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Best Practices for Executive Succession Planning

By Melissa J. Anderson

Recently, the Korn/Ferry Institute released a study on how the US’s biggest 100 companies are approaching succession planning, including interviews and case studies on how to create a smooth transition in the C-Suite.

According to the writers, Dennis Carey, Vice Chairman, Board & CEO Services, Philadelphia; Steve Mader, Vice Chairman and Managing Director, Board Services, Boston; and Jane Stevenson, Vice Chairman, Board and CEO Services, Atlanta, the key to a successful succession plan is, well, planning.

Not every company will plan the same way, but it’s important for each company to ensure they have a carefully planned succession process – for expected and unexpected transitions – that will work for the company and its culture. “It never ceases to amaze me how simultaneously simple and complex succession stories are,” Stevenson said. “There are underpinning guidelines that point the way to the right process, yet the application of that process is so widely diverse, depending as it does on the board, the CEO, the business strategy, and the type of challenges that are unique to each company.”

As the study says: “A smooth and sure succession shouldn’t be difficult to pull off. Companies that understand the right process, and apply it effectively, generally come out with a good choice.”

Succession Best Practices

The study, “KFMC100 Smooth CEO successions: Lessons in passing the baton” polled the 100 US public corporations with the largest market capitalization (public investment firms and companies not traded on the NYSE or Nasdaq were not included). The results were surprising – very few companies could identify who their interim CEO would be if the need suddenly arose. The study continues, “Only 17 percent indicated that they had identified an interim replacement, annually reviewed a list of candidates, or had written procedures in place.”

A full quarter of the companies polled had no succession plan for the short or long term.

Korn/Ferry suggests that companies should not only plan for the expected, but also the unexpected transition. A few top tips from the study included:

Decide how involved the current executive should be in advising his or her replacement

Settle whether the whole board should be involved in succession planning or just a committee

  • Communicate about the topic frequently in board meetings
  • Discuss and decide how the succession plan plays into larger corporate strategy
  • If you hire a director as the executive, they shouldn’t be on the succession committee

It seems the most important part of the plan is simply talking about the process and deciding what the company’s priorities should be in succession planning. This will set a framework for the process and make the transition easier for the company.

Executive Pipeline

The study also suggests that it’s better to hire internally than externally – and it also outlines a few steps boards can take to ensure the pipeline to the executive suite is strong.

Over half (57 percent) of the companies said that their boards oversaw succession planning beyond the CEO seat – 46 percent said they oversaw the transitions of all senior managers, and 11 percent said they oversaw planning for key corporate officers. Yet 43 percent did not specify how they were involved with planning beyond CEO transition.

Korn/Ferry suggests that boards should incentivize CEOs to take an active hand in developing the next generation of leaders. “In addition to making talent development a factor in annual bonuses for a sitting CEO, consider providing future financial upside through equity or incentive payments, based on the successful transition of the new CEO,” the report says.

In an interview with Ajay Banga, CEO of Mastercard, Korn/Ferry discusses how CEOs can work ensure a smooth succession plan. Banga says, “Developing a good pipeline—not just potential CEO candidates for the near term, but also for the second and third levels of leadership further out—is 50 percent of what a CEO should be doing.”

Korn/Ferry says that while the CEO should focus on talent development, he or she should not lead CEO selection. “The nonexecutive chairman or independent lead director should head the latter effort, including any external search. But the identification and development of future leaders should be driven by the chief executive and overseen by a board committee.”

By ensuring that leaders in management are focused on building a robust pool of talent internally, and directors have created a robust plan for selecting CEO successors independently, companies can better ensure a smooth transition in the C-Suite.

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