Understanding CEO Succession Planning

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In the past few weeks, NACD Directors Daily has covered numerous stories of companies left in a lurch after an abrupt CEO departure. In many well-recognized companies, the lack of formal CEO succession planning has been a frequent news item. This week, ITworld cited a recent survey by executive search firm KornFerry International, noting that while nearly all executives polled indicated CEO succession planning was “an important piece of the overall corporate governance process,” only 35% were prepared for the departure, either planned or unexpected, of their CEO.

NACD also includes questions regarding executive talent management as part of our annual Public Company Governance Survey. In 2010, 24.6% of respondents indicated CEO succession was a top priority for their board in the upcoming year. Since 2009, CEO succession has ranked in the top five of board priorities, an area that had previously languished in the bottom of rankings.

According to our research, the statistics in the aforementioned article only tell part of the story. Our data shows that companies have some form of succession planning. However, these plans may not always be formalized. When asked in 2010 about the components of their CEO succession plans, formal or not, over 90% of respondents answered the question. Most commonly, CEO succession plans include:

  • Development of internal candidates (70.6%)
  • Plans to replace the CEO in an emergency (69.1%)
  • Long-term succession planning (56.6%)
  • Engagement of an executive search firm to identify external candidates (21.1%)

There are many explanations as to why a company does not formalize a CEO succession plan. Company size is often a factor. By market cap, larger companies tend to have formal plans. These plans are also more likely to include programs to develop internal talent. Conversely, smaller companies, with fewer resources, are less likely to have development programs to create “bench strength.”

The takeaway is, in the face of increased shareholder scrutiny, boards should make an effort to strengthen and formalize their CEO succession plans. Directors should begin discussions on long-term succession planning three to five years before a CEO transition is expected, in order to develop and assess internal candidates. Plans should also provide guidance for an emergency succession situation. Having an established succession plan, a specific duty of the board of directors, can provide stability and clarity in what can be a volatile time for stakeholders.

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