Take CEO Succession Planning Off the Back Burner

CEO transitions have always been high-stakes moments for companies, and they’re becoming more so. Pressure from a widening circle of stakeholders has added to CEOs’ enormous responsibilities, and when controversies arise, they’re under intense scrutiny as the public face of an organization. But succession planning for this critical role often fails to get the attention that boards acknowledge it needs.

While many CEO transitions offer an unparalleled opportunity for strategic renewal and value-enhancing change, they can also be rife with pitfalls. Given that the median tenure of S&P 500 CEOs has been falling and now stands at under five years, navigating CEO transitions is a near inevitability for boards.1 And yet, it’s one for which many boards don’t adequately prepare.

A 2019 survey by the National Association of Corporate Directors found that public-company directors ranked CEO succession planning as one of the most important governance areas — and they also named it one of the top priorities to which they most needed to devote more time. More than half (57%) of directors identified this area as needing improvement.

In our own survey of board directors, a quarter of them thought that their board had poor or below-average CEO succession-planning practices, 39% were neutral on the matter, and just 36% thought that their boards had an above-average or excellent process. In contrast, roughly two-thirds of board directors thought that their processes were above average or excellent for other core governance responsibilities, including regulatory compliance, financial planning, and board composition decisions. (See “How Boards Rate CEO Succession-Planning Effectiveness.”)

Although CEO succession planning doesn’t necessarily guarantee a positive succession outcome, our exploratory analysis of a set of CEO transitions suggests that having good processes in place can increase the likelihood of a positive outcome. In our analysis, 59% of companies with a good CEO succession-planning process (as assessed by executive search firm Spencer Stuart) outperformed the S&P 500 in their CEO’s first two years in office, compared with just 17% of companies that had a bad process. Nonetheless, in our research and interviews with boards and executives, we’ve identified a gap between their acknowledgment of the importance of CEO succession planning and action on the issue.

Why Succession Planning Doesn’t Happen

What barriers do boards face when trying to implement or improve CEO succession-planning processes? In our survey of board directors, two issues emerged repeatedly among the laundry list of challenges that directors cited: complacency, and concern about maintaining a good relationship with the CEO.

A neglectful complacency can set in when the current CEO is relatively early in their tenure. Directors may want to take a break from succession-planning discussions after having recently gone through a CEO transition. One director mused that, because their organization had recently hired a new CEO, succession planning was “not an immediate issue … hopefully.”

Others simply don’t feel the need to plan ahead due to the CEO’s age. A director told us that succession planning on their board is “nonexistent” because the CEO is a “relatively young man and, apparently, in it for the long haul.” At another company, a director confided that the CEO “is 52, [and] I think we have been a bit lax, as he is young and relatively new, in hashing out a succession plan.”

Sensitivity to the feelings of the current CEO can also interfere. According to one director, their delay in initiating CEO succession-planning discussions stems from a desire to placate the current CEO: “[The] board is not willing to engage in this discussion. [The] standard answer is, ‘We don’t want to spook the CEO.’” Another director concurred: “Too much talk demoralizes the present CEO.”

A CEO’s strong prior performance can also stymie these efforts, as one director confided: Their company’s current CEO “did an excellent job of turning the situation around in very difficult circumstances. As a result, many board members felt/feel reluctant to challenge or deny him once the company stabilized. He has declined to engage in succession planning for his position.”

Some directors worry that succession-planning conversations could even precipitate an undesired CEO departure. As one director lamented, “The other board members are ... frozen, since they are concerned [that] if we push too hard, then the incumbent would leave, and we have no replacement.” This particular concern was shared by another: “I think some of the board members are not sure if they should challenge the CEO, as she may leave with no plan in place.”

Bridging the Gap Between Acknowledgment and Action

Concerns about CEO succession planning are a constant refrain in conversations about the most significant challenges directors face. We’ve conducted surveys; interviewed over 100 board members, CEOs, executives, and search consultants; and developed case studies on specific companies on issues related to CEO transitions. These experiences have helped us uncover what works and what doesn’t when it comes to CEO succession planning.

Whether board members are struggling with getting the issue onto the board agenda for the first time, are looking to make their processes more robust, or are hoping to improve upon processes used in a prior succession, we believe applying some key principles can help them move to a more proactive, systematic, and consistent approach. These are four key lessons to help adjust expectations and navigate some of the most common CEO succession-planning pitfalls.

Lesson 1: CEO succession is a process, not an event. Many boards are reactive and start to consider CEO succession only when the issue is imminent. A more proactive approach, where CEO succession-planning processes are always running in the background, can yield many benefits. Here’s why.

