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How the best boards approach CEO succession planning
CEO exits continue to rise, and shareholder activists are exerting ever more pressure on boards to make leadership changes. Yet many boards have failed to adjust to the new uncertainty at the top, and may not be fully prepared for CEO changes despite succession planning being one of their core responsibilities. In fact, some companies have had to resort to “boomerang CEOs” to navigate transitions. In today’s complex environment, in which disruptions are the norm and emergency successions are ever less surprising, the board’s engagement in CEO succession planning has become essential for keeping operations and sustainable growth on track.
With accelerating CEO turnover, traditional ways of approaching succession planning may no longer be effective. In our latest report, we outline important steps directors can take to be proactive and better prepared for both planned and unplanned departures.
Why CEO succession planning is so important
Planning for who will be the company’s next leader has long been one of a board’s most important responsibilities. Without the right person at the top, even established companies with solid business models and innovative strategies may struggle. And that’s even more true in the post-pandemic business landscape — the way organizations operate, adapt and thrive has been profoundly transformed. This transformation, marked by unprecedented disruptions and accelerated digitalization, necessitates a fundamental re-evaluation of which skills and attributes a CEO needs today. Boards must proactively re-think and recalibrate the skills they seek for long-term viability and growth.
The changing nature of CEO succession planning
In 2022, 56 S&P 500 CEOs resigned, up from 48 in 2021. Of those, only four did so under pressure. The lower number in 2021 can likely be attributed to longer CEO tenures and higher departure ages to provide stability during the pandemic. However, average CEO tenures are starting to normalize back to slightly shorter tenures, making it increasingly likely that directors will oversee more CEO successions (both planned and unexpected) during their board service, particularly given that board tenures continue to increase.
Nine leading practices in CEO succession planning
Boards that prioritize CEO succession planning find ways to lay the groundwork for smooth CEO transitions. How do they do this despite the more immediate pressures of overseeing quarterly performance and strategy execution? We’ve identified nine actions that may make them successful.
Successful succession discussions often stall due to differing opinions on how the company's strategies and future demands should shape the choice of the next CEO. To find common ground, boards should begin by assessing factors likely to impact the business in the next few years. Once aligned on strategy, they can identify the dynamic skills and experience required for the next CEO and plan for multiple succession scenarios. This includes defining qualities for a good cultural fit and involving the current CEO and management team in the process.
Overseeing CEO succession planning is widely considered a full board responsibility. But determining who does what within that mandate can be challenging. Most boards designate the nominating/governance or compensation committees to lead these efforts. Some create a special ad hoc committee for this purpose. No matter the structure, what’s most important is to establish clearly defined roles and responsibilities.
To keep CEO succession planning a priority, directors need to lay out the goals of the process, the cadence for discussion, the plan’s short- and long-term aspects, and the details of the candidate development program. They should also determine how often CEO succession planning appears on the board agenda. And although the current CEO can provide valuable input, the board should regularly discuss succession in executive sessions.
Developing an emergency succession plan requires identifying strong interim candidates who could step in quickly, such as the CFO, COO or other senior executives. Having emergency CEO candidates spend time with the board and the current CEO to better understand the business will help smooth the transition.
If there is no clear internal or external candidate, the board should discuss whether a former CEO or director could temporarily step into the CEO role while the board searches for a longer-term replacement. As part of this discussion, it’s important to assess their comfort level for stepping into the role as well as the anticipated time horizon.
A board that makes it clear to its CEO from day one that planning for succession is a critical part of the board’s job can circumvent much of the anxiety about whether the CEO will feel threatened by the process. The CEO’s responsibility, much like the board’s, is to avoid the disruption of a messy transition.
Maintaining a strong pipeline of CEO-level talent can be a significant challenge in succession planning. If and when a transition becomes necessary, a weak pipeline can result in a scramble to fill the role or in choosing someone who’s not yet ready for the challenge. The first step is a thorough assessment of the company’s leaders — going beyond CEO direct reports — with the aim of identifying individuals poised to become the company’s future leader.
Boards should consider their methodology for evaluating candidates and use the resulting information in their decision-making process. The most effective boards leverage data to aid impartiality and objectivity. Adopting an analytical and evidence-based approach to assessing CEO candidates can reduce bias, allowing boards to avoid evaluating candidates based on personal preferences and familiarity. Simultaneously, leveraging data in the succession process can effectively highlight outlying opinions and possible favoritism against objective facts about each of the candidates.
In the era of activist investors, it’s important to establish and maintain transparency. Boards should consider outlining their CEO succession process in the company’s proxy statement. This could include a description of who is responsible for leading the process, how the company identifies and assesses CEO candidates, how often the board reviews the succession plan, and how the board would respond to an emergency departure.
Directors also need to plan to promote a new CEO to lay the groundwork for a successful tenure. If and when the succession plan is put into effect, the media, employees and other stakeholders should all hear the message that the board fully supports the new executive.
The best boards have an onboarding plan that helps the new CEO get up to speed on company goals, strategy and culture, with directors investing time in listening to and guiding the new CEO. Onboarding details should be shared with key stakeholders and senior business leaders, and the plan should include the division of responsibilities of the outgoing CEO should they remain in the role for a period. Having a well-structured plan will ultimately contribute to the success of the incoming CEO.
Eyes on the prize
These turbulent times demand much more from corporate leaders. Done well, CEO succession and transition planning can boost stakeholder confidence in the company’s board and executive leadership — and, when the time for a transition arrives, increase a company’s chances of getting a CEO who can lead the company into a profitable future.
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