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03.05.17

Boards need to Plan for Succession Planning

by Mark O'Donnell, Partner

Bank of Ireland and Aryzta are currently planning successors to their outgoing CEOs. It put me thinking about the issue of leadership management and succession planning.  

There are many variables which influence a company’s performance that a board has no control over. The one area where it can exert total control is in the appointment of its CEO. Given the importance of the position, it would make sense that every effort was made in advance preparation for the expected or unforeseen vacation of an organisation’s top appointment. 

Turnover among CEOs globally is rising. The Harvard business review estimates that, each year, 10 to 15 percent of US and Canadian companies appoint a new leader due to resignation, ill health, retirement or poor performance. Yet, companies are universally ill-prepared for an inevitability that largely determines their future. 

A 2010 study by Heidrick & Struggles and the Rock centre for Corporate Governance at Stanford showed that just 54% of boards had active processes in place to prepare for this transition. 39% had no suitable internal candidates at the ready to take over if needed. Strategy and Business estimated that planned succession had risen to 78% among top US companies by 2014, a notable recognition of its importance. For those who were unprepared for forced successions, they estimated that these companies would have generated about $112bn more in market value in the years before and after the changeover if the appointments had been the result of careful planning. 

My experience tells me that substantially less Irish and UK companies have strong succession planning in place. As PLCs are subject to stricter governance, their chairmen and remuneration committees are more likely to follow ongoing strategies to plan for upcoming leadership vacancies. But there are few corporate companies that operate best practice in this area, instead relying on a reactive, unsophisticated system that can cost dearly. The sudden announcement of a CEO’s departure often has a serious effect on a company’s performance and the longer it takes to announce a credible successor, the more nervous investors and markets become. Internally, uncertainty at the steering wheel affects decisions on new initiatives and can lead prized team members to get itchy feet and look elsewhere. 

What does Good Succession Planning Look Like?

A smooth passing of the baton from outgoing CEO to one who is unquestionably the best choice available comes from a proactive rather than reactive process; the final stage in a structured leadership development plan that is considered, measured and assured. Rather than being treated as a once-off event, pinched off from a broader culture of talent management, it is an organic product of an overall business strategy that includes an ongoing plan for the identification and active development of potential successors. 

Having a CPO (Chief People Officer) on the board is one way to ensure the continuum of excellently chosen and precisely suitable CEOs. The CPO position emerged among tech companies, mainly in the US, over a decade ago. To deal with an industry where much-desired talent moved frequently and had high expectations, a new culture of people management was needed. Now, top performing global companies are driving decision-making from a triangle of CEO, CFO and CPO. Last year, Burberry, Jet.com and Bobonos each appointed CPOs to their boards. 

LinkedIn have estimated that 80% of a company’s operating expenses are talent related. It pays to get it right. Adopting an inbuilt agenda on a board’s governance to strategise for attracting, keeping and developing essential team members that is pinned to an organisation’s values, vision and modus operandi keeps its employees thriving and minimises disruption due to unexpected vacancies. 

Leadership development in practice 

Doing a yearly review of internal talent will identify a successor pool which can be subjectively assessed in-house and objectively viewed with the help of outside professional expertise. A readiness assessment validates qualifying skills and experience and shows where further development is needed. The top candidates’ trajectory towards fitness can then be accelerated. Having a keen awareness of the potential that is already ripening among talent in various ranks of a company gives invaluable foresight and preparedness for both inevitable and surprising turns in the road. 

Ideally, one to three potential successors to the CEO could be at the ready at all times, ensuring stability and continuity. A policy of such investment in valuable people also increases retention, saving costs. Patrick Coveney’s smooth transition from CFO to CEO of Greencore in 2008 shows how well this approach works. Similarly, Bernard Byrne’s position of CFO of AIB evolved into his appointment as CEO in 2015. More creative thinking is obvious in Patrick Kennedy’s transition from appointment to the board of Paddy Power in 2015 to CEO in 2016. Just a year after his appointment as CFO of Hargreaves Lansdown, Christopher Hill was appointed CEO in 2016. Mark Evans, appointed CFO of Telefónica UK (O2) in 2012, took over as CEO in 2016 an also joined the Telefónica SA Executive Committee. 

Internal or external candidates?

The beauty of an internal candidate is their understanding of the strategy and culture of an organisation and familiarity with the macro and micro context in which it operates. Conversely, it may prove difficult to evolve into and be accepted as bearing the new set of responsibilities the CEO role demands. Not having an external perspective could mean missing crucial, objective views. An external potential, on the other hand, has the advantage of an unencumbered overall impression that could inspire new and creative initiatives, taking a business in exciting directions that someone closely involved hasn’t seen.   

There’s always a risk factor to appointing a new CEO. If you’re in the lucky position of having a strong internal pool of likely future leaders, to consider an external candidate, his or her attributes would need to be 10-15% stronger than the best internal choice. If there’s a margin of difference of just 6-7%, the risk of failure in placing an internal person is lower. If your external choice does trump your best in-house candidate significantly, having gone through a robust process where they went toe-to-toe with internals, the likelihood of a successful outcome is very promising. 

A 2012 study by PWC subsidiary Strategy& on the rise of the internally appointed CEO gives tips for successful succession planning:

1. Institutionalise the activity. “CEO succession must be a standing agenda item for every board.” 

2. Personalise the process. “…the process of picking a CEO is unique to every Company…”

3. Ensure broad, active ownership. “Successful CEO transitions require tangible and proactive participation on the part of multiple players.”

4. Have a diverse set of candidates. “Even if the board’s preference is for an internal candidate, source multiple candidates, both from inside and outside the company, to ensure a wide talent pool and the ability to benchmark internal candidates against the current talent market. In the end, the board should have at least three solid contenders for the job, with an assurance they represent the best talent in the market.” 

5. Be transparent. “CEO successions tend to run far more smoothly when the incumbent can play an active role, including onboarding and transitioning duties to his or her successor.” 

We wish both Bank of Ireland and Aryzta a fruitful outcome to their current preparations for appointing new CEOs and look forward to seeing the new developments these will undoubtedly lead to.