An ongoing process provides time to observe internal candidate development. There really isn’t any other role quite like the role of a CEO. Evaluating how potential candidates might perform as CEO is always going to require something of a leap of faith. In many cases, it relies on evaluating potential rather than prior performance. A standing process for CEO succession planning allows the current CEO and board members to observe internal candidates’ performance over time and, when possible, how they respond to stretch assignments — an indicator of how their current capabilities might grow in the future. As one executive search consultant shared, “If you have a good process that the board trusts, where early on they get an in-depth evaluation of individuals’ strengths and development needs, they are able to see the growth trajectory of internal candidates.”

Spending more time observing internal candidates builds board member buy-in. The process of getting to know candidates, evaluating them, and discussing them can build a board’s commitment to the eventual decision and a vested interest in the selected successor’s future success. When challenges inevitably arise after the CEO transition, this buy-in can prove to be crucial in having a united board that is willing to step up to advise, guide, and support the new CEO. CEO selection decisions are notoriously complex and political. Having time to become more familiar with candidates and discuss possible successors when the matter isn’t urgent can increase the likelihood that the board will arrive at consensus around a candidate. As the consultant mentioned above put it, “If you leave it to the last minute and you haven’t had a real process where the board is learning continuously and observing growth in internal succession candidates, you can often get really disparate views. … If they get many touchpoints over time, with a really good data baseline to start with, a board is much more likely to be aligned and ready to make a decision about the next CEO candidate.”

A continuous process means that the board has a foundation for decision-making if the need arises unexpectedly. Executives can leave on short notice for a variety of reasons. A successful CEO might be poached by a rival business; family or medical emergencies may arise that require a CEO to step down; misbehavior or an ethical transgression could erode trust in the CEO’s judgment. Ongoing CEO succession planning lays the necessary groundwork to ensure that the board isn’t left scrambling to build a process and pipeline from scratch in the midst of a crisis or if the transition timeline suddenly shifts.

Boards can create a continuous process by starting with the basics: creating a contingency plan for CEO succession, which many directors refer to colloquially as the “hit by a bus” scenario. Who would take over as an interim CEO if the current CEO were suddenly incapacitated or abruptly left the company? Review this plan as a board at least annually. The board chair or lead independent director could be a suitable choice for the name in the envelope.

Next, getting CEO succession planning onto the board agenda as a recurring item can make the discussion less awkward and more routine. Keeping communication channels between the board and CEO clear and framing CEO succession planning as a fiduciary duty of the board can help institutionalize the process as a customary board responsibility. One board member noted that while succession planning may be perceived as threatening to a sitting CEO, “by talking about it constantly, we made it more nonthreatening” and seen as mandatory. Once these processes are in motion, many directors find that they are easier to sustain. Another director explained that after appointing a new CEO from within, “five minutes after giving him the good news, the lead director said that we expect him to begin tabling candidates to be his successor within a few months. He wasn’t surprised; he knows that is the culture of this company.”

Depending on the anticipated timeline for succession, the topics under discussion will evolve and may focus on issues such as the internal pipeline of candidates, the company’s business strategy, the desired qualifications for a future CEO, the selection of a short list of candidates, the evaluation of candidates, or the logistics of the transition. Illustrating this evolution, one director reported that their board had been having CEO succession-planning discussions annually but that those discussions took on a “rubber meets the road” tone once the incumbent CEO began thinking seriously about retirement.

Lesson 2: When setting a transition timeline, it’s often better to act too early than too late. The reality is that stepping away from the CEO role is notoriously difficult for many leaders — consider the history of “boomerang” CEOs, such as Howard Schultz at Starbucks, Bob Iger at Disney, and Jack Dorsey at Twitter. Each of those leaders returned to their company for a second (or third) go at being CEO. While such dramatic returns are far from the norm, a more subtle way this dynamic can play out is if there is a reasonably well-performing CEO who hangs on a little too long before finalizing a retirement timeline and finding a successor. By the time the board can get a successor lined up, the CEO should have been long gone. In such scenarios, board directors often quietly lament that it’s time for the CEO to go, but social niceties and a long history of working together get in the way of broaching the topic.

One risk of having a CEO linger is that their vision can stagnate: They may press forward with approaches that were successful in the past but are no longer effective. In these scenarios, some CEOs are unable to change how they do things in order to bring their company’s strategic direction back into alignment with the current operating context. Of course, this example doesn’t reflect the performance of all CEOs, but it points to the risk of waiting too long to act on a CEO transition.

In other cases, CEOs hope to go out on top with a fresh record of accomplishments but don’t commit to succession planning early enough to allow this to happen. If CEOs and boards delay the process of succession planning until performance begins to slip, the actual transition may occur after the CEO has passed their peak, potentially compounding the challenges facing the organization.

