It should come as no surprise that the evaluation and selection of the organization’s CEO is one of the boards more important governance functions. Similarly, it should come as no surprise that being prepared for any planned or unplanned departure amongst senior management of an organization, specifically the CEO, is critical to an organization’s success. When it comes to management succession, boards need to be proactive and not reactive.
Boards have a fiduciary duty to address major business risks to which an organization may be exposed, including the inevitable loss of senior management. Addressing the loss of senior management on an as needed basis can be extremely costly for the organization. Without proper planning, boards often find it exceedingly difficult to quickly and effectively attend to all of the tasks associated with replacing a senior manager.
The board needs to plan early to effectively accomplish this task by creating a strategic and disciplined approach to identifying and/or developing the next top executive of the organization. A well thought out plan will serve several purposes. It will:
- Increase the chances of having a competent and available workforce;
- Ensure strategies are in place to transfer knowledge;
- Minimize disruptions when a CEO joins or leaves the organization; and
- Provide for continuity, even in the event of an unplanned departure.
Historically, the management succession plan for most organizations is solely focused on finding replacements. Organizations relied on reactive systems, conducted in secret, with limited search options. Today, organizations need to begin the process early and develop a plan in writing that will not only meet the current needs of the organization but will be flexible enough to adjust for future needs when a position becomes available.
Implementing the Plan
Like a good board succession plan, an organization’s management succession plan must coordinate with its strategic plan. To create and implement such a plan, an organization needs to:
- Assess the current environment and current strategy under which the organization is operating;
- Assess if there are any potential candidates within the organization;
- Assess the role of the current CEO in the organization;
- Determine what roles and skills are critical for the growth of the company;
- Analyze and address the gaps revealed by the planning process;
- If the organization is looking within the organization, identify and understand the developmental needs of employees to fill those positions; and
- Understand the time needed to backfill key roles.
An organization’s succession plan should be viewed as a living document that will continue to evolve over time. It is important for the board, as a whole or a committee of the board, to annually review the succession plan, revise it to account for any changes in the organization’s strategy, and to ensure, if applicable, whether planned individual development has taken place.
As part of any plan the board needs to prepare for both “planned departures” and “unplanned departures,” whether permanent (i.e., death, resignation, etc.) or an extended absence (i.e., medical issues, family issues, etc.). The steps a board must take in the event of an unplanned departure will differ from those the board will take when the departure is known, and a good succession plan will provided direction for each scenario. Similarly, the steps a board will take when the departure occurs also will differ depending on whether the organization has already has identified a potential successor, identified a potential pool of successors, or whether no potential candidates have been identified. Thus, an organization’s succession plan must account for each.
Do Not Forget About A Communication Plan
Finally, a critical, often overlooked component of any succession plan is the organization’s communication plan upon the occurrence of a departure. Regardless of your organization, whether for-profit, nonprofit, privately held or publicly traded, failing to have a communication plan may cause significant damage. In the event of any planned or unplanned departure, it is important that the board be able to communicate to the public that it is on top of the situation and has a plan in place. Inability for a board to quickly show its preparedness regarding a departure could negatively impact the reputation of the organization in the minds of employees, shareholders, funders and the capital markets.
For example, take the recent extended absence of Apple’s CEO Steve Jobs. In January, Jobs reported he had health issues that would require some time away from the company. The day of the announcement, which was not coupled with any statement by Apple’s board on a potential succession plan, Apple’s stock dropped 7 percent as the uncertainty over Jobs’ health underscored the need for clear communication of a well-defined succession plan.
While not every organization needs to go public with its planning, communication addressing the plan may be essential in the case of any organization whose image and reputation is intricately tied to the CEO.
Regardless of whether your organization has a CEO that is expecting to lead the organization for years to come or one that is on his or her way out, the time is now to begin planning for their eventual succession—the cost for waiting may be too much for the organization to bear.