By Melissa J. Anderson

A new Korn/Ferry white paper suggests one big reason that firms need to focus more strategically on CEO succession planning: $40 trillion dollars.

That’s the size of the market cap of the world’s publicly traded companies, and, write report authors Alan Guarino, Vice Chairman of Global Financial Services at Korn/Ferry and David X Martin, Senior Advisor to Oliver Wyman and author of The Nature of Risk, that’s a lot of shareholder value hinging on successful CEO transitions. They explain, “Collectively, there is a $40 trillion reason why succession planning has to evolve. A more rigorous process prompts deeper analysis, longer term planning, and tough questioning from the board. That’s precisely what a board is for.”

By engaging in careful planning and bringing CEO succession out of the shadows and into the daylight as a talent management topic within boardroom risk management strategy, board members can work toward better, less risky CEO transitions – and help companies maintain their value through these sometimes-rocky events.

The Risk

According to Guarino and Martin, almost one in S&P 1500 CEOs lost their jobs between 2007 and 2009. That’s a lot of turnover in a short amount of time, during a particularly tumultuous period in the global markets. Most firms, they continue, aren’t prepared for a smooth CEO succession should the need arise.

About a quarter of firms fill CEO vacancies with external candidates because they have not prepared any internal candidates for the role. Outside hires are 6.7 times more likely to be fired than internal candidates. But that doesn’t mean other three quarters of firms are prepared either. Guarino and Martin cite research showing that 40 percent of all new CEOs get fired or retire within a year and a half.

This represents quite a bit of risk, the authors say, as companies are particularly vulnerable during CEO transitions. That’s why boards need to be more strategic about succession planning, creating a detailed plan of action, delegating specific line-item responsibilities to Chief Human Resources Officers, and making the grooming of future CEOs a responsibility of everyone in the C-Suite.

Steps for Succession Planning

The report suggests that boards should spearhead the strategy behind succession planning and then delegate specific tasks to CHROs and other members of the C-Suite. “Boards should always build a CEO succession profile that takes future strategy into account.”

Boards must take the lead here, they continue, because individuals in the C-Suite can find it particularly challenging to discuss succession planning in a proactive manner. “Directors also want to avoid “horse races” and are discomfited by addressing the topic with the incumbent CEO, especially if the CEO is unwilling to confront his/her own mortality. That is why boards are best served by a succession strategy that is simply an extension of the company’s ongoing talent development program.”

First of all, boards should make sure there are members in the C-Suite whose skills are aligned with future strategy. It’s important for them to have delivered results on past work, Guarino and Martin say, but they also have to have the ability to lead in terms of softer skills like “decision making, emotional strength, tolerance for ambiguity, personal values, and career motivations,” as well as “Learning Agility, the fusion of self-awareness, cognitive flexibility, resourcefulness, and interpersonal skills that is the best predictor of success after a promotion.”

The CHRO should be tasked with regularly reporting to the nominating or compensation committee chair. The authors explain, “In risk management terms, it’s important to know where the company sits among its competitors for talent. The bench strength of leadership should be a regular agenda item, and boards should be as vigilant in assessing this risk as they are enterprise risk.”

C-Suite successors should be groomed for advancement through a combination of “on-the-job training, intensive coaching, mentoring, and learning/education.” They write:

“There is an infrastructure – including assessments, performance reviews, key experiences, stretch assignments, feedback, and coaching—that can help ensure the readiness of internal candidates. The appropriate board subcommittee should review the developmental road map for each succession candidate to make sure he or she is exposed to the right mix of people, cultures, and business cycles—as well as put through some genuine challenges. Boards also should review the assignment of mentors and sponsors, and apply robust coaching when appropriate.”

Finally, they suggest making the topic of succession planning a regular agenda item, driving a disciplined succession process that becomes enculturated throughout the firm and board.