The last decade or so has been witness to far-reaching changes in the global business environment. One of these is the emergence of corporate governance as a means to benchmark corporate performance. And this has manifested in the form of stakeholder demands for transparency and accountability. Boards today are held to account as never before, and their expectations of a chief executive have been raised even further.
Illustration: Malay Karmakar / Mint
However, despite the critical importance of CEO succession, many boards find themselves unprepared when the inevitable actually comes to pass. As a result, what should be an orderly, well-planned transition often turns into a firefighting exercise, more akin to crisis management than far-sighted stewardship.
At the same time, increasing responsibilities and the ever-increasing need to “fit” within the organization have made CEO selection criteria more stringent, making it even more challenging to define leadership strategy.
This has made systematically planning for a capable successor to the CEO so critical to the ongoing success of the enterprise that it is no longer deemed prudent to leave it completely in the hands of the CEO, as it was historically.
Today, succession planning is the shared responsibility of the CEO and the board, though it should ultimately fall squarely within the board’s realm. This is because succession planning is considered to be one of the highest priorities of a board, and is increasingly scrutinized by stakeholders as well as outsiders.
There is no one answer to creating the “right” succession strategy; what is required is a focused, long-term approach.
General Electric Co. (GE) is one company that has been able to grow leaders effectively. When GE announced that the successor to Jack Welch would be selected from a shortlist of three, successors to each of these potential successors were also nominated.
However, while everyone agrees that succession planning is critical for the success of an organization, in India, implementing a formal succession planning strategy is a relatively new practice, especially as it relates to an entire organization. The need to avoid dissent still prevents companies from including objectivity and transparency in succession planning. However, there are encouraging signs from some of the larger organizations, particularly those that believe in hiring from their own ranks.
Hindustan Unilever Ltd has its “listers” and Larsen and Toubro Ltd, its “stars”, while companies such as Zydus and Pfizer Ltd have identified “Six Core Competencies” and “Leadership Behaviours”, respectively, that help determine future leadership potential. By identifying these executives early on, their boards have been able to track performance as well as equally important “soft” skills, enabling them to make informed decisions at the required time.
The Tata group set up a governance council that made CEO succession its primary concern, as also formation and evaluation of the board of directors of the company.
Infosys Technologies Ltd is currently working towards a structure that tightens the star performance benchmarks and differentiates between star versus good versus average performers, and identifies the top 15% of employees.
Succession plans are also given particularly intense focus at deal-minded companies or those owned by private equity (PE) firms. CEOs at PE firms tend to be more responsive to what the board wants for a couple of reasons: Typically, there are fewer shareholders and there is usually an exit strategy. And, since PE investors tend to be more involved in the day-to-day operations, they have the right to drive the succession issue.
One of the most challenging tasks is specifying the criteria the next CEO should meet. Some companies have also looked at communicating internally the core competencies they believe future leaders need to possess. So, whether it is entrepreneurship, networking skills or people development, this helps companies identify a talent pipeline that can then be developed into future leadership.
Many boards, however, confine themselves to generalities such as the ability to build a team or the ability to manage change. Some concentrate largely on technical skills, many a time overlooking “soft” skills such as the ability to listen, to effectively communicate and support employee empowerment.
In today’s dynamic environment, selection criteria need to grow beyond past track record in delivering measurable performance to a balanced approach that takes into account the requirements of the job in a holistic manner.
One of the critical issues that also needs careful consideration is the handling of the transition period, especially in emergency situations, where unexpected events result in the need for a new CEO. Instead of setting up a run-off between two or more individuals, it is advisable to have a sitting board member who could step in as CEO on a temporary basis.
An approach used by astute boards is to have an ex-CEO on the board who would be qualified and inclined to step in until a thorough search could be completed. In this manner, there is no pressure to find an immediate successor in emergency solutions, and decisions can be made more objectively and by staying true to the succession strategy that has been outlined previously.
Succession planning can be a complicated bit of choreography and, therefore, it is a good idea to map out specific roles and responsibilities for the board and the CEO to ensure a thorough approach, and at the same time, avoid any overlaps.
While there are myriad ways in which CEO succession may play out, for planning purposes, it is prudent to cover and address the broad categories below, where the degree of CEO involvement varies:
Logical succession: A core plan based on the age and future plans of the current CEO, which includes internal and external candidates and plans for the development of the internal group.
Emergency succession: A contingency plan developed to deal with an unexpected event that could force a sudden succession, including a health crisis or the CEO’s departure to another company. This plan would identify an acting CEO, such as a board member, a senior executive or a retired executive, who could step in immediately.
Accelerated succession: A plan that the board would be able to implement if it has concerns about the performance of the company and/or its relationship with the CEO.
The responsibilities of the board and the CEO are what will need to be defined for these multiple situations to ensure a smooth transition for the next rung of leadership.
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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