Succession Planning

Earlier this month, the Catholic Church elected Cardinal Jorge Mario Bergoglio of Argentina to the papacy. Bergoglio took the name Pope Francis only two weeks after the resignation of Pope Benedict XVI. For the leader of over a billion Catholics worldwide, two weeks was not that much time. It often takes months for an executive board to replace a CEO of a company that has only a couple thousand employees. No one knows what goes on during the Pope selection process, and Pope Francis’ legacy has yet to be determined, but one thing’s for sure: the Vatican has an efficient succession plan. Clearly, a Pope’s role is completely different from a C-level business role. But, both must still be qualified for the position.

The main problem companies face when succession planning is finding someone who, every member of the executive board agrees can take over the company’s reigns and become an effective leader. In the past, businesses operated in a more feudal fashion. CEO’s would appoint their own successor or pass the business through the family and that was it. This process usually led to one of two mistakes: 1) the CEO chose someone in his own likeness when what the company needed was someone drastically different, or 2) the CEO choosing someone of lesser stature to preserve his own legacy. Today, it is more common for a board of director’s to appoint a new CEO, with the current CEO acting as just one participant in the process. Succession planning has become the board’s most crucial responsibility. Equilar recently studied 361 S&P 1500 companies that had change in CEO between 2009 and 2011.

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These are some of their key findings:

• Among the 361 companies included in the study, 348 changed their CEO once, while 23 changed CEO twice or more
• Departing CEOs were most likely in their 50s or 60s, while incoming CEOs were most likely in their 50s
• Two-thirds of incoming CEOs were internal hires or former CEOs and one-third were hired from outside the company
• 23 companies chose a female CEO to replace a departing male CEO
• 77 new CEOs were awarded with larger than ordinary equity grants
• the Services sector had the highest amount of turnover, with 88 companies changing CEOs

As the economy rebounds from the recent recession, expect higher CEO turnover rates. A recent study by Booz & Co. found that executive turnover rates are lower during a down economy and rise as the economy improves. Why? It’s simple, changing leadership is risky and during hard economic times, people become more conservative. When everything starts to pick up, it’s harder for a CEO, CFO, or COO to make excuses for subpar performance. As the economic ball gets rolling again, companies will want to stay ahead of the game. Furthermore, when a public company’s executive board replaces a CEO with a more highly regarded candidate, the market reacts favorably and stock prices rise.

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Every now and then, a board of director’s must find a replacement for a C-level executive who is retiring, or leaving under his or her own will. According to Stephen Miles of Heidrick & Struggles, “most businesses don’t do all they should to pick the right CEO.” Miles lists several myths about succession planning:

1) External candidates are more exciting and promising=> Internal successors are often lower risk than outsiders. They may not have CEO experience, but they are often only a year or two away from being ready.
2) We have a great internal candidate, we don’t need to look externally=> This is the other extreme point of view. An executive board should weigh all options before hiring a new CEO. An outside candidate, although potentially more risky, could offer valuable new insights into the business.
3) The successor has to be ready now=> Nobody is going to be “ready now” unless he or she has already served as CEO for that company. It takes time to adjust to, and learn the ins and outs of, every new position; it’s all about who will have the easiest time adjusting.
4) What worked in the past will work in the future=> As most executives know, this way of thinking is in the past. Fresh perspectives and ideas are often the lifeline of a competitive modern business. As Miles puts it, “there is a strong danger in framing the process by looking in the rearview mirror. What a company needs in the next six months and beyond may be drastically different from what was needed even in the last quarter.”

Read more about Stephen Mile’s take on succession planning on Forbes.com, here => (http://www.forbes.com/2009/07/30/succession-planning-failures-leadership-governance-ceos.html?partner=email)