2014 Senior Executive Succession Planning

IED and Stanford University Research & Statistics By David Larcker, Scott Saslow
Mar 06, 2014

IED and Stanford University Rock Center and Graduate School of Business 2014 report on Senior Executive Succession Planning. The following is from the Executive Summary.

“The corporate leaders we interviewed all believe that succession is vitally important today, just as it has been in the past,” said Professor David Larcker of the Stanford Graduate School of Business. “Still, the majority do not think that their organizations are doing enough to prepare for eventual changes in leadership at the CEO and C-suite levels, nor are they confident that they have the right practices in place to be sure of identifying the best leaders for tomorrow. These findings are surprising, really, given the importance that strong leadership has on the long-term performance of organizations. Research shows that companies with sound succession plans tend to do better.”1

“Most company directors greatly underestimate the difficulty, time, and cost associated with CEO and C-suite succession planning,” adds Scott Saslow, founder and CEO of The Institute of Executive Development. “They fail to recognize the need for a strategy for this critical business process, they haven’t had great exposure to what other organizations are doing, and they haven’t thought through what their own organization should be doing given its unique set of circumstances. This is more than lost upside opportunity. It puts many organizations at risk of having unstable executive leadership.”

In the fall of 2013, The Institute of Executive Development and the Rock Center for Corporate Governance at Stanford University conducted in-depth interviews with executives and directors at 20 companies regarding their succession and executive development practices. Key findings include:

Companies do not know who is next in line to fill senior executive positions. Organizations often do not make the connection between the skills and experiences required to run the company, and the individual candidates—both internal and external—that are best-suited to eventually assume senior executive positions. When a list of possible successors is compiled, it is too often narrow in scope and therefore not relied on when a succession event actually occurs.

Companies do not have an actionable process in place to select senior executives. Companies recognize the importance of a thorough and rigorous succession process for both the CEO and senior executive positions; however, most fail to create one. The problem tends to be cultural: the majority of companies do not have honest and open discussions about executive performance, nor do they allocate sufficient time to the process of identifying and grooming successors. 

Companies plan for succession to “reduce risk” rather than to “find the best successors.” Succession is fundamentally a preparation exercise for the future. However, respondents are more likely to view this activity in terms of its potential to reduce future downside risk rather than producing shareholder value benefits from the identification of strong and appropriate leadership. This is due in part to the scrutiny of regulators, rating agencies, and other market participants that emphasize the risk management and loss minimization aspects—rather than value creating elements—of succession.

Roles are not defined and often they are not followed. Companies agree that succession planning involves the combined efforts of the board of directors, the senior management team, and support staff such as the human resources department. Most, however, do not structure an evaluation process that formally assigns roles to each of these groups and requires their participation. Furthermore, the key performance indicators of an executive’s performance often do not measure his or her effectiveness in grooming and mentoring direct reports. There are few organizational metrics in place to determine how well the company is managing succession overall.

Succession plans are not connected with coaching and internal talent development programs. Succession planning and internal talent development are treated as distinct activities rather than one continuous program to gradually develop leadership skills in the organization. Because of this, the board of directors does not have sufficient insight into the skills and capabilities of the senior management team and is not prepared to determine which executives are most qualified to replace an outgoing CEO or C-suite member when a succession event occurs.

Governance & Risk Management, Talent Management
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  • May 09, 2014 10:13 pm