Succession planning – Are you ready?
What if your CEO or CFO were suddenly hit by the proverbial bus and disappeared? It could be that their contract is not being renewed, they’ve resigned, or at worst they’ve been dismissed or had an untimely departure or death. In the former situations, you as board chairs and directors may have some opportunity to address the change, but in the latter situations what do you do – are you ready? This is a very critical time for any business and one that should be planned for.
Turn-over of senior staff can be an important element of business renewal. It can lead to new ideas, innovation and a shift in the strategic direction of the organisation. Not done well, rushed or a knee jerk response, it can adversely impact on the operational performance, culture and undermine the very stability of the business. Therefore, being unprepared can expose the organisation to considerable risk.
So why plan for succession?
The general duties imposed by the Corporation Act (2001) on directors is for them to “exercise their powers and duties in good faith in the best interests of the company and for a proper purpose”. More so, every board chair, director and CEO should aspire to leave the organisation in a better condition than when they found it.
Therefore, it is beholding on board directors to ensure the organisation is not unreasonably exposed to risks which could result in its failure. As a consequence of this obligation a succession plan for your key leadership team is a fundamental responsibility which cannot be ignored.
Unfortunately, weak succession planning is more common than we think. According to a NSW survey of over 2,000 businesses conducted by RSM in 2015, only one in three said they had a formal succession plan in place. These respondents conclude that building and maintaining valued relationships with all stakeholders was more important [28%], than getting the right successor [16%].
Therefore, it is clear that boards need to have a premeditated, well planned approach to succession – not only at the board level but particularly at the CEO/CFO level to ensure stakeholder confidence, ongoing business stability and momentum with its strategic direction.
Mitigating the risk?
The risks of not having a succession plan are significant, however there are a number of forces that can keep the process from getting the attention it deserves. The most powerful is a lack of urgency. For most organisations, the CEO’s departure is viewed as a far-off, theoretical event, and it is easy for succession to get neglected in favour of more immediate and tangible issues the board must address.
Unfortunately succession planning can accentuate the incumbent CEO’s own mortality on an emotional level, with the consequence of active succession planning relegating the CEO to the perception of lame-duck status. As a result, succession planning almost always stirs up uncomfortable issues. However, the board must maintain their commitment to work past these issues.
Therefore, dealing with a ‘sensitive’ CEO/CFO should not be an issue, as succession planning only reinforces the importance and critical value these individuals have to the business. It should not signal their imminent departure but more so, reflect the process to be undertaken if and when such a decision is made.
Other benefits of a formal succession plan is that it demonstrates clear evidence to stakeholders that corporate governance is important to the board, and being appropriately managed. Furthermore, it builds ambition and drive in the next level of leadership, and provides board directors with an immediate public response to any possible crisis.
While increased external scrutiny from key stakeholders or funders like government authorities may provide impetus for action, boards should find even stronger motivation to undertake succession planning as it is widely regarded as a proxy for overall corporate governance; organizations that do the former well are presumed to be strong in the latter.
What are the key fundamentals?
First, there must be an established level of trust between the board and the CEO; the CEO and CFO. In an antagonistic or egotistical environment the board needs to exercise its authority to ensure a planning framework is developed and constantly reviewed.
Second, the board must approach succession planning as an ongoing process rather than as an item to check off on an annual agenda. Embed the process into the board reporting cycle and CEO/CFO performance reviews [KPIs] is a must.
Next, the board should examine its own track record on succession. Does it have its own planning framework mapped out, regular review and key criteria set to ensure stability at the governance level?
A current and detailed corporate strategic plan is at the centre of the process. The succession plan must form a part of the overall business strategy, be regularly
reported on to the board and systematically monitored as part of the strategic planning process.
Finally, boards need to evaluate the organisation’s human resources department and its ability to operate as a full partner in the succession process. If this capability doesn’t exist [as in many small NFPs] designated providers are to be sourced, briefed and engaged early. This element should be seen as a valued investment to getting the right outcome in a timely and professional manner.
BE AHEAD OF THE RACE.
How do we do it?
In my experience there are five  key elements which you need to do in preparing your succession plan;
First, determine the qualities [cognitive abilities, technical expertise and emotional intelligence] to be sought in the next CEO or CFO; as a board, review the criteria regularly, and ensure you’re flexible to any changes the organisation may need.
Second, seek out your internal potential and once recognised ensure professional development plans for them so as to maximise their potential success; and ultimately your success as an organisation. Regularly check-in with those recognised potentials to monitor their progress. Again, embed flexibility into your selection criteria to ensure you meet the changing needs of the organization.
Similarly, prepare parallel documents for assessing potential external candidates. Identify formally or informally any particular individuals who may fit your criteria, and monitor their movements and leadership progress.
Next, develop a succession schedule. This is critical to minimizing the gap between your outgoing CEO/CFO and landing your new appointment. Getting this right will ensure stability of operations, strategic direction and build stakeholder confidence in the board’s corporate governance capabilities to execute their responsibilities; diligently and expeditiously.
Finally, have an emergency plan. This is most important in mitigating your risk exposure in the event of a crisis. The Emergency Plan provides an immediate planned response that has been developed and considered in a non-pressure situation. Having an emergency plan will ensure the board chair, directors and key personnel understand what will happen if the need arises, the business can maintain momentum and interim appointments are prepared and aware of their responsibilities, accountabilities and opportunities.
A Planned Implementation
In a trusting environment and with a formal framework in place the Board Chair, CEO and CFO will be keeping each other briefed on their intentions. Therefore, and subject to any formal periods of notice, the optimal solution is to start actioning the succession plan approximately one year before a known transition. The
conversation should be held between the exiting executive and the Board chair to ensure the business and the individual pass through transition with the least amount of disruption to either party, or the business; maintaining dignity and respect. Countless businesses and individuals have suffer reputation or financial damage because they have not planned for that time when their CEO or CFO gets hit by the proverbial bus. Are you prepared?
It is extremely important that when it’s time for change that your plan pulls together the Board chair and directors to review the succession plan, confirm their requirements and commit to the schedule for succession.
Having a Succession Planning reduces the shock to the organisation, minimizes business risk and confirms to stakeholders that the board is well in control and exercising good corporate governance.
Can you afford not to be ready?