By Theresa Minton-Eversole
6/21/2010
More than half of U.S. and Canadian companies could not name a successor to their CEO immediately, according to new research conducted by executive search firm Heidrick & Struggles and Stanford University. This news is even more alarming considering that turnover among top executives in the United States jumped 23.7 percent in May 2010, as 125 CEOs announced their departures, reported global outplacement and executive coaching firm Challenger, Gray & Christmas, Inc., June 9, 2010.
Overall, the pace of CEO turnover in 2010 is 12.7 percent ahead of 2009, with 566 departures announced through May. Through May 2009, a total of 506 CEO changes had been recorded. At the current average of approximately 113 CEO exits per month, 2010 is on track to exceed 1,300 annual departures.
“The lack of succession planning at some of the biggest public companies poses a serious threat to corporate health, especially as companies struggle toward a recovery,” said Stephen A. Miles, Heidrick & Struggles vice chairman and a global expert on succession planning, in a statement about the report. “Not having a truly operational succession plan can have devastating consequences for companies from tanking stock prices to serious regulatory and reputational impact.”
“We found that this governance lapse stems primarily from a lack of focus: Boards of directors just aren’t spending the time that is required to adequately prepare for a succession scenario,” according to Stanford Graduate School of Business Professor David Larcker, who is a senior faculty member of the school’s Rock Center for Corporate Governance, a joint initiative of Stanford Law School and the Stanford Graduate School of Business.
The 2010 Survey on CEO Succession Planning, conducted in the spring of 2010, surveyed 140 CEOs and directors at large- and mid-cap public companies in the U.S. and Canada, with 10 percent of respondents from large private firms. Following are key survey findings:
While 69 percent of respondents think that a CEO successor needs to be “ready now” to step into the shoes of the departing CEO, only 54 percent are grooming an executive for this position. “This statistic, combined with the finding that more than half couldn’t name a new permanent CEO if the current chief became incapacitated tomorrow, is a total disconnect,” said Miles. “It’s hard to imagine that the CEO would be ‘ready now’ if he or she is not being groomed today.”
Thirty-nine percent of respondents cited that they have “zero” viable internal candidates. “This points to a lack of talent management and not paying enough attention to your ‘bench,’ ” said Miles.
On average, boards spend only two hours a year on CEO succession planning. “The full boards of respondents’ companies meet, on average, five times a year,” said Larcker. “Succession planning is discussed at only two of these meetings, at one hour apiece. The nominating and governance committee, [which] often takes primary responsibility for succession planning, did not fare much better; respondents reported that only four hours of meeting time is typically devoted to this topic each year.”
Only 50 percent have a written document detailing the skills required for the next CEO. Larcker thinks this seems rather low: “If nothing is written down, how do we know that the board really understands what these skills should be?”
Seventy-one percent of internal candidates know they are in the formal talent development pool, but there is regular communication (typically yearly or biyearly) for only 50 percent of these internal candidates. “There is a large communication gap, which can cause retention issues,” said Miles. “Executives who don’t know they are even in the running to be CEO might be easily lured elsewhere, where they believe they have room for advancement.”
Sixty-five percent of firms have not asked internal candidates whether they want the CEO job. “Many firms simply assume that their top choices want the job, but that is not always the case,” said Miles. “More and more, we see executives who don’t want to be in the spotlight as the CEO, given the extreme public scrutiny associated with the position. Making this assumption without checking can cause real problems down the road.”
Once viable internal candidates for the CEO job are identified, 38 percent of firms think the external search should continue at the same pace. “This is a big mistake,” Miles warned. “Companies lose strong candidates when they keep the outside search open too long even though they have perfectly capable internal talent.”
While 48 percent of respondents think they have an extremely strong or very strong understanding of the capabilities of internal candidates, only 19 percent have extremely well-established or very-well-established external benchmarks against which to measure their skills.
“It is another disconnect between perception and reality,” said Larcker. “How do you know that a candidate is strong unless you compare him or her against the marketplace?”
And once the new CEO is installed, only 50 percent of companies provide onboard or transition support for him or her. “This is the most important job at the company,” Larcker notes. “Not having the support in place for onboarding the executive can put the entire organization on unstable ground.”
Ways to Address C-Suite Succession
With companies at risk because of their lack of succession planning, Miles and Larcker offer these suggestions for boards:
Recognize that succession planning as practiced by most companies gives a false sense of security. Even though boards have made progress in this area in the post-Sarbanes-Oxley world, most companies’ succession planning still isn’t even close to being good enough. These experts recommend making sure that the company’s board devotes meaningful time to this exercise, rather than simply checking off the box of a meeting agenda. Boards need to ask themselves, “Could they really name someone today, or is everyone in the succession plan always one to three years out from being viable?”
Focus on making succession plans operational. Companies need to move from the “names in boxes” approach that gives them a false sense of security about developing viable candidates. “Plans aren’t worth the paper they’re printed on unless there is a robust inside/outside process that ensures they are both developing and knowledgeable of all candidate pools—internal and external,” noted Miles and Larcker.
Demand experience from board directors. Regulators such as the Securities and Exchange Commission are recognizing the importance of a rigorous succession process. Firms should seek lead directors and/or nominating and governance committee chairs with sufficient experience in this area to ensure that it is addressed adequately. “We are typically better at the things we have practiced before, and this is no place for someone to be ‘practicing’ for the first time,” they advised.
Pay attention to your bench. “Open lines of communication with potential internal candidates minimize surprises down the road,” said Miles and Larcker. “When it comes time, you don’t want your No. 1 contender to turn down the job.”
Keep the “runners-up” happy. “We see otherwise terrific executives who may not have been chosen as the CEO’s successor left hanging with no explanation. If you want to retain these executives, tell them why they weren’t chosen at this time and why they are still valuable to the company.”
Theresa Minton-Eversole is an online editor/manager for SHRM.
