The CEO may resort to survival politics and try to minimise the perceived threat of others to their position.

It is good practice, however, for CEOs to invest time in the development of the leadership skills of the CEO succession options. This is because they are much closer to the day-to-day interactions and performance of the candidates than the board.