In 2009 Xerox made an unprecedented move by appointing Ursula Burns as chairperson and CEO of the company. Not only did Burns become the first African-American woman CEO to head a Fortune 500 company (a position she still holds today), but everything about her, from her background to her appearance, was drastically different from her predecessor Ann Mulcahey.
We’ve all heard about the benefits of building diversity into company culture, from an increase in productivity and creativity to increased sales, but as evidenced by Ursula’s distinction as the only African American woman to ever head a Fortune 500 company, very few corporations consider the importance of building diversity into their top levels.
When considering a succession plan for a senior leader, it’s easy to imagine their replacement as someone who looks and acts just like them, but that’s not the best or smartest way to plan for a successful future. In a speech at the Economic Club of Washington, D.C., Burns argued that leaders and policy makers in all sectors have become too satisfied with the status quo. “Rather than focus on what can’t be done, we all need to exhibit a lot more impatience with what is and more passion for what might be.”
As it turns out, the problem may not be a reluctance to challenge the status quo, but rather that companies are failing to create proper succession plans, let alone build diversity into them.
A Shocking Find
According to June 2010 research conducted by Heidrick & Struggles and Stanford University’s Rock Center for Corporate Governance, more than half of today’s companies cannot immediately name a successor to their CEO should the need arise, revealing critical lapses in CEO succession planning.
Stephen A. Miles, vice chairman of Heidrick & Struggles and a global expert on succession planning, believes the lack of succession planning at some of the biggest public companies poses a serious threat to corporate health. “Not having a truly operational succession plan can have devastating consequences for companies – from tanking stock prices to serious regulatory and reputational impact,” Miles said.
The findings, which resulted from a survey of more than 140 CEOs and board directors of North American public and private companies, seem to suggest a lack of focus. As Stanford Graduate School of Business Professor David Larcker said, boards of directors just aren’t spending the time that is required to adequately prepare for a succession scenario. This is something that was echoed by Stephanie Buckles, associate principal at Heidrick & Struggles.
“Most companies are prepared in some way, but they don’t have a formal succession plan in place,” Buckles said. “Frankly, in this economic climate, succession planning is not a top priority. Many are just waiting for the need to arise because right now, their focus is on recovery and their priorities lay with the shareholders.”
Another issue is that formalizing a succession plan can be a costly endeavor, but in reality not having a plan in place is even more costly. According to Buckles, being unprepared to hire a successor can cost three times the average corporate salary because of the planning, searching, and training that must ensue as a result.
One of the survey’s most troubling finds is that 39 percent of respondents cited having “zero” viable internal candidates. “This points to a lack of talent management and not paying enough attention to your ‘bench,’” Miles said. It was also discovered that on average, boards only spend two hours a year on CEO succession planning and only 50 percent have a written document detailing the skills required for the next CEO and while 48 percent of respondents think they have a “very strong” understanding of the capabilities of internal candidates, only 19 percent actually have well-established external benchmarks to measure their skills against.
When it comes to building diversity into a company’s succession plan, the next data point could be the most troublesome: Only 50 percent of companies provide on-board or transition support for new CEOs. Even when the status quo is maintained, this could put the entire organization on unstable ground, but if a CEO is drastically different than their predecessor, this could be disastrous, setting the new CEO up for failure and putting the company in harm’s way.
Finding the Right Match
According to Buckles, appointing a new CEO that is drastically different than those who came before them has the potential to cause some friction, as it’s difficult to tell how polarizing their new approach will be.
“People acclimate to new situations differently,” Buckles said. “There is emotional and intellectual adaptations that must take place when taking on a new role and most of us intellectually adapt much more quickly than we adapt emotionally. This is why transition support is so important. It doesn’t matter who you choose to hire, you have to groom the CEO for success and ensure they know how to succeed in your company’s culture. When hiring someone very different, key areas that cannot be changed must be outlined so that other changes won’t feel so dramatic or polarizing to the company. The key to success is getting the new CEO up to speed within six to eight months.”
For obvious reasons, picking an internal candidate for an available CEO position is ideal, but according to Buckles, companies looking to diversify their upper ranks need to look at what their organization needs today and figure out why they’re looking to make a shift. For some companies, “diversity” may only mean coming from a different background or thinking differently than others in the organization. Buckles recommends doing a comparative analysis of the candidate and the needs of the company because when building a succession plan, the successor must have key strengths that will either help the company where it is lacking or continue to move the company forward.
“Diversity comes in many shapes and sizes. The general premise is that everyone who is hired should have potential in the company and over the course of their career, those people should be built up. Choosing a ‘diverse’ candidate just for the sake of it is not ideal. A better practice is building on the potential of those already in the organization and then figuring out who is most qualified for the position,” Buckles said.
Best Board Practices
Most companies’ succession planning still isn’t even close to being good enough, so boards should devote a meaningful amount of time to developing their succession plan and if they care at all about being able to compete in an increasingly diverse and global marketplace, they should also figure out a way to build real diversity into their plans.
In their research, Miles and Larcker offer a number of suggestions to boards who have less than solid succession plans in place. The number one question they should ask themselves is whether or not they could really name someone today, or is everyone in the succession plan always three years out from being viable?
According to the pair, there should also be a focus on making succession plans operational, meaning companies need to move away from the “name in boxes” approach that gives them the false hope that they are actually developing viable candidates. “Plans aren’t worth the paper they’re printed on unless there is a robust inside/outside process that ensures they are both developing and knowledgeable of all candidate pools – internal and external,” Larcker said.
Lastly, and perhaps most importantly, Miles and Larcker recommend that companies demand experience from board directors. While the SEC has recognized the importance of a rigorous succession process, firms are still failing to name directors with sufficient experience. “We are typically better at the things we have practiced before, and this is no place for someone to be ‘practicing’ for the first time,” Miles said.