There has been much fanfare about the impending ‘great resignation’ expected this year. How much this impacts Australian organisations, especially the c-suite remains to be seen. It’s not unrealistic, however, to think many executives, burnt out from the unprecedented difficulties faced as a result of the pandemic may consider calling time on their reign this year, potentially leaving many organisations exposed at the top.
The impact of CEO performance and organisational success has long been observed and there is no denying there is a direct correlation. Since the 1980s, researchers have found that CEOs could influence changes to a company’s stock price. By the 2000s, a study by John Wiley & Sons, Ltd among others, found the effect of CEOs on profitability was as much as 15%. More recently, research has focused on firm value (using Tobin’s Q), estimating that CEOs are responsible for at least 25% of a company’s market value.
There’s no doubt succession planning should be a priority for any organisation. Yet, research has found that most organisations are unprepared and have little understanding of how to approach succession planning properly. It’s not surprising that organisations who fail to prepare and plan accordingly risk excessive turnover at the top and can destroy a significant amount of company value.
Perhaps the biggest cost is underperformance. Poorly suited external hires can result in the loss of intellectual capital but the dangers run deeper and have far broader implications. According to MicKinsey 46% of leaders underperform during their transition to a new role. Furthermore, 50% of leaders reported that it took them six months to become effective in their new roles. 20% of C-Suite Executives stated it took more than nine months to become effective according to a survey by Egon Zehnder.
Poor preparations and a lack of support for new executive appointments can have a negative impact on overall company performance but the impact is also felt among teams and employees. Direct reports perform 15% worse under a struggling leader and are significantly more likely to become disengaged, a study by McKinsey found. These harrowing statistics highlight the importance of succession planning. For business success in 2022, organisations must do better. The solution is simple; companies must start succession planning well before they think they need to.
Where are organisations getting succession planning wrong?
According to a CEO succession study by Stanford University, one of the reasons organisations fail at succession planning is because they don’t devote sufficient time to it. The study found boards of directors spend on average 1.14 hours discussing it. This lack of preparation and forward planning puts companies on the back foot, often leaving them with little choice but to rely on those external hires or internal candidates available at the time. This band-aid approach is hardly conducive to business success especially considering the direct cost of replacing a failed executive is close to 10x his or her salary according to a study by Heidrick & Struggles.
As Australia is plunged back into uncertainty with record levels of infections of the Omicron variant, the importance of resilient leadership cannot be overstated. It’s unsurprising that 74% of Boards are making emergency plans in case of a sudden CEO departure according to the Governance Challenges 2019: CEO Succession report.
CEO succession planning is crucial to company stability, empowering employee trust and investment in the long-term but success requires a shift in thinking and approach. Succession planning needs to be an ongoing process rather than a contingency plan. Even then, it can often be as much art as science. Talent pools and internal candidates earmarked and groomed for succession can often be headhunted or resign unexpectedly, leaving gaping holes in the hopes of boards. Research by McKinsey in recent years highlights that nearly half of all leadership transitions fail.
Whilst this statistic may sound concerning, it is not always a reflection of a poor transition. Changes in strategic direction or aggressive innovation can lead to a reshuffle. Succession planning can be complex, delicate and subject to any number of variables. Even the most extensive succession planning processes, invested CHROs and skilled executive search firms could struggle to find a high-calibre replacement. As such, it’s important to give thought to the pitfalls that can arise when succession planning is not treated as an ongoing initiative.
Here are 8 of the potential dangers to avoid:
Lack of reliable succession-plan
Surprisingly, whilst 86% of leaders believe leadership succession planning is of the utmost importance, only 14% think their organisation does it well according to Deloitte. Many organisations still lack the tools and necessary processes to conduct worthwhile succession planning, according to a 2018 Deloitte study. Alarmingly, only 35% of organisations have a formalised succession planning process according to ATD’s research report Succession Planning: Ensuring Continued Excellence with SMBs and scale-up businesses not yet considering succession planning as a necessity yet.
Short term, reactive thinking
For many organisations, succession planning is often only a priority when an executive is exiting or planning to exit the business. Effective succession planning is a continuous process, requiring ongoing focus and review. The development of internal candidates requires long-term planning and investment. The alternative is a band-aid solution or external hire, neither of which helps to retain commercial IP.
Poorly handled discussions
Succession planning, by its very nature, can be a destabilising process if poorly managed. Executive transitions are typically high-stakes, high-tension events. Naturally, leaders that are under pressure or even those performing well might be hesitant about having succession planning discussions for obvious reasons. However, succession planning is exactly that; planning. It’s about safeguarding the future of an organisation and an important part of board responsibility. This can only come from ongoing discussions, development and planning to ensure that whatever decisions boards make regarding future executive leadership comes as a surprise to nobody.
Insufficient information or access to internal candidates
Impartial screening and selection of potential candidates cannot be conducted without the proper structure and processes in place. Naturally, executives will be reluctant to concede their position. Heavy reliance on the opinion and thoughts of the incumbent executive when planning for succession invites bias into the process, which may lead to poor decision making and negative outcomes. Boards can ensure they receive the right information and access to the best possible potential successors by actively talent pooling the market or engaging a specialist executive search firm to conduct a thorough executive assessment and talent mapping process
Managing internal candidates
Every organisation wants a promising pool of talented internal candidates for c-suite roles. Good succession planning is as much about the retention of high-calibre talent as it is about executive assessment. Organisations need to focus on retaining potential candidates through well-considered financial incentives, career planning and professional development. Ambitious leaders seeking executive roles will find them elsewhere if structured career paths are not created and presented.
Transparent, competitive selection processes
Boards risk making poor executive appointments if they approach the selection process with a closed mind and biased outlook. Quality succession planning goes beyond skill matching and assessment for cultural fit. Clear and open dialogue around leadership potential, the quality of thinking and objective assessment enables organisations to make informed decisions.
Using the right resources
Whilst the use of executive search firms can be costly, organisations need to consider the costs associated with making a poor hire. Good executive appointments are the result of adequate investment in time and resources to what can be a lengthy, complicated process. Given the immense significance of executive selection on business performance, extensive review of internal and external candidates, independent advice and a wider search of domestic and international candidates are important steps in securing the right leadership.
Internal vs External Candidates
Given the opportunity, it stands to reason that most organisations would prefer to source prominent executive appointments through internal candidates rather than external hires. Whilst both have pros and cons, it is difficult to arrive at an informed decision without conducting a proper selection and assessment process. The merits of new perspectives or differing skills versus organisational IP cannot be properly ascertained without first engaging in the appropriate success planning discussions and processes.