New Research Spotlights CEO Succession Challenges

“Who should be the next CEO?” is a headline few boards would like to see referencing their company atop the financial dailies. It often suggests a failure in succession planning. There may be a number of reasons for this—from inadequate or antiquated formal plans, to unexpected departures and difficulty to agree on a successor profile. Wells Fargo & Co., HBO, and others have encountered some of challenges, but they do not stand alone. All public companies have been put on notice by BlackRock and others on the investor side, who now have an increased focus on effective succession planning.

The recently released Governance Challenges 2019: CEO Succession report highlights the significant and growing importance this challenge for board. Succession planning was also a key theme of our 2018–2019 NACD Public Company Governance Survey and its private company counterpart.

Data from these surveys reveal that directors now regard CEO succession planning as a more important improvement priority than they did two years ago. What are boards doing to strengthen their practices in this critical governance area?

Several findings stand out:

• Public company boards are more focused on long-term succession planning now than in years recently past. This year, 80 percent of public company respondents to the survey reported discussing long-term (three to five year) CEO succession plans in the previous 12 months. This is a 20 percentage point increase compared to two years ago when 60 percent of directors reported to NACD that their boards used this time horizon. For public companies, this emphasis on long-term succession planning may be part of a broader shift of board focus toward long-term strategy and value creation. For example, 45 percent of public company boards now discuss their oversight of long-term strategy with institutional investors.
• More boards are making emergency plans in case of a sudden CEO departure. Despite the existence of robust succession plans, sudden, unexpected CEO departures can create significant challenges as both boards and staff adjust to new leadership. Two years ago, 59 percent of public company directors reported that they had identified an individual who would serve as interim CEO in case of an emergency. This year, that number rose 15 percentage points to 74 percent.
• Challenges remain in building an internal leadership pipeline. Both public (74%) and private (52%) company directors reported that maintaining a robust leadership pipeline of internal talent is the most challenging aspect of CEO succession planning. This was followed by developing a long-term succession plan (50% public, 46% private), and aligning succession with the strategic needs of the organization (38% public, 38% private). Finally, fewer boards surveyed have formal written CEO succession plans—a 13 percentage point drop from 36 percent in 2017 to 23 percent this year. The absence of such a plan can make it difficult to maintain a strong pipeline of candidates.
• Boards see room for improvement in CEO succession planning. Despite recent improvements, further enhancing the succession planning process remains a priority for many boards. Fifty-six percent of public directors report that CEO succession planning is an area where improvements are important or very important over the next 12 months. Fifty-two percent of private directors report the same.
• Private-company boards lag behind in both long-term and emergency succession planning. Compared to their public company peers, private-company directors were less likely to consider long-term succession planning or to have identified a person to serve as an interim CEO in case of an unexpected departure. Sixty-eight percent reported that they had discussed long-term succession planning, a figure 12 percentage points lower than the average public-company director response. Further, 63 percent of private company directors indicated that they had identified an individual to take the helm of the organization in the case of a sudden executive departure—11 percentage points lower than the figure for public company board members.

Although CEO succession planning is a long-standing core board responsibility, directors of both public and private companies clearly feel more urgency to review and improve upon their boards’ processes in this area. To improve the rigor around CEO succession planning, NACD suggests that directors and their boards take several action steps. Three of them are highlighted below.

1. Integrate succession planning into long-term strategy. Rather than treating CEO succession as a standalone process, boards should integrate the conversation into long-term strategy discussions. The succession process should be viewed as a full-board responsibility with the nomination and governance committee taking the lead. This can help ensure that the process is aligned with the evolving needs of the organization.
2. Pressure-test the CEO succession pipelines. Evaluate existing internal and external succession pipelines to ensure that they remain fit for purpose. Pipelines should be flexible enough to match candidates to the current and future needs of the organization. Candidates should reflect the evolving needs of the organization. The pipelines should not be blocked by candidates who do not see a true opportunity to advance to the CEO chair, nor should the pipelines leak, allowing preferred candidates to leave before an opportunity is available.
3. Identify and mitigate risks in the succession process. A thorough evaluation of the goals, objectives, and process involved in CEO succession planning and transition can help to highlight potential trouble spots and allow the board to take action before these problems become true challenges. These challenges may include potential destabilization of the leadership team during a transition or a pipeline of talent that no longer reflects the needs of the organization. Unexpected CEO departures can be especially destabilizing. For this reason, boards need to work to ensure that they have a potential temporary successor in mind.

Governance Challenges 2019: CEO Succession was produced in collaboration with our five strategic-content partners, each offering a valuable perspective on CEO succession to help directors ensure their CEO succession-planning processes stay fit for purpose in a dynamic environment.

• CEOs in the Crosshairs of Activist Investors: Considerations for Boards, Heidrick & Struggles
• Championing Successful CEO Succession, KPMG Board Leadership Center
• The CEO as ‘Culture Champion’, Mercer/ Marsh & McLennan Companies
• The Compensation Committee’s Role in Strategic Succession Planning, Pearl Meyer
• Planning for CEO Succession, Sidley Austin LLP

Looking to strengthen your CEO succession process? Visit NACDonline.org to log in and download the complimentary report, which is available to members and non-members.