Ahead of time: planning for succession

September 2023  |  FEATURE | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

September 2023 Issue

Amid the uncertainty of today’s corporate landscape, the vision of a secure future is a comfort for any organisation, particularly those whose success has been built upon the consistent cultivation, retention and replacement of key talent.

Whether it be the chief executive, chief financial officer, chief operating officer, chief information officer or any other member of the upper echelons that is heading for pastures new, it is essential that a business has a succession plan in place to ensure continuity of operations.

“Succession planning is the process used to identify replacements for high-level positions,” says Kristin Ryba, brand strategist at Quantum Workplace. “It helps increase the availability of candidates prepared to fill critical roles when an organisation’s senior leaders leave or retire. But succession planning is so much more than simply picking replacements – leaders need to understand how open positions and bad hiring decisions can potentially impact the organisation.

“An effective succession plan equips identified successors with the skills and competencies needed in their future role,” she continues. “By using a customised development plan, an organisation can promote employee growth and ensure successors make the right impact. This also means that there will be no scramble to fill open positions when top leaders leave.”

In its take on the importance of succession planning for organisations – ‘Leadership: easier said than done’ – the Chartered Institute of Personnel and Development (CIPD) emphasises that the development of future leaders has to be aligned with supportive organisational processes (reward and recognition, decision making, cross-functional working) and organisational culture.

“Modern succession planning looks quite different from what it has been traditionally, with a broader vision, greater openness and diversity, and closer links to wider talent management practices,” states the CIPD. “For example, progressive organisations who adopt an inclusive whole workforce approach to managing and developing talent will identify business critical roles at all levels within their organisation.”

However, despite the contention that succession planning should be among the most important considerations for any organisation, the reality, according to research by AIIR Consulting, LLC – ‘State of Succession Planning’ – is that most companies are not ready to appoint replacements for their most senior leaders.

AIIR’s research found: (i) the median tenure for chief executives at large-cap organisations is only five years; (ii) only 54 percent of public companies are actively developing chief executive successors; (iii) 40 percent of companies do not have a single internal candidate to replace the chief executive should he or she exit the position; (iv) although organisations around the world spend $370bn per year on leadership development, five out of six HR managers are dissatisfied with the results of their leadership development programmes; and (v) while 86 percent of leaders believe leadership succession planning is of utmost importance, only 14 percent think their organisation does it well.

“Chief executives can account for a 30 percent variance in their organisation’s profitability, and research suggests that top management has an even greater impact on organisational performance than the chief executive,” states the AIIR analysis. “It follows, then, that executive selection and succession planning should be among the most important considerations for any organisation. And yet, most are unprepared to replace the individuals in their highest leadership positions.”

Echoing AIIR’s findings is a study by the Learning and Performance Institute (LPI), which states that while most organisations recognise the value of succession planning, few actually succeed in setting up a sustainable, long term succession plan. According to the study, although 86 percent of leaders believe succession planning is an urgent priority for their business, only 14 percent think they are doing it well.

Moreover, the LPI study found that just 21 percent of organisations reported having formal succession plans. An additional 20 percent have informal succession plans, while 20 percent said they do not currently have a plan but want to develop one. And among the most common reasons cited by organisations for not having a succession plan in place are a lack of time and resources to develop one and that their organisation is too small to have one.

“In an incredibly fast-paced world, it is often difficult to plan for the present, let alone the future,” states the LPI. “Whether an organisation is closing a deal or putting the finishing touches on a big report, there is always something urgent to do right now.

“In this environment, even knowing what they will be doing next week can feel like an impossible task for any organisation, so trying to plan years ahead can be incredibly daunting,” it continues. “Yet, as is often the case in life, taking the time to stop, smell the roses, and plan ahead will set an organisation up for sustainable, long-term success. Accordingly, robust succession planning is imperative.”

Preparing a succession plan

While neither foolproof nor a guarantee that a transfer of power will go smoothly, succession planning is critical in ensuring, as far as is possible, that an organisation’s next generation of leadership is capable and the transition of power seamless.

To this end, a wide range of activities may make up succession planning programmes. These are likely to include formal and informal learning and development processes, together with a crucial focus on relevant management experience.

According to Gallagher’s ‘Top 10 Best Practices for Succession Planning: Make Certain Your “Who’s Ready Next” List is Solid’, the items outlined below constitute the best practices organisations should be following to maximise their chances of a successful and effective succession planning process.

