The Epic of Succession – Part 1

June 10, 2010 at 3:50 pm

Jack Welch, the acclaimed former CEO of General Electric is famously known to have said: “From now on (choosing my successor) is the most important decision I’ll make. It occupies a considerable amount of thought almost every day.” Key and central to this notion was the timing of when it was said. This statement was in fact uttered in 1991 – a full NINE years before Welch’s anticipated retirement.

Given the many leadership crises we hear about these days it is surprising that more executives and companies do not heed to the sage idea of Mr. Welch. According to a recent survey conducted by Chief Executive Magazine: 95% of the directors polled acknowledged that CEO succession is a business continuity issue. Yet, despite the seriousness of the responsibility, less than half of those surveyed rated themselves as effective on this critical aspect of their role.

Before any discussion of why this critical business function is not performed more consistently can take place we must truly appreciate the value of succession planning and exactly why it is so critical to the effective functioning and continuity of an organization. And to present a complete picture we must also look at how succession planning can be implemented and made more central to the functioning of the board and CEO. Thus this series on succession planning will be written about in three parts: Part 1 will focus on the importance and value of succession planning, Part 2 will look at why is it an underutilized tool and Part 3 will outline and describe how companies can undertake effective and improved succession planning.

Put quite simply and in the language of today’s business preoccupation; succession planning is part of overall strategic planning. It is also part of risk management. Risk management, so ubiquitous in discussions these days, may be defined as the policies, procedures, and practices involved in identification, analysis, assessment, control, and avoidance of unacceptable risks. Wouldn’t it be safe to say that a lack of leadership in any corporation is quite an unacceptable risk?

Besides mitigating risk, succession planning is cost effective. Internally promoted CEO’s tend to require slightly smaller salaries than those brought in from the outside. Internally promoted CEO’s also do not require as much education and little integration, another cost efficiency. CEOs recruited from outside the organization and from another job generally require a compensation package that not only “makes them whole” but diminishes the risk that they assume when they leave their current position to take on something new.

Likewise, it has been shown that the average hiring mistake costs 15 times an employee’s base salary in hard costs and productivity loss. In addition to the actual search costs associated with looking for a new CEO, there is education and on boarding (integration) costs as well as the often significant expense associated with the departure of senior executives who did not get the CEO job when they may have been contenders.

Succession planning is also important because it enhances corporate culture. That is, succession planning ensures that there is a sense of continuity in the organization. It is motivating to employees to know that the very best performers can reach the very top of the organization. Searching outside for a chief executive is an interruption that can cause turmoil and uncertainty throughout the organization.

When there is a lack of succession planning the search for a new CEO is always constrained. The process is reactive rather than proactive. As a result it is less strategic and executed to fill an immediate need. The company is generally trying to avoid a crisis and chaos and is working against the clock. In the case of a public company, there is the added visibility and scrutiny (particularly these days). All this can result in a less than optimal solution. Rather than hiring the very best person for the job, the company can end up with simply the best person available at that particular time.

A very recent study was conducted by several professors at Insead where they looked at the performance of 2000 CEOs at 1200 public companies over the past 15 years. The research indicated that, when they reach the top job, company insiders tend to do better than those who are brought in from outside. Furthermore, Peter Drucker and other management gurus have long estimated that the hiring success rate of managers is a dismal 50 percent.

Thus we can clearly see that succession planning makes sense for so many reasons. It is strategically and financially important. It provides the organization with stability and contingency planning. It provides opportunity both to the organization and to the individuals within. It is practical and oriented towards the future.  But for all of these compelling reasons it is still sporadic. Therefore to genuinely make change we must not only know that it works but understand the incongruous lack of comprehensiveness. This series will continue with a detailed  look at this very basic question of: “why not?”

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Entry filed under: Business, Recruiting.

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