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Few Companies Prepared to Replace CEO

Few Companies Prepared to Replace CEO
Most businesses don't prepare for a CEO's departure. / Credit: Help wanted image via Shutterstock

Do you know who will run your company when your CEO leaves? Probably not.

A new study from the Stanford University Rock Center for Corporate Governance and The Institute of Executive Development discovered that only 46 percent of businesses have a formal process for developing successor candidates for key executive positions. Additionally, only 25 percent have an adequate pool of ready successor-CEO candidates at their companies.

"These findings are surprising given the importance that strong leadership has on the long-term performance of organizations," said David Larcker, one of the study's authors and a Stanford Graduate School of Business faculty member. "The corporate leaders we interviewed all believe that succession planning is vitally important. But the majority do not think that their organizations are doing enough to prepare for eventual changes in leadership, nor are they confident that they have the right practices in place to be sure of identifying the best leaders for tomorrow." [Chief Engagement Officer? 7 Social Media Tips for CEOs]

The research shows that part of the problem comes from a lack of preparation. Organizations often fail to make the connection between the skills and experiences required to run the company and the individual candidates who are best suited to eventually assume senior executive positions. In addition, rather than looking for someone from inside the company, some organizations believe it is simpler to choose an outsider. This way, the organizations believe, they can outsource the succession process to a recruiting firm who will source candidates, conduct assessments and facilitate a recommendation.

Many of the businesses surveyed view succession planning in terms of its potential to reduce future downside risk rather than an effort to produce shareholder value-benefits through the identification of strong and appropriate leadership.

"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," said Scott Saslow, founder and CEO of The Institute of Executive Development. "This is more than lost upside opportunity — it puts many organizations at risk of having unstable executive leadership."

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. However, most of those surveyed failed to structure an evaluation process that formally assigns roles to each of these groups and requires their participation.

Businesses run into an additional problem when they treat succession planning and internal talent development as distinct activities, Saslow said. Instead, businesses should treat these processes as one continuous program to gradually develop leadership skills in the organization.

To improve organizational succession and talent-development programs, Saslow and Larcker offer several recommendations, including:

  • Assign ownership and roles: Organizations frequently fail at succession because they do not assign ownership and accountability to the process, Larcker said. An independent chairman or experienced outside director should take primary responsibility, he said. Ideally, this will be someone with considerable experience guiding CEO-succession efforts. Organizations should assign specific roles to other board members, the CEO, senior executives and support staff, holding each accountable for measurable results.
  • Cast a wide net: Because an organization and its strategy constantly evolve, the skills needed to run the organization in the future might change. Companies should evaluate executive talent in terms of its ability to meet future — not just past or current — needs.
  • Be comprehensive and continuous: Succession is not episodic. Treat it as a continuous practice, whereby management and the board prepare for transitions at any time and at multiple levels throughout the organization.
  • Get strategic assistance when necessary: Companies should survey the practices of other corporations and integrate those policies that are best suited to the business' current structure and situation.

The study was based on in-depth interviews with executives and directors at 20 companies regarding their succession and executive-development practices.

Originally published on Business News Daily.

Chad Brooks

Chad Brooks is a Chicago-based writer and editor with nearly 20 years in media. A 1998 journalism graduate of Indiana University, Chad began his career with Business News Daily in 2011 as a freelance writer. In 2014, he joined the staff full time as a senior writer. Before Business News Daily, Chad spent nearly a decade as a staff reporter for the Daily Herald in suburban Chicago, covering a wide array of topics including local and state government, crime, the legal system and education. Chad has also worked on the other side of the media industry, promoting small businesses throughout the United States for two years in a public relations role. His first book, How to Start a Home-Based App Development Business, was published in 2014. He lives with his wife and daughter in the Chicago suburbs.