Succession Planning_ What the Research Says https://hbr.org/2016/12/succession-planning-what-the-research-says
Succession Planning: What the Research Says
Overview
Author: Eben Harrell (HBR Senior Editor)
Focus: Effective succession planning for CEO transitions.
Inevitability of CEO turnover highlights poor organizational preparedness.
Importance of Succession Planning
CEO Turnover: 10% to 15% of corporations appoint new CEOs annually due to various reasons (retirement, resignation, dismissal, ill health).
Trends: CEO turnover reached a 15-year peak in 2015 due to pressures from activist investors.
Unprepared Boards:
54% of boards groom a specific successor.
39% have no immediate internal candidates for CEO replacement.
Financial Implications of Poor Succession Planning
Study findings: Companies that delay in naming a new CEO lose an average of $1.8 billion in shareholder value.
Duration of delay negatively correlates with company performance, leading to prolonged tenures of ineffective CEOs.
Booz & Company study: firms in the lowest stock return decile lagged behind peers due to insufficient governance.
Challenges in CEO Replacement
Lack of preparedness leads to improper replacements, with up to 40% of new CEOs failing to meet expectations within 18 months.
Importance of aligning executive development with succession planning to identify internal candidates early.
Best Practices for Succession Planning
Companies with strong leadership training programs (e.g., General Electric, IBM, Procter & Gamble) succeeded in fostering market confidence.
Noel Tichy's Insights: Involving potential successors in new projects can yield better assessments of their leadership potential.
Research by the Conference Board revealed poor knowledge among directors regarding the capabilities of potential successors.
Director Engagement and Governance
Lack of Involvement:
Only 55% of directors understand senior executives' strengths well.
Directors often don’t evaluate performance of senior executives aside from the CEO.
Suggested improvements:
Directors should have relevant experience in executive hiring.
Encourage active mentorship and familiarity with potential CEO successors.
Guidelines for Effective Succession Planning
Begin planning early during a CEO's tenure.
Establish objective performance metrics for CEOs.
Develop internal candidates and compare them with external talent.
Regularly conduct emergency succession drills.
Implement a transition process to assist new CEOs, focusing on onboarding.
Internal vs External Candidates
Hiring Trends: Moving towards external candidates, with 20%-30% of boards choosing this route.
Critique of External Hires:
Higher pay than internal candidates (average $3.2 million more).
Outsiders often underperform compared to insiders over time, reflecting contextual challenges.
Evaluating CEO Success Traits
Research indicates difficulty in scientifically defining effective leadership traits.
Factors for strong CEOs:
Previous board experience, military background, spending habits impact financial controls.
Younger CEOs tend to outperform their older counterparts.
Emotional traits valued more by private equity firms include resilience, urgency, and execution skills.
Conclusion
Continued research is needed to uncover ideal traits for successor identification.
Many boards lack adequate succession planning, suggesting a significant area for improvement.
This summary is based on the article from Harvard Business Review, December 2016.
Key Findings Summary
Inevitability of CEO Turnover: Annually, 10% to 15% of corporations appoint new CEOs due to reasons such as retirement, resignation, or dismissal, emphasizing the need for robust succession planning.
Unprepared Boards: A significant portion of boards (54%) groom a specific successor; however, 39% lack immediate internal candidates, indicating a gap in succession preparedness.
Financial Implications: Companies that delay naming a new CEO can lose an average of $1.8 billion in shareholder value, underscoring the importance of timely succession decisions.
Challenges in CEO Replacement: Lack of preparedness often results in improper replacements, with high failure rates (up to 40%) of new CEOs within the first 18 months.
Best Practices: Companies with strong leadership training programs excel in producing confident markets; involving potential successors in new projects can better assess their potential.
Director Engagement: Many directors fail to adequately understand senior executives' strengths; engagement in mentorship and hands-on evaluation is necessary for better succession outcomes.
Internal vs External Candidates: There is a notable shift towards hiring external candidates, which raises concerns about their effectiveness compared to internal candidates.
Success Traits: Identifying effective leadership traits remains challenging, but younger CEOs and those with prior relevant experience generally outperform older counterparts.
Lessons Learned
Commonalities: The importance of early planning and developing internal candidates emerged as a common theme across many findings, suggesting that proactive measures are critical in succession planning.
Contradictions: The preference for external candidates contrasts with the data suggesting that internal successors tend to perform better, highlighting a need for organizations to re-evaluate their hiring strategies.
Gaps: There appears to be a gap in directors’ knowledge about potential successors’ capabilities, which can lead to poor leadership decisions. Also, continued research is necessary to better define ideal leadership traits.
