Leadership development: Why you need assessments

By Josh Smith

Whilst I cannot claim to have operated within the CEO practices of Korn Ferry or Egon Zehnder, where large, listed companies are knocking on the door for their assistance, I have worked on several CEO successor recruitment plans.  Most recently this included working with the Executive Board at a Private-Equity backed, multi-billion-euro business, that required support solidifying their CEO succession plan and their talent pipeline.

What is succession planning?

According to CIPD, succession planning focuses on the identification and growing of talent to fill leadership and business critical positions for the future. The aim of it, is to prepare an individual/s to be able to fulfil key roles effectively should the current person in that role leave the organisation.

Why is succession planning so important?

Succession planning is one of the primary drivers for the success, growth, and legacy of all organisations.  Many companies overlook the need to consider succession planning until too late, this is most evident within Small-to-Medium Enterprises (SMEs).  An SME is classified as any company with fewer than two hundred and fifty employees.  At the other end of the spectrum, badly managed C-Suite transitions in large corporates across the FTSE100 and S&P500 have accounted for more than a trillion-dollar loss, per year (Fernandez-Araoz et al., 2021).

How can succession planning be carried out more effectively?

The obvious answer is to plan leadership changes before they arise, i.e., when the CEO chooses to resign, retire or depart.  When there is a sudden exit, and the organisation must react to the unplanned change, is typically where things go wrong for future share price, and revenue.  Faleye (2017) found that when businesses failed to prepare for succession planning it annually cost shareholders $870 billion globally.

To prevent this happening in your company there are several actions the CEO and Board can take:

  • Create a Shadow-Board headed up by a C-Suite executive but occupied by high potential, or high potential employees.
  • Create additional seats at the Executive Board for high potential Directors, or Senior Employees who are not yet on the Exec Team but could gain valuable experience being there.
  • Nominate a member of the Non-Executive Committee or Chair to handle the CEO succession planning, removing the burden from the CEO and ensuring it is a well-planned transition.
  • Finally, ensure that the HR function has a keen focus on learning and development within the organisation, so those “highflyers” are spotted early and developed.

Several FTSE listed businesses which did not follow these rules, were replacing the CEO’s successor within twelve months of appointment.  Even those that were supported by global executive search companies, failed to make the right selection, and were left having to rescue share prices with another CEO appointment.

Who is the right successor?

When it comes to succession planning a business has two options, promote from within or appoint an external candidate.  Previous research (Cannella, 2020) indicates that when an organisation is performing well, but appoints an outside individual as the next CEO, return on assets declines.   Equally, when an organisation is underperforming, promoting from within does not improve the declining performance.  Doubtless, there are examples which disprove this research, such as Citigroup replacing Vikram Pandit in 2012 with Mike Corbat, who was being promoted from Chief of Operations EMEA to CEO.  Corbat turned around a declining business and share price and was a favoured promotion by analysts.

To maximise the incoming CEO’s chances of success, succession needs to be well planned.  It needs to start the moment a new Chief Executive is appointed, which may sound too soon, but it is not.  The first place to look is on the Executive Board or Director-level for a pipeline of successors.  This pipeline should be constantly monitored by Non-Executive Director (NEDs), and if the requisite bench strength does not exist, the business must hire externally into that C-Suite team.  The HR function then needs to play a more involved role with learning and development across the organisation to prepare future Executives. NEDs or the Chair will have to play a more involved role in this pipelining activity and working closely with the CEO to ensure they are developing their heir apparent.

How can an Executive Search team help?

Executive Search firms can help support a company’s efforts; they require Consultants with the right experience and insight who can help identify the competencies needed in the next CEO, conduct in-depth interviews, and source the appropriate references to help aid the selection process.  Search firms can and should compare internal candidates with external options, providing a transparent but comprehensive process for their clients.  If this is something your business needs help with, please reach out, as Gibson Watts is well-placed to support.

Written by Josh Smith

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