Mitigating succession planning risk

March 2018  |  COVER STORY  |  BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

March 2018 Issue

Succession planning can create a long-term competitive advantage. Prudent companies continuously identify and evaluate prospective external and internal leadership talent, and benchmark that talent against their own criteria for success in the role and the organisation’s overarching culture.

There are many solutions available to companies to ensure that they appoint the best possible individuals to these roles. Leadership development programmes, for example, can help develop a firm’s talent pipeline.

However many companies often overlook their preparedness, or replace their CEOs poorly. Ineffective or non-existent succession planning can be disastrous. It can leave an organisation leaderless for extended periods, or require the board to appoint an interim, who would typically be required to maintain the status quo and not necessarily advance the organisation positively or affect any tangible change. It can even lead to the wrong appointment at the worst possible time.

Companies can suffer from reduced performance, higher turnover of senior management, loss of market share and reputational damage. Relationships with investors can also be damaged, as can the company’s share price. The cumulative effect of poor or inadequate succession planning can be devastating. As such, it is vital that planning is comprehensive and holistic. For Stephanie Rudbeck, GB Talent Management Leader at Willis Tower Watson, there are three key improvements companies can make. “The first is being clear on which roles are critical to company success and what skills and experience are needed to succeed in those roles. The second is using robust assessment tools to identify those with the potential to succeed in a role. The third is ensuring development plans are delivered – too often development plans remain just that,” she says.

Securing the talent pipeline

Companies must dedicate time and attention to identifying and nurturing the right talent. This is particularly important given the rate of turnover at CEO level. According to PwC, in 2015, 17 percent of the largest 2500 public companies in the world changed their CEO, a 16-year high.

“It is desirable, in today’s changing world, to select those who have the internal drive to make others feel strong and energised rather than the internal drive to independently achieve results,” says Christine A. Rivers, a senior client partner at Korn Ferry. “The former leads to a more engaged and productive workforce; the latter creates a command and control environment that can stifle creativity and drive away the best performers. This is critically important”.

Shoring up the company’s talent pipeline requires the board to have a strong command of the entire CEO succession process. An explicit, ongoing programme for managing this critical responsibility should be chartered into the company’s bylaws with a board committee given explicit oversight duties.

Organisations must also create a CEO profile in keeping with the company’s wider strategic goals. “Being clear on where the organisation is headed, and clarity on the strategy to get there, is the most important aspect of CEO succession planning,” suggests Ms Rivers. “If an organisation does not get that right, it will never be in a position to know what it needs in its next CEO or be in a position to assess candidates against it. So, to say that a CEO will be strong in company X just because he or she was strong in company Y misses the mark.”

The direction in which a company is heading should be one of the key factors in building a succession pipeline. According to Stephen A. Ingalls, president and CEO at LGL Leadership, often companies are too narrow in their planning and focus only on the CEO, president or C-suite leader. “Leadership and management literature is all over the map about how poorly organisations plan for these circumstances, but generally agree that more often than not, companies fail to adequately plan,” he says. “Furthermore, their thinking is way too narrow, and unnecessarily exposes the company to a key middle manager, cultural champion or relationship guru’s departure.”

Having a proactive succession plan will embolden an organisation to move forward. A well structured and communicated plan will also help insulate companies against any unforeseen shocks. “Too often succession planning is addressed in reaction to an external crisis or by the unexpected staff departure of a key executive,” says Steve Gravenkemper, a partner at Plante Moran. “While many organisations may have a plan on paper for CEO succession if the person wins the lottery, this leaves companies vulnerable to significant disruption of their business and operations.” By being more proactive, the company will be able to ‘roll with the punches’ in the event of a shock departure. Conducting annual talent reviews can ultimately help accelerate career progression internally. Customised integration plans can facilitate the transition process for individuals moving into new roles.

For many executives, however, it may be difficult to accept that they are merely part of the company’s long-term trajectory. Indeed, succession planning must be handled sensitively for all parties – the company, the incumbent and the potential pipeline. “Addressing issues of succession planning is always difficult as the incumbent may be reluctant to admit that his or her tenure is likely to be time limited,” explains Tony Williams, principal at Jomati Consultants. “Furthermore, identifying a successor too early effectively removes the authority of the incumbent. This is the difficult balance that any board has to achieve. It wants to keep talented people within the organisation and make sure they are motivated, but may not be able explicitly to state what their future roles will be”.

For many company leaders, identifying a successor can be a challenge. Some leaders can offer the pretence of being at peace with succession planning but can actively or passively resist the transition process. Stakeholders must ensure that they are monitoring and evaluating the company’s attempts to determine a successor, and hold the company’s leadership accountable for both their efforts and the results.

Internal vs. external

For many companies, looking to their internal talent pool may be the right thing to do; others may need to search outside of the company. Either way, there are a number of factors to consider. These include the cost of an external hire, the downtime between a business-critical employee leaving and their successor reaching optimal performance, as well as issues around training and personality. Regardless of the pitfalls, some companies choose the external route, although some view this as a short-term solution to a long-term problem. An internal hire requires the company to identify the right employee and then guide that employee through the leadership pipeline over a period of time. Talent management programmes can ensure that the right quantity and quality of people are in place to correspond with the current and future business requirements of the company and help mitigate long-term succession risk.

