While many companies are doing some form of succession planning for their CEOs, most are not doing enough to ensure a successful transition. In light of recent high-profile CEO transition failures, boards and human resource directors are urged to ramp up their efforts.
In a new report by AlixPartners and Vardis, titled ‘2015 CEO Succession Planning Survey’, the researchers explores the differences in common practices, procedures, and criteria used by organisations when selecting a new CEO. The study by the consulting firm and executive search firm involved 100+ senior level executives, including C-suite, board members and business owners; each of whom had significant knowledge of CEO succession planning and selection within their organisation. The participants stemmed in 38% of cases from publicly traded companies, 39% from portfolio companies and 23% from private equity and venture capital firms.
The results shows that more than half of the organisations surveyed did not have a strong candidate prepared in the high risk, and not uncommon event, of a CEO transition. Of all respondents, 31% said that they had no CEO successors identified, while 20% said their firm had just one successor identified. Differences between company types are prevalent however. Public companies are the most prepared in this area, with 18% lacking a potential candidate, while in the case of portfolio companies, 48% state they have no formally identified CEO successor candidates and amongst smaller PE portfolio companies (revenues below $100 million) this is even more marked with 59% of companies lacking a successor candidate.
Development of potential candidates also varies, with across all companies 31% stating that they provided no formal preparation or training for the identified CEO successor, a number which increases to 50% for private equity companies. Across all organisations on-the-job experiences (37%), coaching (36%), and formal assessments of strengths and weaknesses (34%) were provided to potential candidates.
“It is difficult to understand why so many organisations continue to under-assess and under-prepare the individuals they plan to launch into their firm’s highest role, especially in light of recent high-profile CEO transition failures,” comments Ted Bililies, Managing Director at AlixPartners and global head of the firm’s Leadership & Organizational Effectiveness Practice. A recent study from Strategy& for instance shows that companies typically book poorer results in the year prior and after a CEO succession, highlighting the financial cost of a (forced) meagre transition.
Asked for who should lead the CEO succession planning process, there seems to be no standard in terms of who has primary responsibility. According to survey respondents, responsibility is most likely to be held by board member(s) (37%), the incumbent CEO (30%), or the head of human resources (26%).
Despite the lack of preparation, 75% of the respondents still expect a new candidate to step up for the top job within a year, and over 50% expect that within six months, suggesting that there is considerable cognitive dissonance between planning and eventual execution expectations. “At the time a new CEO is named, that person should be deeply familiar with the board, have relationships with key stakeholders across the organization, have a keen understanding of the organisation’s unique culture and challenges, and should be ready to bring leading-edge ideas to the company. This gives investors and employees a clear indication that a stable and controlled transfer, including institutional knowledge, has taken place,” says Bililies.
In terms the top three capacity criteria for CEOs hired in to run companies, most respondents choose“people-leadership skills” (68%), “experience with similar strategic challenges” (63%) and “values aligned with board/owners” (56%). Views on the most critical CEO selection criteria differed across industries. Most notably, private equity firms place a much higher premium on “experience with similar strategic challenges” (cited by 74% of respondents) compared to public companies (cited by only 42% of respondents).