Jul 13, 2016

Six Steps to Best-Practice Succession Planning

From intense media scrutiny to a volatile financial environment, organizations face some of the biggest challenges in decades. But there’s one other concern getting little media exposure. Yet it represents a critical issue over the next several years: the exodus of top leadership.

Why the exodus? Retirement, termination, and an improved job market to name a few. As noted in a recent post of ours, Why Companies Lose Their Best Talent─How To Hold Onto Yours, across the country, CEO departures surged to a 24-month high in January, up 19 percent, as some 131 C-suite leaders announced they’re leaving their posts, according to Challenger Gray & Christmas, Inc.

Are you prepared to face the loss of your leadership team if it packs its bags and heads out the door for a better opportunity?

Experience shows that failing to create and follow a succession plan jeopardizes business continuity, employee morale, shareholder relationships, and stock value. Worse yet, not having a succession plan can result in a loss of customers, and an increased risk of acquisition.

Organizations that incorporate succession planning as part of its critical governance are better positioned to retain a strong management team and remain industry leaders in the future. Of the 28 million businesses in America1, 90 percent of which are closely held, less than 30 percent have a succession plan2. Most companies don’t give succession planning the attention it deserves.

But it’s not that difficult to do.

We believe that within six key steps, you can create a successful succession plan.

1. Adopt a Preemptive Attitude

It pays to be proactive when it comes to developing a succession plan. Don’t wait until a vacancy occurs to start talking about your succession plan. You should be planning at least three to five years in advance of a transition.

Don’t make a quick decision on an internal candidate who isn’t ready for the job or may not be the right choice for the role. On the flip side, a knee-jerk reaction to an external candidate who is unaware of your organization’s long-term needs could also prove to be a bad decision.

Start your planning early. Adjust it as needed so if someone leaves, you’ll have your plan in place.

2. Stay on Strategy

The past isn’t always your most reliable predictor of your future success. Don’t fall back on your previous selection criteria; succession planning needs to be part of your overall strategic planning process.

By keeping your eye on your strategic plan, you can identify the leadership traits that will be needed to achieve your goals. Use the current set of criteria to access and develop leadership so that when a vacancy occurs, your organization will have identified your true needs and will be ready to assess your internal and external candidates against those needs.

This approach enables you to take a proactive stance to identify and address any individual or organizational skill gaps and develop your leadership team.

3. Don’t Plan in a Vacuum

The best succession plans are never based on the opinions of a handful of people. Even though the board is ultimately responsible for succession of the CEO and directors, the process is often overseen by the governance or compensation committees.

Expand your planning to include the current CEO and members of senior management who can provide valuable insights on your organization’s leadership needs. Don’t rule out outside facilitators who can be helpful in conducting confidential interviews with board and management to access internal executives and identify qualified external candidates.

In our business, we commonly advise clients on the executive benefit programs that come into play in the retention and retirement plans of key executives, such as Nonqualified Deferred Compensation Plans and Supplemental Executive Retirement Plans.

These plans (and the accounting and funding of them) need to be reviewed to ensure that the objectives align with the strategy of a succession plan:

What is the departing executive owed when he exits? Does the incoming executive receive the same executive benefit? Does each executive receive the same plan or is it tailored? These and other critical questions require attention in a successful succession plan.

4. Match Successor to Your Needs

Customize your plan so it works in identifying the key talent needed for your organization and your corporate structure. Don’t assume that certain positions are a natural fit for a current opening.

Many organizations assume that the natural successor to the CEO would be its chief operating officer. But keep in mind, these two positions have decidedly different strengths. COOs focus on day-to-day internal organization operations while CEOs must be more externally focused. COOs tend to be more tactically driven while CEOs follow a more strategic vision. They work and think differently, so don’t assume that your COO is ready─or even wants—the top job.

Another mistake companies often make is to identify a successor too soon in the process. Carefully vet each candidate before releasing any information outside the organization. And then carefully manage the communication process to protect the organization and the potential successor.

5. Look Outside

Organizations don’t typically like change. That thinking naturally leads to organizations looking internally for candidates who can preserve the institution’s culture. Internal candidates tend to be less risky─you know what makes them tick; plus, they are less costly than external candidates.

But take an honest look inside your organization and see if your current leadership has the critical thinking and core talents you need to get your organization to the next level. An external candidate may bring a different set of capabilities and a fresh perspective on your organization that is more aligned to your future needs.

Regardless of whether the candidate is internal or external, ask each to present to the board their plan for addressing the organization’s strategic challenges and plan for the future. You’ll be able to interact with different candidates and view their strengths and compare their strategic vision with their competition.

6. Build Leaders

Leaders don’t just appear. Organizations need to invest in developing and assessing the skills of their most promising executives. Take the time to understand the strengths of your current leadership team, and then create opportunities that will prepare them for their next position within the organization.

Besides building organizational bench strength, leadership training, and development programs provide meaningful opportunities for career growth that promotes the type of positive company culture that attracts and retains top talent.

Several people need to be accountable for ongoing career development–from the board, the CEO and human resources. This approach ensures that the process defines critical competencies, skill and knowledge needed for leadership roles and continuously develops employees in key areas.

Identify high-potential employees early in their careers and provide them with the challenges and training to prepare them for larger roles. You’ll secure your future by adopting this approach to retention, as well.

A Critical Element of Business Success

Succession planning is an ongoing process of dialogue and review that’s continually re-evaluated, adjusted and updated to suit your organization’s evolving needs. Succession planning must sit at the center of any annual strategic planning done within your organization.

With so many challenges facing Corporate America, it is imperative to be proactive when developing a succession plan that works. Organizations that invest the time and effort needed for effective succession planning will have the strongest likelihood of sustained success.

To Your Success,
Trevor Lattin, Managing Director
Phone: 949-514-8738
Cell: 949-306-5617
Email: tlattin@ebs-west.com