Succession Planning: A Board Imperative

Directors should have knowledge of their own leaders as well as outside talent to ensure a smooth changeover, advise Spencer Stuart's Dayton Ogden and John Wood

by Dayton Ogden and John Wood

Boards understand the need for succession planning, but all too often they just don't do it very well. In surveys, directors consistently rank succession planning as one of the most important duties. However many boards don't give themselves strong marks for planning for a chief executive officer change and evidence suggests that's an accurate assessment. Even today only about half of public and private corporate boards have CEO succession plans in place, according to a recent survey by the Center for Board Leadership. The National Association of Corporate directors says just 16% of directors reported that their board is effective at CEO succession planning.

A comprehensive, objective, and ongoing succession-planning process is not merely good governance—in today's business environment, selecting the right CEO is critical to performance and sustainability. Management succession should be a continuous process in any company and should begin the day a CEO starts in that role.

Why do boards have difficulty with succession planning? In part because at the heart of succession lie personality, ego, power, and, most important, mortality. And there are several other, more concrete, obstacles to corporate succession planning, such as:

• Poor CEO/board dynamics;

• The lack of a well-defined process;

• Poorly defined "ownership" of succession planning responsibilities;

• Scarcity of internal, CEO-ready talent;

• Inability to assess objectively any potential internal candidates

Three Types of Sucession Planning

While in the past it was unclear who was responsible for CEO succession planning—the board or the CEO—in this Sarbanes-Oxley era the board now has ultimate responsibility while the CEO's role should be that of counselor. Indeed, the stakes are higher than ever for boards to select the right leadership for their companies, given highly visible dismissals of CEOs, critical attention directed to CEO compensation, and increasing pressure on performance.

In fact there are three types of succession planning, and boards tend to do two of them well, but frequently have difficulty with the third. The first is the so-called "name in the envelope"—the person the board has waiting in the wings if the CEO is incapacitated or dies suddenly, as happened at McDonalds (MCD) in April, 2004. The second is the "targeted retirement," where a CEO makes known to the board his or her date for departure, allowing the board to start an orderly process to find a successor.

The third type—and the most fraught with uncertainty—is the "deteriorating situation." In our experience, many boards are less capable of handling succession when it becomes clear over a period of months they must change CEOs sooner than planned because businesses are faltering. In general, boards do not pay enough attention to this increasingly common scenario.

Knowing Your Leaders

One reason boards might not handle deteriorating situations well is their insufficient knowledge of the talent inside companies they govern and within industries in which their companies compete. Boards are only recently grasping the significance of the "talent imperative"—the need to know who future leaders of their companies might be. For many years the talent imperative had been overshadowed by other fiduciary and governance responsibilities.

Now, however, boards understand they must gain deeper knowledge of senior leaders in their organizations. More than that, they realize they need a richer understanding of external executives in order to identify the best possible future leadership for their organizations well before such new leadership is needed. The talent imperative does not require directors to become talent managers. It does require boards to take responsibility for ensuring that the right processes for talent management are in place and that they have the appropriate knowledge of potential leadership.