Practical Applications
Mentorship Programs: Implement mentorship structures within organizations that pair current leaders with potential successors to enhance knowledge transfer and leadership development.
Regular Assessments: Establish routine evaluation processes for senior executives, not just the CEO, to better understand strengths and weaknesses in preparation for succession.
Emergency Drills: Conduct emergency succession drills that simulate leadership transitions, allowing organizations to prepare effectively for sudden changes in leadership.
Leadership Training: Invest in training programs aimed at developing leadership skills among internal candidates to make them more prepared to step into executive roles when needed.
**Community
Key Findings Summary
Inevitability of CEO Turnover: Each year, between 10% to 15% of corporations appoint new CEOs due to a variety of factors such as retirement, resignation, dismissal, or ill health. This significant turnover rate highlights the pressing need for organizations to implement effective succession planning strategies to ensure leadership continuity.
Unprepared Boards: Research indicates that while 54% of boards actively groom a specific successor from within, a concerning 39% do not have any immediate internal candidates ready for CEO replacement. This indicates a glaring gap in succession preparedness within many organizations, potentially jeopardizing their stability in times of leadership transition.
Financial Implications: Companies that experience delays in naming a new CEO are at considerable financial risk; studies show such companies can lose an average of $1.8 billion in shareholder value. This substantial loss underscores the critical role that timely succession decisions play in sustaining organizational performance and market confidence.
Challenges in CEO Replacement: A lack of preparedness often leads organizations to make hasty and improper replacements when a CEO departs. Alarmingly, up to 40% of new CEOs fail to meet performance expectations within the first 18 months of their tenure, indicating the necessity for rigorous evaluation and selection processes in CEO succession.
Best Practices: Organizations that maintain strong leadership training programs—such as those employed by General Electric, IBM, and Procter & Gamble—are generally more successful in fostering market confidence. Furthermore, involving potential successors in strategic projects enables better assessments of their leadership capabilities and readiness.
Director Engagement: Engagement levels among board directors regarding the understanding of their senior executives' strengths are often insufficient. Only 55% of directors demonstrate a solid grasp of the leadership qualities of senior executives apart from the CEO. Therefore, it is crucial to enhance director engagement through active mentorship and evaluations of potential successor candidates.
Internal vs External Candidates: There is a notable trend among boards leaning towards hiring external candidates for CEO positions. However, this trend raises significant concerns about the effectiveness of external hires. Research indicates that external candidates often underperform compared to internal candidates and require higher compensation, on average $3.2 million more, leading to questions about their overall value in leadership roles.
Success Traits: Identifying universally effective leadership traits remains a complex challenge. However, studies suggest that factors such as previous board experience, military background, and sound financial habits significantly influence CEO effectiveness. Notably, younger CEOs are often found to outperform their older counterparts, and private equity firms tend to prioritize emotional traits like resilience and execution skills during their evaluations.
Lessons Learned
Commonalities: Throughout the findings, a recurring theme is the importance of proactive succession planning and the development of internal candidates. Organizations benefit significantly from initiating planning early during a CEO's tenure to build a pipeline of capable successors.
Contradictions: A stark contradiction emerges between the growing preference for external candidates and the data that suggests internal successors typically yield better performance outcomes over time. Organizations are encouraged to critically reassess their hiring strategies to align with effective succession practices.
Gaps: A notable gap exists in directors' familiarity with potential successors' capabilities, which can lead to suboptimal leadership decisions. Moreover, there is a pressing need for continued research into defining the optimal traits for selecting future leaders in organizations.
Practical Applications
Mentorship Programs: To bridge the gap in leadership development, organizations should establish paired mentorship structures that connect current leaders with potential successors. This relationship will facilitate knowledge transfer, skill enhancement, and overall personal development of emerging leaders.
Regular Assessments: Implementing routine and comprehensive evaluations for senior executives—including not only the CEO—will help organizations gain a deeper understanding of their strengths and weaknesses. Such evaluations are vital for preparing adequately for future succession needs.
Emergency Drills: Organizations should conduct regular emergency succession drills that simulate transitions in leadership, enabling them to practice their response strategies and identify areas for improvement in their succession preparedness.
Leadership Training: Significant investment in training programs is essential to cultivate leadership skills among internal candidates. By doing so, organizations can ensure their internal talent is well-equipped to step into executive roles when required and minimize reliance on external hires.
Community Engagement: Organizations can also benefit from actively engaging with community stakeholders, including alumni and industry mentors, to create a broader support network that can contribute to the nurturing of future leaders. This not only enhances the skill set of potential successors but also strengthens the organization's reputation within the community.