Planning for the Next Transition

Change is inevitable—especially at the top of the organization.

Recently, Russell Reynolds analyzed CEO turnover in the S&P 500 between 2003 and 2015. For these 500 companies, there were 688 CEO transitions during that 12-year period, with 40 percent of the firms experiencing two or more changes.

As the data shows, many boards replace their CEOs, but only a small fraction do so via a rigorous succession plan. In fact, Russell Reynolds Associates’ 2019 Global Board Culture and Director Behaviors Survey found that attention to CEO succession planning was a critical differentiator between top-performing boards and average ones, but even among the best boards, fewer than 30 percent considered it a primary focus area.

I have worked on executive search projects for companies around the world for multiple decades, and I can say without reservation that CEO succession is not only the most important issue companies will face, but one of the most difficult to execute well. Too many companies reactively replace their CEO. Not enough proactively plan for an inevitable CEO succession.

But what is the difference between replacing a CEO and a robust CEO succession planning process?

A CEO replacement is a one-time transaction: One CEO departs, a new CEO is appointed. CEO succession planning, by comparison, is a long-term strategy. It involves forward thinking, competitive analysis and the ongoing grooming of multiple candidates to fill the role when the time comes. It means a broader assessment of candidates that goes beyond past experience to include leadership potential, learning quotients and the ability to address emerging stakeholder concerns.

CEO succession is about creating new options for both the present and the future. I like to say succession is a process, not a “plan”. Plans can easily go wrong; processes are designed to flex as plans change.

Given the potential upsides, why do so few companies tackle succession planning? When my colleagues and I speak with directors, we observe five common scenarios:

1. Board members are not aligned on the future direction of the organization: Choosing the CEO of the future means having a shared concept of what that future looks like. If board members talk only in generalities—or hold conflicting views—discussions around the ideal leader are not likely to be productive.
2. Board members are not always clear about their specific, individual responsibilities in driving the succession process: Many organizations are not exactly sure who does what in CEO succession processes or when and how to start. When it is not seen as an urgent need, no one does anything.
3. The board is tiptoeing: Board members do not want to inadvertently convey a lack of confidence in the incumbent CEO. This stems from a desire to avoid conflict with the CEO, as well as the need to manage outsiders’ perceptions.
4. There is concern about triggering internal chaos: This fear cuts a number of ways. For one, those who are designated internal CEO candidates may become overly competitive with each other, to the detriment of the business. Even without in-fighting, moving CEO candidates around to give them exposure to the whole business could be disruptive. Then there’s the worry that those who don’t get the nod are likely to lose motivation and leave the organization.
5. There is a presumptive nominee: The CEO (or another controlling shareholder) has a clear successor in mind and prefers a closed-door process with limited input.

The good news is that boards can mitigate all these factors by making CEO succession planning a positive experience. A key step is to reposition it as a deliberate investment in the future success of the organization. It flips the question from “Who is going to win the contest to be CEO?” to “What can we do to maximize the potential of the next generation?” as well as “How can we limit the risk inherent in any CEO transition?”

When companies effectively develop multiple potential CEO candidates, they maximize the chances of retaining those who do not end up in the CEO role. The goal is for all candidates to feel that the organization has invested in them, to clearly understand why they may not fit into the CEO role at the present time and how they can use their development experience to amplify their impact in other roles.

What are you doing to ensure your company’s next senior leader transition is a smooth and successful one?