The CEO Succession Planning Process Explained

Transferring power is not an easy undertaking, but with proper CEO succession planning, the entire process and the transition itself can be much smoother.

The CEO Succession Planning Process Explained

The transfer of power from one CEO to the next can be a make-it or break-it point in the history of a company. The smoother the transition, the more confidence you can instil in the minds of investors, customers and employees.

You need to provide a strong platform for the new CEO in order for him to continue moving the company forward. With a good solid CEO succession plan, the transfer of power will be almost unnoticed.

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How to Plan for the Unexpected

The loss of a CEO is often planned, but many times tragedy strikes, and you are suddenly without a head of the company. (See our article on the succession planning process.) Either way, by the time you need a succession plan, it is usually too late to start to put one together.

It is vital for the board of directors to make CEO succession planning a top priority, even if there seem to be more pressing matters at hand. A good succession plan not only mitigates the risk of losing the company altogether, it has these additional benefits:

  • Provides a structured framework for developing senior executives, and aligns leadership with the strategic needs of the company.
  • Provides the CEO an opportunity to analyze the requirements of the job, and adjust his role according to the changing conditions and needs of the business.
  • Strengthens the bonds, and improves information flow, between senior management and the board.

Building the Foundation

It is usually the administration or compensation committee that is responsible for CEO succession planning. The current CEO should be involved in the process, but in the face of unexpected circumstances, this may not be possible.

The primary focus is to find a suitable candidate from within the company, develop his skills, and prepare him to take over the responsibilities of the CEO.

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The plan begins with a written document, outlining how the company elects and replaces senior officers, how a successor is selected, and what roles the board, the current CEO, and the various committees play in this process.

The document also must include emergency procedures, in case of an accident resulting in sudden death or disability. All of these factors must be agreed upon before the need arises. This helps to ensure an orderly transition without undue turmoil and uncertainty.

The CEO succession planning document should be reviewed twice a year by the entire board and the senior human resources executive.

Finding a Candidate

While the human resources executive manages the daily aspects of measuring the development of potential candidates, the board should have regular exposure to the candidates.

The CEO Succession Planning Process Explained

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Each candidate should be given the opportunity to give a presentation, make observations in the field, and visit sites. Leadership development should be reviewed and revised for each candidate, in order to gauge progress and note shortcomings.

Boards may decide to enhance their talent pool by recruiting from outside sources. In this case, significant advance planning is necessary. It typically takes at least three years to fully absorb the new recruit into the culture of the firm.

You should narrow down to your list to about two or three candidates, typically a few years before the planned succession. This allows for the final round of development, and should be designed to expose the candidates to various aspects of the company.

They should be given specific responsibilities that imitate the array of complex challenges they may face as CEO. This also gives the board the opportunity to examine and evaluate how each candidate performs.

It is important to defuse any competition. Finalists should not be pitted against one another. Rather, give each potential successor a separate domain, and the opportunity to develop sustainable programs that can contribute to the profitability of the company.

Compare candidates from within the company to peers from other firms. This ensures you are choosing the best person for the job, not just the best from your employees. Companies usually use the services of an independent search consultant to find the most appropriate candidates.

When the board cannot agree to an internal candidate, this list of external candidates will be considered.

Assessing the Finalists

Approximately a year before the succession is to take place, the entire board should gather to implement the plan. The competency of each candidate should be reviewed and revised. The board must then begin a thorough assessment of the finalists, including:

In-depth interviews, probing the essential skills and talents required for the position.Thorough referencing, including insight from colleagues, peers and superiors.Psychometric testing, to evaluate intangible qualities.

Successful Transition From One CEO to Another

When the final selection is finally made, it is crucial that a comprehensive transition plan be developed. This gives the new CEO a strong starting point. Typically, the transition will span a full year. During this time:

  • The CEO that is leaving should meet frequently with the replacement for in-depth discussions about operating procedures, past performance and the expectations of members of the board.
  • The incoming CEO should be introduced to the stakeholders by means of information gathering sessions.
  • An detailed transition plan should be written up outlining the timeline. If the outgoing CEO is staying on as chairman, his role should be clearly defined.
  • Share the plan internally and externally to instil confidence in employees, as well as potential investors.
The ultimate decision may the responsibility of the members of the board, the entire CEO succession planning needs to be a collaboration of every one involved.

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It is a huge decision; taking it too lightly could spell disaster for the company.

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