Connecting...

Blog image

Succession planning for CEOs: should you foster internal candidates or look elsewhere?

9 days ago by David Reynolds

Boardroom chair blue opacity

A common question around succession planning for CEOs is whether company Boards should focus their succession planning efforts on internal candidates or seek those outside of the company to bring in a fresh perspective.

In other words, for the company Board to be deemed to have acted responsibly, they will often be expected to undertake a market map to identify potential candidates to consider for engagement while fostering the talent already in the company.

While the benefit of an internal candidate is that they can assumedly hit the ground running and have a sound knowledge of the organisation, they may not be the right person to take the organisation forward and to deliver on the future strategy. 

A recent CEO Succession Study produced by PricewaterhouseCoopers (PwC) looked at CEO turnover and tenure at the world’s largest 2,500 companies and found longer serving CEOs generally deliver a higher shareholder return than shorter serving CEOs. 

The study reported that just 12 per cent of successors achieved performance in the top quartile compared with 21 per cent of the longer serving CEOs. 

In PwC’s review, it was evident that successors who came in from outside the organisation outperformed internal candidates.  

The reasons why are unclear however, in an environment of ongoing change and disruption, bringing in an outsider may be the better option. 

For ASX-listed companies in Australia, there is now a requirement under the ASX Corporate Governance Principles for Boards to ensure they have a plan in place to manage succession planning for the CEO and senior executives. 

It is an obvious risk mitigation strategy. 

Yet, the extent to which these plans are disclosed to the market remains complex due to confidentiality and privacy reasons. 

Research from John J. McConnell at America’s Purdue University and Qianru Qi from China’s Fudan University, based on responses from 9,000 CEOs, found better corporate governance causes higher succession planning.

Their paper, Just Talk? CEO Succession Plan Disclosure, Corporate Governance and Firm Value, said organisations that disclose CEO succession plans are more effective in their succession planning processes, while regulations that require more information disclosure on CEO succession planning improves the organisation’s shareholder value. 

What should a CEO succession plan include?

The overriding objective of a CEO succession plan is to create a talent pool of proven or high potential leaders from internal and external sources, which is balanced with the external changes that impact the organisation technological, environmental, economic and political 
aspects of the company.

Once the parameters of the search for a CEO successor have been set through a robust analysis based on objective data and evidence, then a decision-making framework can be put in place to guide the investment of time and research to ensure a satisfactory pool of talent is developed. 

It is important to consider diversity in the candidates for a better outcome. 

The other intangible needed when cultivating a successor is ensuring cultural fit, which is often difficult to gauge before approaching them. One mistake to avoid is identifying talent that looks like the current CEO; this could be limiting and may not reflect the CEO needed for the future. 

Talent mapping

It is necessary to identify the skills, experience and key attributes that you are seeking in your next CEO. 

You should also consider which competitors you would like to map as well as which industries and other organisations that might be a perfect source from which to identify talent. 

The new CEO may be required to bring different skills and experiences to the table. This could be due to global change and restructuring, mergers and acquisitions, IPO experience, cultural change or digital transformation. 

Once a target list is prepared and vetted by the Board, it is possible to use executive search consultants. 

They will investigate through the research capability, as much information as possible through their networks and market intelligence to ascertain the reputation and track record of the targeted individuals. From here they are able to develop more detailed profiles on each target so as to refine a shorter list for consideration.

Over time the consultants will be able to approach targeted individuals confidentially to gauge their interest and determine the extent to which future communications may take place. 

Onboarding

When bringing in an external appointment, it is also important to consider how to integrate them most smoothly into the organisation. 

Research from the Society for Human Resource Management indicates that 66 per cent of all companies that developed and used a strong onboarding process had a higher rate of assimilation. 

Of huge importance is induction by the Board and the Chair and the total support of the Board. 

In the well-known book The First 90 Days by Michael Watkins, there are some incredibly good hints on what steps should be taken in ensuring a successful transition. A guiding framework should be determined from a risk perspective.  

The new CEO also needs to take responsibility through building networks and alliances and identifying their own learning gaps and being very self-aware of their own leadership style. 

The real challenge here is how well Boards have managed risk around succession planning for their CEO and Executive team and to what extent the plan is based on the future rather than the past.

If you would like to read more on this topic, I recommend reading Strategy+Business magazine’s story on Succeeding the long-serving legend in the corner office.

If you would like to download a PDF version of this whitepaper, please click here and submit your details.

Download Whitepaper


By David Reynolds, Senior Partner with Davidson Executive & Boards