Most people prefer to avoid contemplating the replacement in their role, especially just after they have been appointed to that position. This is exactly the reason that a company’s Board of Directors plays a pivotal role in the CEO succession planning process. It is also why that process should start soon after the appointment of a new CEO or other key executive. Ensuring that there are identified, qualified, prepared successors for the CEO and his or her key team members, and that there is a well-defined plan for those transitions, is an important part of the Board’s governance responsibilities. 

What is Executive Succession Planning?

In Claiming Your Place at the Boardroom Table, Thomas Bakewell and James J. Darazsdi define succession planning as “the process by which the board of directors attempts to ensure that executives, in particular, chief executive officers (CEOs), have capable and willing replacements and that the transition to a new CEO goes smoothly.” That’s a lot to ask for, so let’s break that down.

CEO departures arise for various reasons – some planned and some unexpected. A CEO may come in with a planned duration in mind or determine that later on, both of which provide the Board the opportunity to plan around a specific timeframe. Another firm could offer the CEO an attractive role and compensation package, leading him or her to depart on short notice for that other opportunity. The reasons for CEO transition continue getting more negative. The Board may choose to remove the CEO for performance, ethical, or legal issues or, worse yet, he or she may suffer a serious injury or fatality.  These latter occurrences don’t leave much time for planning.

That is why proactive succession planning is an essential responsibility of the Board of Directors. Searching for successors, identifying qualified ones, and preparing him or her for the role are key steps. An organized transition plan rounds out the actions for the Board.

The focus in this article is on CEO succession planning but the Board is involved in succession planning for other key executives as well. Board members should have the opportunity to become familiar with these leaders (typically the C-level or equivalent executives reporting directly to the CEO) through their periodic presentations to the Board or through the Board’s social and networking events. Some of these leaders may be candidates to fill the CEO role in the future. Whether that is the case or not, the Board should ensure that there is also a robust succession planning process in place for these key leaders as having an empty spot in one of these positions could negatively impact the company’s performance. The Board should formally approve the succession planning efforts for these roles and the designated successors as part of good governance. Unlike CEO succession planning, where the Board of Directors should take the lead with assistance from the current CEO, succession planning for the other key executives should be an effort led by the CEO with the Board taking a ‘consult and approve’ role.

Executive succession planning differs from ownership succession planning (such as from one generation in a family to the next) which may also require the board’s involvement to represent the best interest of the company and other stakeholders. While also very important for the owners and the company, that is not covered in this article.

What are the Elements of Succession Planning?

Once the board acknowledges the need for a succession plan and agrees it is time to initiate that effort, the first step is to identify potential candidates. Continuing our focus on the CEO’s role for simplicity in this article, taking a close look at his or her direct reports is a good start. They may have much of the needed experience from their current functional leadership role, from serving on the company’s executive team, and from their past experiences outside the company.

Other places to look for candidates include:

• External candidates, particularly in related industries
• For family-owned companies, qualified family members
• For PE-owned firms, executives at other portfolio companies

It is important to objectively evaluate each candidate in terms of their skills, experience, and suitability for the type of leadership needed by the company at this time. While an internal candidate can provide familiarity, continuity, and a shorter learning curve, a company facing new challenges or looking to grow in different ways may be better served by an external candidate. If it is determined that this effort does not already fall within the purview of a standing committee, such as the governance committee, a board level search committee should be created. Recruiters may be engaged to assist in this effort.

Just as the candidate’s potential to successfully move into the CEO role is important, their willingness to do so is also crucial. The CEO has tremendous responsibility and an often much wider set of stakeholders to engage with than other leaders face. A candidate’s understanding of this scope, and interest in taking it on, is critical and should be a factor taken into consideration.