According to Pearl Meyer, internal executive hires add more value than external canidates. Internal appointments reportedly add as much as 6 percent in value to organisations and are paid 20 percent less than their external counterparts.

“Organisations that are prepared to promote within typically have taken a more proactive and intentional approach to succession planning,” says Dr Gravenkemper. “Successful companies start early and view succession planning as a continuous process, rather than a one-time event. They also have a consistent process in place to assess and develop internal talent which is linked to key business objectives and leadership skills that will help drive the success of the business.”

Yet the internal vs. external debate continues to divide executives, analysts and scholars. While every company is different, there are benefits and advantages to each approach. Traditionally, internal candidates have been favoured, as they progress through the organisation, gaining experience of the company’s operational structure. However things have begun to change in recent years.

CEO vacancies are increasingly filled by external candidates. According to research from PwC’s Strategy&, from 2012 to 2015, companies’ boards chose external CEO candidates during 22 percent of planned successions. From 2004 to 2007, the total amount of outside hires was just 14 percent. Many boards are turning to external candidates due to their experiences in a different sector or different market. There is a suggestion that this kind of diverse background can positively influence investor returns.

Companies can guarantee that their internal candidates gain the experience they need in other ways, however, primarily by identifying and managing these individuals and positioning them strategically throughout the organisation. “Encouraging executives to gain experience in a number of the organisation’s businesses and locations will certainly provide a larger talent pool from which to choose if these people can be retained over the medium term,” explains Mr Williams. “A clear career development plan with a range of different roles and challenges at different stages will help to keep executives fresh and invigorated, but by definition some of the best future leaders will be quite high-maintenance individuals and will be quite ambitious for management opportunities.”

Culture club

Regardless, many companies find it advantageous to look beyond their internal pipeline. Culturally, one might argue that companies should be looking beyond binary concepts such as internal vs. external hires. The right candidate for the position should be the right fit, both in terms of culture and capability, notes Mr Ingalls. “An organisation in transition should not have to settle for sub-optimal capability in a key leader, simply because they ascribe to an internal vs. external succession strategy. Where capability is insufficient to need, the ‘solution’ will be short term. Importantly, this capability must be a fit for the company. Leaders often confuse their personal perspective on leading, business, management, people and relationships with an organisational culture. What individuals bring to an opportunity is their own leadership climate. Culture belongs to the organisation. Where succession is required, those involved in the selection must additionally weigh the degree to which an individual’s leadership climate aligns with the organisational culture,” he adds.

External hires must also be handled in a sensitive manner. In the wrong environment, employee morale can be adversely affected. Disillusionment can impact the company and its potential talent pipeline in the years to come. “To appoint an external person to a position that an internal candidate had hoped to be promoted into can cause terrible resentment which can play out in the workplace,” says Gareth Brahams, managing partner at Brahams Dutt Badrick French LLP. “The employer may often hope to see the more junior long-serving employee and new executive work harmoniously together, but often it just does not work. The resentment from the junior person and the desire of the new senior person to have his or her own person in key positions ultimately wins out. One or other has to go.”

For many companies, internal hires often have an innate understanding of the brand, culture and business proposition of the company. They are also able to ensure continuity of the organisation’s strategies and have a thorough understanding of its goals, values, employees and processes.

However, it is imperative that companies make an informed decision based on the merits of the candidates in question. The right appointment for the company should be the candidate who is the right fit for the business as well as the role itself. “Whether a candidate is internal or external, what is important is that candidates are properly evaluated and the selection is evidence-based. In many cases we find that those making the selection decision make an instinctive judgement that can lead to unconscious bias and hiring people in their own image,” warns Ms Rudbeck.

While a spectrum of factors should be taken into account, they should be limited to professional considerations, otherwise the company many open itself up to legal liability. “The biggest danger around succession planning from a legal point of view is of employers making unlawful discriminatory assumptions connected to employees’ personal lives and characteristics that may hold true in some cases, especially historically, but certainly not all,” explains Mr Braham. “Where a false assumption has been made, this can give rise to discrimination claims. For example, assumptions have been made that a woman having her second or third child is looking to park her career for a few years and would not want to take on a bigger role, that someone approaching age 60 did not have the appetite or desire to take on a big role or would shortly be hoping to retire, or that someone with an ill relative will not devote the necessary time to the role. It would clearly be better to ask about people’s aspirations rather than make assumptions. However, if that is done inelegantly and with reference to age or gender and so on, that would equally well set up the employee for a claim.”

No right answer

Of course, succession strategies will differ from one organisation to the next and there is no ‘correct’ way to ensure that efforts to mitigate all forms of succession risk will be successful. Companies, however, must ensure that they are taking all of the necessary steps to minimise disruption. This is achieved by preparing correctly and building a solid succession plan for each business-critical role.

Companies should start thinking about succession planning as early as possible. Managers burying their heads in the sand can only create issues in the future. By planning for a succession years in advance, companies can ensure a smooth transition and minimise disruption to their operations and their long-term goals.

© Financier Worldwide

BY

Richard Summerfield