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Study Shows Serious Gaps in CEO Succession Planning

Melissa Klein Aguilar | June 22, 2010

Is a lack of succession planning putting your company at risk?

According to new research Heidrick & Struggles and Stanford University's Rock Center for Corporate Governance, more than half of companies today can't immediately name a permanent successor to their chief executive should the need arise.

A joint survey of more than 140 CEOs and board directors of North American public and private companies found that, 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.

Those findings are a total disconnect, since "it's hard to imagine that the CEO would be ‘ready now' if he or she is not being groomed today," notes succession planning expert Stephen Miles, vice chairman at executive search and leadership consulting services firm Heidrick & Struggles. Miles says the lack of succession planning at some companies poses a serious threat to corporate health, especially as companies struggle toward a recovery.

"Not having a truly operational succession plan can have devastating consequences for companies - from tanking stock prices to serious regulatory and reputational impact," he says.

According to David Larcker, a Stanford Graduate School of Business professor and Rock Center senior faculty member, the 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," says Larcker.

More than a third of respondents (39 percent) said they have "zero" viable internal candidates, which Miles says points to a "lack of talent management and not paying enough attention to your ‘bench.'"

Despite the fact that full boards of respondents' companies meet, on average, five times a year, boards spend only two hours a year on average on CEO succession planning, one hour apiece at only two meetings, according to The 2010 Survey on CEO Succession Planning. The nominating and governance committee, which is typically primarily responsible for succession planning, didn't fare much better. Respondents reported only four hours of meeting time is typically devoted to the topic each year.

Among those polled, only half say their companies have a written document detailing the skills required for the next CEO. Moreover, while 71 percent of internal candidates know they're in the formal talent development pool, there is regular communication (typically yearly or bi-yearly) for only half of those internal candidates-a large communication gap which Miles says can cause retention issues, since executives who don't know they're even in the running to be CEO might be easily lured elsewhere.

Meanwhile, the majority of firms (65 percent) haven't even asked internal candidates whether they want or would accept the CEO job, and even when viable internal candidates for the job are identified, 38 percent of firms think the external search should continue at the same pace. Miles says that's big mistake, because companies lose strong candidates when they keep the outside search open too long.

Only 50 percent of companies provide on-board or transition support for new CEOs-a mistake Larcker says can put those that don't on unstable ground.

Miles and Larcker offer some suggestions for boards:

Make sure that the board devotes meaningful time succession planning, rather than simply checking off the box of a meeting agenda.

Focus on making succession plans operational. Companies need to move from the "names in boxes" approach to truly developing "viable" candidates by having a robust inside/outside process that ensures they are both developing and knowledgeable of all candidate pools - internal and external.

Demand experience from directors. Firms should seek lead directors and/or nominating and governance committee chairs with sufficient experience in this area to ensure that it is adequately addressed.

Pay attention to your bench. Open lines of communication with potential internal candidates helps minimize surprises down the road. "When it comes time, you don't want your #1 contender to turn down the job," Larcker and Miles note.

Keep the "runners up" happy. Don't leave them hanging with no explanation. Tell them why they weren't chosen at this time and why they are still valuable to the company.