An effective chief executive officer, or CEO, succession strategy needs to take into account the different succession scenarios that a company could face.
So, whether it is a logical succession plan—where internal candidates are groomed—or an emergency/accelerated succession—where an immediate CEO need surfaces—there should be clearly defined roles for the board and the CEO to ensure a smooth transition.
Grooming a successor
The logical succession scenario—now embedded at some of India’s leading companies, such as the Tata group and Infosys Technologies Ltd—is a well-tuned process that unfolds over the course of a number of years.
During that time, the CEO and board work as a team to ensure the development and readiness not just of a successor CEO, but also of the bench of executives for all key management positions throughout the organization.
To be most effective, succession planning should ideally be institutionalized as a routine process in just the sort of circumstances where one might assume it is not required at all; that is, in situations where both company and CEO performance are proceeding well.
(Illustration: Malay Karmakar / Mint)
In addition, while the CEO and her/his team have day-to-day responsibility for succession planning, there should be regular interaction between the CEO and the board to assess the company’s succession readiness.
The approach works well with a CEO who is used to longer term succession planning, since she/he recognizes that it is linked inextricably with management development, and, thus, always thinks ahead. This also ensures that there is time to round out the development of high-potential managers, whether or not they are viewed as future CEOs.
Further, with a process that anticipates shifts in the competitive environment and strategy, the board ultimately has greater flexibility and, ideally, choices when it is time to select the next CEO.
A process that is truly systematic about succession planning includes an assessment of each key position, and seeks to identify both immediate backups and individuals who may be ready to step in within a one- to three-year time frame.
As the window for a CEO retirement narrows to two or three years, the board should make it a priority to get to know high-profile potential successors and create opportunities to get to know them in a way they have not been able to previously. This helps the board determine whether the process is on track towards the right solution before a formal succession plan is set in motion.
With such an ongoing conversation about succession, the board is never left guessing about succession planning progress, but builds updates from the CEO, as well as exposure to potential successors, into the agenda of each board meeting.
However, a critical success factor for this process to work is also the freedom to express dissent in the boardroom, and avoid raising issues outside the meeting. This is where Indian companies will need to focus in order to move forward in their succession planning initiatives.
As a CEO transition nears, the board naturally will take over the reins from the CEO, and may want additional outside confirmation that it has made the best choice.
Here, a benchmarking exercise with a select group of external candidates with relevant experience may help to highlight areas where internal candidates still need to enhance skills, or possibly even add capable outsiders to the succession slate.
An effective planning process should also anticipate shorter term and emergency leadership needs.
Here, the CEO’s role is to provide insights about any internal candidates and their readiness to step into the CEO role in an emergency. But, once an emergency occurs or when the board concludes that it must quickly make a leadership change, it may no longer be appropriate or prudent for the CEO to have a role in the process.
When there is any hint of a crisis—and, thus, the risk of eroding investor confidence in the ongoing leadership and performance of the company—the board should quickly move to install capable, interim leadership, activating the process to identify a permanent successor, if need be.
One interesting trend that has been noted in the past year or so is for boards that are thrust suddenly into an unplanned succession scenario to appoint an interim CEO. There are clear benefits to this approach. Such an individual—perhaps a respected director with CEO experience, or even the former CEO—may be identified and designated by the board as part of its own planning, just in case a situation arises where the board needs an immediate CEO replacement. With the company in capable—if temporary—hands, the board then has the luxury of finding a permanent replacement without rushing to fill the spot and possibly skipping key steps in the recruitment process.
Some interim CEOs become permanent CEOs, but that does not have to be the case.
Some critical factors
For succession planning to succeed, there must be a perception of transparency—and that the plan, in however remote ways, applies to everyone.
Lack of communication regarding the objective of the strategy, conflicting agendas and the need to please everyone prove detrimental to the exercise.
A critical factor in ensuring the success of a succession strategy is belief in the system, accepting that the process is a fundamental and ongoing board responsibility, closely tied to management development.
Another factor is clarity about the CEO’s role versus the board’s. The board’s succession planning efforts should be led by a director who is respected both by the CEO and fellow directors, and has the necessary clarity about the CEO’s role. It is also crucial that directors and the CEO clearly understand the company’s direction over the next several years and articulate those priorities and plans in the same way. Understanding the strategy is an important step in helping to define the specifications for the next CEO, who will help to execute that strategy.
CEO succession is now becoming institutionalized at many companies as a far more complex, far-reaching and rigorous process than it was in the past. That more leading companies are anticipating the inevitable departure of the CEO—whether sooner or later, planned or unplanned—and addressing their succession needs should instil greater confidence in investors.
While the board should be charged with the ultimate responsibility for succession planning, CEOs are indispensable to the process. The extra work required to clarify roles and responsibilities of the CEO and the board should be well worth the effort.
Anjali Bansal is a consultant in Spencer Stuart’s Mumbai office, and leads the India practice for the firm. The article contains inputs from an in-house white paper by Spencer Stuart consultants Jim Citrin and Tom Neff, USA
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