02 October 2017 by Lucy McClements
Proper succession planning ensures the right people are in place should the unexpected strike.
The stakes may be high, from both financial and reputational perspectives, yet this summer’s FT–ICSA Boardroom Bellwether found that only half (53%) of FTSE company secretaries believe their executive pipeline had a sustainable pool of diverse talent.
Our experience carrying out independent board evaluations echoes the lack of focus many boards give to planning for orderly succession, both at board and senior executive levels.
The UK Corporate Governance Code requires listed companies to comply or explain with the principle of ‘orderly succession of appointments to the board and to senior management’.
Although non-listed entities could be forgiven for thinking they can focus their efforts elsewhere on the boardroom agenda, succession planning remains an important element of helping every board (and senior management team) be effective.
After all, failure to plan for the orderly succession of your leadership team can mean your organisation is left without the right skills and experience to succeed – whatever your firm’s size and ownership structure.
Achieving smooth leadership succession can deliver significant returns, including the transfer of organisational know-how and maintained continuity in leadership culture.
More importantly, it allows organisations to deploy strength from the bench to capitalise on emerging business opportunities, or to mitigate the risk from a sudden absence of leadership or unexpected crisis.
However, the reality is that many companies make inadequate succession plans. This leads to lost productivity, negative culture and morale, and subsequent competitive decline.
Research in the US by Strategy&, the global strategy consultancy from PwC, in April 2015 found that companies forced to replace their CEO through poor planning forego on average $1.8 billion in shareholder value when compared with those that implement leadership changes through a planned – and thus controlled – chief executive succession process.
The problems often begin with failure to align succession planning with the company’s culture, business objectives and longer-term strategy.
The right leaders for today may not prove to be the ones needed for tomorrow, and developing a pool of talent with the skills and experience to allow an organisation to thrive in the future can take significant investment over several years.
Combine this with the inherent unpredictability of individual leaders and their frequently changing roles, and it is perhaps unsurprising that many boards conclude that the effort involved simply outweighs the potential benefits.
“The right leaders for today may not prove to be the ones needed for tomorrow, and developing a pool of talent can take significant investment over several years”
On a more fundamental level, it is easy to forget that high-quality succession planning creates internal candidates that fail to make the grade when that sought-after promotion finally becomes available.
The willingness and ability to handle such individuals in a sensitive and honest fashion can present uncomfortable distractions (and potential collateral damage) during an otherwise positive appointment process.
Then there is the issue of managing the current incumbent.
We know that emotional intelligence can be in short supply in the boardroom. However, taking a proactive and thoughtful approach to managing the potential ego of any senior leader is vital if the individual is to perform at their best while still in place, and depart amicably when the time comes to hand the baton over.
As well as this, it is not always as clear who should be driving the various aspects of succession planning: a potential candidate’s line manager, HR, the chairman? Moreover, who should – and should not – be involved in these sensitive discussions?
This is where the company secretary can play their part in scheduling constructive board discussion at the most appropriate time, with all the relevant supporting cast and information available to aid high-quality decision making.
As far as smaller companies are concerned, it is neither practical nor desirable to have fully-equipped successors in place to cover all leadership roles. Inevitably at least some successors will need to come from outside the organisation on either a temporary or permanent basis.
Nevertheless, it remains important for smaller organisations to consider how they would mobilise their existing resources to cover critical tasks that need to be done to secure the company’s short-term survival.
A very simple strategy is to have two or more individuals capable of completing any key task. This has the practical advantage of providing cover for those everyday short-term absences that are part of running any business.
External pressures also need to be managed carefully. Many senior leadership teams have a tale to tell of how a parent company failed to listen to their needs by parachuting in an unsuitable leader from elsewhere in the wider group.
One approach to succession planning is to seek to close the gap between the leadership talent you currently have and what is needed to ensure the company achieves longer-term success.
First, articulate the optimum profile of skills and expertise needed for any particular role in the context of delivering long-term strategy. This is not just technical knowledge, but also about identifying the broader mix of leadership and behavioural competencies required.
“There will always be companies that seek to ‘tick the box’ by diligently documenting and following a process”
Second, assess the talent in your existing leadership development pool, including their readiness and willingness for promotion. This is not as easy as it might first appear. To achieve this, many turn to a trusted partner that can provide an objective assessment.
Finally, develop a plan to close any gap between the current and desired situation. This might mean targeted learning and development interventions, or supporting a newly-promoted individual during the transition phase with coaching or mentoring.
The secret here is to be creative and engage identified successors in robust development experiences that will build leadership skills while stretching them in their current roles.
There will always be companies that seek to ‘tick the box’ by diligently documenting and following a process.
Others will choose to engage with the more subjective cultural and strategic elements that need to be confronted for succession planning to have the best prospect of a positive outcome.
Do not underestimate the value of transparency and quality discussion – both with an individual and on a collective basis.
These can yield the greatest benefits, particularly when the succession debate generates tangible actions that are owned and carried out. In this sense the process creates the necessary conversation and reflection for good results.
However, even an excellent process, followed with the greatest care and attention to detail, does not guarantee success. Nevertheless, it appears organisations with the most effective succession planning practices tend to:
In the context of disruption to existing business models, increasing regulatory scrutiny and demands from stakeholders, every company aspires to high-quality decision making, better business outcomes and ultimately improved value for stakeholders.
A well-executed succession plan is just one component to achieving this. With so many different factors in play, not all of which can be controlled or anticipated, companies would be well advised to take a more proactive approach. Plan ahead.