While there’s no standard approach to determining the ideal length of a CEO’s tenure, boards may benefit from regularly revisiting the skills and attributes needed for the role. Aligning these reassessments with the company’s existing strategic planning cycles provides a natural rhythm to step back and consider leadership needs in the context of the company’s future direction. Using these desired qualifications as a guide, directors can then conduct annual check-ins to assess the CEO’s performance and identify any gaps. This doesn’t necessarily require a new process; these conversations can be incorporated into existing discussions on CEO compensation or board evaluations. Regular checkpoints can help directors determine whether the CEO needs to course-correct or whether it might be time for fresh leadership.

Once a succession timeline has been determined, board leaders can schedule regular discussions to ensure that everyone is aligned on following through, and to make plans for doing so. The timing of the transition should complement plans for future strategic change. At one company we studied, planning for the next major phase of growth would trigger planning to hire a new CEO, among other structural changes. In another company anticipating a significant industry shift, the CEO collaborated with his board to catalyze the succession process because, he said, it “wouldn’t work if I were going to make the decisions and then turn the game plan over to someone else.”

For many CEOs, however, the prospect of stepping down from such a high-status role can take time to process. Having a board member who’s in the CEO’s corner as a trusted confidant and is available to talk through challenges that arise can help to ease this transition and ensure that the CEO doesn’t try to backtrack or delay the process. If a high-potential candidate believes that the CEO is stalling and might be unwilling to step down, they may start looking for opportunities elsewhere. A protracted transition can also put critical strategic moves on hold and lead to a lame-duck scenario. Delineating clear responsibilities for the outgoing CEO in the succession process can help mitigate these risks by enforcing boundaries, ensuring that they feel valued, and building commitment to the process. Settling on a clear timeline benefits everyone — the CEO, the board, and potential candidates.

Lesson 3: Look for candidates in unexpected places. Smooth relay successions, where the CEO passes the baton to their second-in-command, used to be the hallmark of careful CEO succession planning, but times have changed. Boards should keep an open mind when compiling a short list of potential candidates. The best candidate may very well be the second-in-command, but that determination should be made only after the board has considered other high-potential candidates within and outside of the company; boards can include relevant external candidates as benchmarks, even when a search is internally focused.

Don’t overlook what may be unconventional sources of candidates. For example, elevating someone a few levels down in the organizational hierarchy who is leading a growing business division could facilitate a necessary technological shift or strategic reorientation. Leaders in functional areas that are less commonly considered to be in the pipeline to become CEO, such as supply chain management, or leaders of regional business units who primarily work outside of headquarters, could have the right skill set needed to address emerging strategic challenges. Board directors should set their sights on finding the candidate who has the right vision and capabilities rather than narrowly focusing on someone who’s in a role that has been a traditional stepping stone to the CEO’s office.

Directors should also beware the trap of trying to find a new CEO who possesses the best traits of the outgoing leader. Because those characteristics and capabilities might not be what’s needed for the future, the selection process should begin with a frank discussion about the company’s future strategy and needs, which should then be translated into the top capabilities sought in a CEO. Ideally, this should happen before any specific candidates have been identified or discussed: Once specific candidates have been named, the discussion of capabilities can be influenced by directors seeking to strategically position a favored candidate.

Lesson 4: CEO succession is about more than just the CEO. There can be a natural tendency to focus exclusively on the CEO when considering succession planning, but such a transition will affect a much broader network of executives and leaders and may precipitate other departures. When CEO transitions occur, it’s common for other high-level executives (regardless of whether they were considered as CEO candidates) to decide it’s time to retire or look elsewhere for opportunities to grow in their careers. Recruiters also recognize that these leadership transitions provide a window during which it might be easier to convince an executive to jump ship.

As a new CEO formulates a C-suite team to complement their own skills and puts what they judge to be the right people in place to execute their vision, some senior executives may be sidelined or leave, and some high-potential employees from levels further down in the organization may be elevated. Additional churn and turnover are to be expected as other positions are backfilled.

The board can gauge the extent of staffing disruption in advance by asking candidates for their thoughts on the kind of team they want to build to carry out their agenda. Push candidates to get specific: This conversation will offer insights into their talent management skills and give them an opportunity to consider how their staffing decisions might impact the company. Once a hire is made, the board should work with the new CEO throughout the transition period to ensure that they’re ready to act quickly on personnel decisions.

When we surveyed directors, we noticed that the awkwardness and discomfort that comes with broaching the topic of CEO succession planning can lead to a deep sense of dread and, sometimes, complete avoidance of the issue. CEO succession planning requires active work and commitment; this is not an issue that will resolve itself over time. In fact, often, the longer a board waits, the more challenging it becomes to implement a solid succession-planning process.

Internalizing these four lessons on CEO succession planning can help to reframe it as a core responsibility of the board, just like financial audits and setting CEO compensation are. And once the wheels are in motion, these lessons can help boards build the right perspective and foundation to set directors and executives up for long-term success.