How can organizations ensure that they manage their leadership transitions in the most effective way?

An executive leadership transition is one of the most high risk processes that a business has to undertake. It can be time consuming and expensive, and without clear communication and decisive execution, uncertainty can emanate. CEO succession planning is a significant governance issue, but the consequences of mismanaged succession can also have a large impact if it isn’t extended through an organization’s other key leadership positions. If the effect of having a calm, experienced leader is akin to navigating a ship successfully through increasingly unpredictable economic waters, the risk of mismanaged succession planning is that you may lose people overboard. Employees can become disengaged due to the uncertainty, shareholders will begin to question the future and security of their investments, and customers may question the direction of the business.

A 2014 report from the Institute of Economic Development (IED) and Stanford University’s Rock Centre for Corporate Governance revealed that 40% of the participating organizations do not have a formal talent development program for the senior executives below the CEO, while 93% of respondents do not assign a board member for mentoring of senior executives below the CEO.

However, this is beginning to change, according to Nicola Brazil, Leadership Advisory Services Leader, Europe, Middle East, Africa & Asia Pacific at Spencer Stuart. “Our clients are recognizing that there are three forms of succession: logical, planned succession, accelerated succession and emergency succession,” she says. “We’re seeing a focus on getting ready earlier. Obstacles to effective succession planning can be both structural and cultural, so it is important to start as early as possible. The best CEOs that I have worked with recently are those who start the succession planning for their own role right at the start of their tenure.”

Aligning succession planning with business strategy

Yet there is more to sophisticated succession planning than just identifying a list of individuals who could step into a certain role under a variety of different circumstances. In order for the leadership transition to be effective, a succession plan should be aligned with the overall business strategy. This requires an audit of internal talent to identify who the high performing and high potential employees are, and what development opportunities they need in order to be truly ready to execute the business strategy.

While this has always been the case, we currently stand at the precipice of a much talked about generational shift. Not only will the talent pool for qualified executives be smaller in Generation X than it was in the Baby Boomer generation, but there may be different requirements for developing this generation of leaders. For example, we know that Gen Xers are less loyal to one company than Baby Boomers were. Therefore, effective succession planning also represents an opportunity for proactive retention of high potentials.

In a recent article about multigenerational succession planning, Judy Stubbs, Vice President at Pearson Partners, wrote: “Company leaders should take into account the values, motivations and drivers for mid-career executives in this age band, because there are some distinct generational differences in their work styles and motivators…In many cases, Gen Xers value freedom and autonomy to a greater extent than either the boomers or millennials. Like the boomers, they are hard workers while still valuing family and personal time, and like the millennials, they appreciate an enjoyable workplace along with flexible work hours and location.”

Understanding these subtleties between generations could be crucial in ensuring that the individuals identified in an organization’s succession plan are aligned to the business strategy in a way that is practical, actionable, and engaging for the individual. Without doing so, there is a risk of a talent drain as these high performers look for opportunities that are more aligned to their personal priorities and working preferences.

Looking outside as well as in

The board has a governance requirement to oversee CEO succession and the management of succession pipelines for other key executive positions can be handled with proactive and effective talent management programs. It is also important to develop an understanding of how internal successors compare to potential external successors. According to the IED and Stanford University report, 25% of companies surveyed turned to an external candidate when identifying a new CEO.

Justus O’Brien, Co-Leader of Russell Reynolds’ CEO and Board Practice, is an executive search consultant who also provides advisory support around succession planning. He says: “When we talk about talent assessment at these levels, one of the clear advantages of working with an executive search firm is that you can assess internal candidates and benchmark them against external candidates. Most of the time, you have to do that benchmarking without raising alarm, which is where it becomes vital to bring in an executive search consultant who can reach out to individuals in a confidential way.”

Executive search firms have bolstered their ranks with dedicated leadership consulting and succession planning experts, providing them with a unique position in the market. They possess a deep understanding of the leadership talent pool, serving as trusted advisors to sitting CEOs and increasingly understanding the dynamics at play within organizations – whether that is between the board and the CEO, or the CEO and the rest of their executive team. Spencer Stuart’s Brazil explains that executive search firms have a strong foundation due to the knowledge of executive talent, and when that is supplemented with the specialist skills that leadership consultants possess, it means that the firms are able to handle the process sensitively and discreetly. “The challenge with succession planning is to objectively assess internal options,” she says. “Who does that assessment if it is done internally? How is it truly objective? We have deep relationships with our clients and design succession planning that provides credibility for internal candidates and benchmarks them against what is available in the marketplace.”

Using succession planning to be proactive on diversity

In addition to considering generational differences and benchmarking internal candidates against external executives, proactive succession planning also has a benefit in terms of tackling the lack of diversity in executive ranks and at board level. In recent years there has been an increased focus on diversity in business, often beginning at the top of an organization with the board. The involvement of governments and the threat of quotas may seem heavy handed to some people, but it has proved to be a catalyst in many countries across Europe, as well as in Australia and New Zealand. As progress begins to be made, attention naturally turns to how organizations can ensure that this change is sustainable.

Succession planning, when it is matched with the business strategy as mentioned above, is a powerful way to introduce diverse individuals, skills and perspectives into the executive ranks. The very nature of succession planning means that you identify a group of individuals that could potentially fulfill the role in question, and then provide them with the development and growth opportunities required to ensure they are ready to take on the responsibilities of the role when the time comes. It is sometimes said that there isn’t a deep enough talent pool of diverse candidates, but by being creative with the individuals an organization considers, there is an opportunity to address this concern amongst the next generation of leaders.

Ultimately, succession planning requires an organization to take their executive talent risk as seriously as they take their financial risk. It is often said that the link between strategy and execution is people, and effective succession planning gives organizations a pool of qualified talent to choose from that is aligned to the organization’s strategy and ready to step up when required.

Download Issue Six