It is not required that a candidate has all of the desired skills and experience already in order to be designated, informally or formally, as the successor. An essential part of the succession plan is to help that person fill in those missing areas, which can take the form of the Board and CEO collaborating to provide that person developmental roles as well as learning opportunities. Such a role could mean leadership in a new geography to that person for a global company or leadership in a different functional area than that in which they have much of their experience. Learning opportunities include formal classes and leadership programs, involvement in executive peer organizations, and spending time with board members who are subject matter experts in areas where gaps have been identified. Beyond that, group and individual interactions with the Board members will be beneficial given the importance of the CEO-Board relationship and the understanding of the Board’s expectations when that person takes on the CEO role. Regardless of the specific actions, the Board committee should create and track a formal, structured development plan to best ensure that this person is ready for the CEO role when it is his or her time to move into that position.

It also may not be necessary to focus on only one candidate. It may be beneficial to have multiple candidates for several reasons. One could serve as an immediate successor, with another the potential successor for him or her. A single designated successor could move to another company, in which case a wider set of successors could minimize the impact to the succession plan. In addition, a successor may not be as successful in development roles and with learning opportunities as hoped, requiring a pivot which is made easier if other candidates are also being prepared. Of course, the board committee will need to be careful not to stretch its efforts too thin or to create rivalries.

Creating an Effective Transition Plan

The last, but certainly not least important, aspect of succession planning is the creation of a documented transition plan for the new person moving into the CEO role. Often these take the form of 30-60-90 day plans or 100 day plans. There will be a lot of demands on the time of the new CEO, so prioritization is important, as is balancing that with not neglecting any key constituencies.

The specific plan should contain several important items, including:

• Who to meet over what time frame, including investors, customers, board directors, his or her leadership team, and the overall employee base, the latter usually through some form of all-hands meeting(s)
• Key events to plan for (such as Board meetings, budget proposals, employee meetings, etc.), the CEOs role in those events, and where to find historical and other useful information to prepare for them
• How to access important company information, such as strategy, budget, organizational structure (particularly important for a new CEO who is external to the company)
• Company priorities and challenges, updated

The plan should be considered a starting point and may need to be modified based on the situation and company needs. If this is a scheduled transition, there is more time to share knowledge, hold meetings, and meet key stakeholders in advance through the aforementioned development plan than if the actual change in leadership is sudden and unexpected. Similarly, transitioning to an existing company executive, involved family member, or board member would reduce some of the urgency since they should already be familiar with the company, its strategy, its challenges, and its stakeholders. It is still valuable for the new CEO to meet with these stakeholders in his or her new capacity as CEO because the topics discussed, nature of conversation, and relationships will likely differ to some degree. In addition, the plan may vary depending on whether the succession is taking place during relatively steady operations at the company or when the company is facing significant changes or challenges. Sometimes the latter is the reason for the transition itself. The current CEO, having transitioned into this role himself or herself at some point, and also being aware of priorities, challenges, and key constituencies, can be of great assistance in designing this transition plan. 

Why is Executive Succession Planning Important?

 It is exactly during this critical time of transition that the various stakeholders – customers, investors, employees – will be the most nervous. It is also at this time that it is most important not to lose the confidence or support of those stakeholders, or risk exacerbating an already challenging time.

It is also important for the future CEO or other executive officers. Ensuring that she or he is well-prepared for the new role is a critical step. The current person in the role should partner with the Board to provide the appropriate training, leadership opportunities, and functional knowledge to complete his or her qualifications. In addition, an effective transition plan, which likely will include time with Board members, will give this person one less thing to think about as they step into the challenge of this new, expanded role.

Selecting the next CEO, preparing him or her for that role, and developing an effective transition plan are key succession planning responsibilities for private company Boards of Directors. As part of good governance, Board Directors should take seriously how they can best prepare companies and individuals for these challenging events. Now that the new CEO has successfully transitioned into this new role, it is never too soon for the Board to start looking for his or her successor.

ABOUT THE AUTHOR

Steven Lustig is the founder and CEO of Lustig Global Consulting and an experienced operations executive. He is a recognized thought leader in board governance, risk mitigation, and supply chain, and serves on the boards of Loh Medical and Atlanta Technology Angels.