Why Does CEO Succession Planning Produce So Few Successors?

• Press Release
• Source: Heidrick & Struggles
• On 10:34 am EDT, Tuesday October 20, 2009

Common roadblocks can sabotage best efforts, says Heidrick & Struggles Vice Chairman Stephen A. Miles

NEW YORK and CHICAGO, Oct. 20 /PRNewswire-FirstCall/ -- "The past year and a half has been a real wake-up call for many boards of directors who have taken their leadership of succession planning to the next level," says Stephen Miles, an expert in leadership succession issues and Vice Chairman and Managing Partner, Leadership Advisory, at top executive search firm Heidrick & Struggles.

"New regulation and legislation have added another layer of scrutiny and oversight to the governance process, but we cannot get lulled into a false sense of security. These new initiatives do not in any way move succession planning from simply putting names in boxes to becoming a fully operational plan.

"In fact, of the 80 new CEOs who were appointed among Fortune 1000 companies in 2008, only 44 of them - 55% - were promoted from within," says Mr. Miles.

"While almost all companies technically have a succession plan in place, the fact that 45% of them had to go outside to hire a CEO means that many of these plans failed to hit the mark. CEO turnover in and of itself adds to employee and shareholder anxiety, but this 'fail rate' contributes to even wider concerns among corporate stakeholders during the current recession.

"And this failure shows that while these plans allowed companies to comply with corporate governance rules saying 'they do succession planning,' the plans were not truly 'operational.' They involve just checking the boxes, which is a real risk for shareholders," adds Mr. Miles.

Why aren't these succession plans becoming operational?

"Very often you will interview a CEO and he will enthusiastically state that he has one or two potential successors. And then you will independently interview the board of directors - and they will unanimously state that 'there is no one who can run this company.' Herein lies the problem: there is a real disconnect between the CEO and the ultimate 'jury' - the board - on the viability of the potential successors.

"Boards are often unfamiliar with internal candidates who are more removed from the CEO's office - those outside the COO, CFO, or other C-level positions. I've seen too often that, when pressed, board members admit concern about the presence of truly viable CEO successors, when it may be simply a lack of 'real' exposure to internal candidates.

"Succession has now become the most critical responsibility of the board, while sitting CEOs' role has moved from choosing their successor to the job of developing candidates and providing input to the board, which now owns the process and makes the selection decision.

"Part of developing successors is ensuring they are 'viable candidates' in the eyes of the board of directors - not just to the CEO. This requires a programmatic approach using external resources to validate the candidates and develop them over time. This is not simply taking a snapshot at 'point A' and a second snapshot at decision time, but a truly in-depth approach to development and the creation of viability over time."

Common roadblocks to operational succession planning

"There are misunderstandings around succession planning that sabotage effective leadership transitions at companies," says Mr. Miles. These roadblocks include:

• Favoring the "exciting" external candidate over an internal option - "It appears boards often prefer the devil they don't know to the devil they do," Mr. Miles observes. "They often find it difficult to imagine an internal candidate in a higher role after seeing them operate for a time in a lesser one. Internal candidates will hear time and time again that they are still 'one or two years away' from being ready, while they watch their external 'competition' being lauded for similar efforts."

• Demanding a "ready now" successor - "The concept of a 'ready now' executive effectively eliminates perfectly viable candidates from true consideration. The fact is that a company would only know that someone is 'ready now' after the fact - when they see the executive moving to another company, probably a competitor, and proving himself there. The candidate might have been ready to lead all along, but the company missed its chance. This is actually a risk management decision - and the amount of risk a board can take is dependent on the requirements of the role looking forward combined with the complementarity of the top team."

• Focusing on the high profile CEO role and not on the whole team - "The best succession planning really involves constant assembly and re-assembly of a leadership puzzle with many pieces, including not only the CEO, but the CFO, COO, sales and marketing chiefs, and other C-level officers. A trend we are seeing in the best-managed companies is that boards are looking beyond the CEO and his or her direct reports. Now boards want a detailed calibration of the C+2 and C+3 executive populations to see who's 'on deck' to take the reins down the road. Again, from a risk management perspective it is important to understand the bench strength and resulting strength or risk in the 'people portfolio.'"

"But companies can also sabotage the CEO transition process by remaining myopically focused on their own people," says Mr. Miles. "Having a viable internal candidate does not eliminate the best practice of looking outside as well to ensure that the best candidates for the job are considered - period. Many modern boards are doing this as a matter of best practice today and we anticipate this positive trend to strengthen going forward."

"All CEO transitions bring a certain amount of risk - even when the incoming CEO is a major step in the right direction, and even when many blame the outgoing CEO for bad decisions contributing to a company's woes. For these times, a fully operational plan is what is needed, and this must be achieved at the company level, through proactive leadership from lead directors, nominating and governance committee chairs, and CEOs.

"Boards can, and really must, direct succession planning with an honest evaluation of current talent and the development of a rich pipeline of talent that can form the future of the company. It is this kind of forward-thinking, proactive leadership that can mitigate risk and maintain confidence among internal and external stakeholders."

If you would like to speak with Stephen Miles, please contact Davia Temin or Suzanne Oaks of Temin and Company at 212-588-8788 or news@teminandco.com.

Stephen Miles is a Vice Chairman and the Managing Partner, Leadership Advisory within Heidrick & Struggles' Leadership Consulting Practice and oversees the firm's worldwide executive assessment/succession planning activities. He is also a key member of Heidrick & Struggles' CEO and Board Practice and is a member of the firm's management committee.

His third book, The Career Game: Applying Lessons from Game Theory to the Management of Your Career, is due out next spring from Stanford University Press.

About Heidrick & Struggles

Founded in 1953, Heidrick & Struggles International, Inc. (Nasdaq: HSII - News) is recognized as one of the world's leading executive search firms. With more than 60 offices in the principal cities of 33 countries, it helps its clients to address strategic issues that have human capital solutions in times of growth, turnaround, acquisition, integration, expansion into new markets, and economic flux.

With its executive search, leadership services, and interim management capabilities, Heidrick & Struggles can seamlessly integrate a customized approach to meeting the diverse leadership challenges facing its client organizations. The organization prides itself on its relationships with, and immediate access to, some of the world's most talented people.

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