How Strong Boards Orchestrate CEO Succession
CEO succession is the board’s No. 1 priority, and the time and effort dedicated to this task should reflect its critical importance. A well-orchestrated succession plan not only ensures continuity but also safeguards the organization’s future, according to the participants of a recent Directors Dialogue program held in Philadelphia, organized by Drexel LeBow’s Raj & Kamla Gupta Governance Institute.
Median tenure among S&P 500 CEOs had decreased 20% over the past decade dropping from six years in 2013 to 4.8 years in 2022 according to research by Equilar. In the first quarter of 2024, 15.1% of outgoing CEOs were in role less than two years according to Russell Reynolds’ CEO Turnover Index, up from an average of 9.6% since 2019. Since effective succession planning begins at least five years before an anticipated CEO transition, CEO succession planning is essentially a continuous process for many boards.
The participants noted several factors that can enable boards and directors to effectively manage the complex process of CEO succession. These include getting started early — often as early as five years; finding ways to integrate external talent; focusing on talent management; nurturing deep engagement by the board; paying attention to the organization’s culture; identifying the skills that future CEOs will need; enhancing the diversity of the leadership team; emphasizing management accountability for effective mentoring and career development; and board accountability for identifying the right candidates and setting appointees up for success.
Get Started Early
Start planning early for CEO succession by developing and implementing a robust framework for identifying internal and external candidates. Once identified, the board should have sufficient time to assess candidates’ potential through a critical lens to ensure the best fit for the organization’s future needs.
Integrate External Talent
Bringing in outside talent well before the transition ensures these individuals become insiders. Early integration allows them to assimilate into the company’s culture, build relationships and gain a comprehensive understanding of the business, thereby positioning them as strong candidates when the time comes for leadership change.
Focus on Talent Management
Talent management is far from a box-ticking exercise; it demands the board’s continuous focus and attention. The board should champion and invest in long-term succession planning, executive development, and assessment. This includes discussing individual members of the talent pipeline in every committee meeting, ensuring a personalized and in-depth understanding of potential leaders.
Deepen Board Engagement
Getting to know the leadership team beyond formal settings is crucial. The board should encourage the CEO to provide informal, unstructured opportunities for interaction with the executive management team. This deeper engagement fosters a clearer picture of each leader’s capabilities and potential.
Understand the Organization’s Culture and Need for Skills
A deep understanding of the organization’s current culture and the desired future culture is essential. The board must identify the skills, experiences and personality traits necessary for the future CEO, considering what has derailed leaders in the past and what contributes to success. Anticipating the future business environment is critical, as it will shape the skills and experiences required for the next CEO (which may be quite different than the incumbent).
Enhance Diversity in the Leadership Team
Great boards actively address structural and cultural barriers to CEO diversity. This requires courage to confront biases and dismantle impediments to diversity. By moving talent across different functions and exposing them to varied experiences, boards can cultivate a diverse pool of future CEO candidates.
According to the S&P Global Corporate Sustainability Assessment, women held less than one-third of revenue-generating roles or roles with profit and loss (P&L) responsibility in 2023, which are often stepping stones to the C-suite. A Russell Reynolds Associates’ analysis of the S&P 100 the same year found the leadership role most often occupied by women to be Chief Human Resource Officer, a role from which the path to CEO remains more limited.
Boards need to encourage rotation among functional and P&L leadership roles to develop a talent pipeline with a diversified portfolio of leadership experience and better position diverse candidates for promotion.
Emphasize Accountability
Boards must hold themselves and management accountable for implementing effective mentoring and career development processes. Identifying talented leaders from a diverse pool early on and steering them towards roles that develop essential skills and horizontal leadership experiences is crucial.
According to Fortune, in 2023 the average Fortune 500 CEO tenure was five years for men and 3.8 years for women. Women CEOs are more than twice as likely as men to leave their roles within two years of appointment and are more than four times more likely to last less than 12 months in the CEO role than men according to Russell Reynolds’ CEO Turnover Index.
While boards appear prepared to move quickly to remove underperforming CEOs, they also cannot ignore their accountability for a new CEO’s success. Many are not doing enough to set candidates up to succeed, particularly women, as evidenced by the data.
The participants in this session noted that CEO succession planning is a multifaceted and ongoing process that requires foresight, dedication, and a commitment to diversity. By focusing on long-term planning, thorough assessment, and proactive talent development, boards can ensure a seamless transition and a strong future for their organizations.
This article is part of the 2024 Directors Dialogue Digest series, Changing Leadership for a Changing World. Join the Institute’s mailing list for early access to valuable research, industry updates and more.