First, start with the end in mind. Organisations need to take the time to clearly understand what they will be looking for in terms of roles to fill, requirements for those roles and what is important for success. Identify core competencies, skills, abilities and other required criteria for someone to be successful at the organisation in a specific role.

Second, be clear about the roles that will (and will not) be included. As soon as an organisation starts talking about succession planning, people start to get nervous because they feel their careers are now in someone else’s hands. So, up front, identify and communicate the positions and the people involved in the process. Will it include all supervisory roles? Senior leadership? Or only executive roles?

Third, engage all stakeholders who will be impacted in the process. HR should not own the process. Rather, business leaders should drive it and HR’s role should be to facilitate the process and provide appropriate tools along the way. Engaging stakeholders, particularly senior leadership, is critical.

Fourth, look ahead one, three and five years. While organisations need a plan if those in critical roles get ‘hit by a bus’, they also need to focus on longer term succession planning, which means forecasting workforce needs for each individual and level of management under consideration.

Fifth, incentivise and recognise leaders who develop others. Where organisations take a manager’s ability to develop others for granted, it is useful to link this skill to succession planning readiness results, i.e., the more people a manager has developed for other roles across the organisation the better. Incentives and performance evaluation goals for developing others could also be considered.

Sixth, use technology. With a cloud-based software programme, organisations can enter in the data they have collected and easily update and share it with leaders across the globe. Also, automation allows organisations to keep the process fluid and simple because as soon as a plan is created it will change. No assessment is set in stone – people can improve or decline, and interests and ratings will change.

Seventh, conduct talent assessments at least annually. Succession planning is not and should not be considered a static event, but rather a fluid process constantly evolving and changing. As soon as an organisation creates a plan, it is outdated. Thus, talent should be reviewed on a regular, consistent basis. That begins with ensuring role requirements are current and talent assessment is timely.

Eighth, facilitate creation of employee-owned individual development plans (IDP). Once an organisation has identified the appropriate competencies that an employee wants and needs to work on to get to the next level of performance, an IDP can be created. It is important that the employee rather than the manager owns the plan to ensure it actually gets attention and completed.

Ninth, regularly engage in two-way feedback. The development of an employee to get to the next level requires regular and consistent feedback and feed-forward between the manager and the employee. These conversations should include an evaluation of progress against objectives, competencies, development and career goals.

Lastly, communicate. Organisations should conduct their succession planning process in the open rather than behind closed doors, primarily because transparency builds trust. Involve all stakeholders along the way and encourage openness in one-on-one conversations with employees.

“Many organisations have developed frameworks for technical and generic competencies, which relate to a broad range of desired skills and behaviours,” states the CIPD. “The assessment process for generic frameworks, especially for management competencies, can be a useful starting point in evaluating an individual’s past performance for a senior role. So succession plans may need to be integrated with existing competency frameworks.”

Costly neglect

While organisations may choose to overlook succession planning due to what may seem like significant time and cost investments upfront, this attitude is very much a false economy as the apparent savings of today are likely to prove anything but in the long run.

According to AIIR Consulting, the costs of ineffective or non-existent succession planning are manifold and illustrated by the following: (i) the direct cost of replacing a failed executive is close to 10 times his or her salary; (ii) large companies that underwent forced chief executive successions would have generated $112bn more in market value in the year before and the year after their turnover; (iii) direct reports perform 15 percent worse under a struggling leader and are significantly more likely to become disengaged; and (iv) disengaged employees cost companies 34 percent of their annual salary in lost productivity each year.

Smooth and successful

Succession planning, whether at times of crisis or tranquillity, is good business for organisations of all types and sizes. And while no absolute guarantee of success, a succession actively embraced is a plan for the future – identifying and growing talent to fill leadership and business-critical positions.

“The failure rate for chief executive successions is unacceptably high, but it does not have to be,” states AIIR Consulting. “By following a simple set of design principles, including making succession planning an organisational priority, aligning stakeholders, infusing data into the selection process, and providing new leaders with development and support, organisations can make their succession processes smooth and successful.”

In summary, succession planning is a long-term process and vitally important for ensuring organisations’ continued success. In an uncertain and volatile business world, those that focus on identifying and developing the talent required to fill critical roles in the future will be the ones to deal with the unexpected and, as a consequence, maximise their chances of surviving and thriving.

© Financier Worldwide

BY

Fraser Tennant