What is Succession Planning
Succession planning is quite simply, thinking ahead to when someone leaves your company. When the time comes for a valued member to move on, as we all do, you need to have a successor in mind or at least a succession planning strategy ready. Turnover in today’s modern business world is high. In the year 2015 for example, it hit a 15-year high. Each year between 10 and 15 percent of CEO’s move on. This of course can be for various reasons: retirement; resignation; dismissal; or ill health being the obvious candidates.
If a company is not ready to replace them, they are normally punished by way of shareholder value. A study of the largest public companies in the world showed that this dip in shareholder value amounted to an average of $1.8 billion in companies that took time to replace their heads
The Importance of Good Succession Planning
As already stated not being prepared can cost your company money. However there can be other potentially damaging effects to any business. Inadequate succession planning can mean that a CEO, who is performing badly, remains in place longer than would be ideal. Booz & Company conducted a study that was extremely telling. They looked at the bottom performing companies and found that only 5.7% of these had their CEO forcibly removed. The authors of the report concluded that “boards are giving under-performing CEOs more latitude than might be expected.”
Another failure by not having good succession planning is that in the rush to appoint someone, the wrong candidates are more likely to win through. Chasing any candidate whilst time is a pressure is never good. Choosing a CEO under these conditions can be devastating.
Obviously if your company has been diligent in the interviewing and appointment of employees over the years, a steady promotional progression should be evident within your staff. Good people should be remaining with you and moving up the ladder. Therefore the ideal candidates for CEO, and indeed any other position, should be known to you already. This is the very essence of succession planning.
The Peter Principle states that candidates are more often than not promoted once too often. That is to say because they are judged on their performance in their current position. They only cease to be promotion candidates when they have reached a position at which they fail. In short, managers rise to the level of their incompetence. The Peter Principle was formulated by Laurence J. Peter. This obviously needs to be avoided at all cost. It takes a lot of planning and foresight to avoid it.
The Critical Nature of Good Succession Planning
In many ways succession planning is the most important job befalling any corporate board. Even with this is mind many fail miserably. By failing good quality people already in their organisations, they end up having to appoint people from the outside at the very time when they are at their most vulnerable.
One of the most serious issues in appointing from the outside is that of increased executive compensation. In order to attract the best candidates it is often a fact that companies will have to exceed existing packages despite taking a bigger risk on the new name coming in. No matter how much due diligence has been adhered to, there are always unknown factors involved. There is only so much one can learn through interviews and CVs.
Look at it from the candidate’s point of view. He or she might be about 50 years of age and have been settle in a safe position for years. In order for them to give that up and make a leap of faith, it often takes an enhanced package.
Compare that to companies that have consistently made succession planning a priority and you’ll soon see that they are better able to maintain high standards of governance whilst at the same time satisfying the demands of investors.
Another threat to the integrity of outsourcing is that often a new CEO will start to bring in his or her own people. It is completely natural for them to trust people with whom they have a working relationship. Over time this can mean that the company starts to lose its integrity somewhat. There is a slow change of direction whilst at the same time a drip-drip-drip effect on the company coffers. More new people mean more increased compensation packages.
Incentivise in Order to Grow
It is sometimes rather difficult to get executives to buy in to the idea of succession planning. There is often reluctance on their part as they see it as building in their own obsolescence. It takes a highly confident individual, happy with their value to the company, to work with it.
Any kind of reluctance can often be overcome by incentivising the executives financially to work with their succession planning. Reaching these long-term goals is not necessarily seen as a priority in the bigger picture of running a company. This sometimes results in a lack of urgency in even the best succession planning efforts.
It is all about building a complete ethos within the company. Good hiring and promotional practices should be seen as the norm within any well-run company. Senior management need to nurture and present, regular assessments of management teams with a view to promoting the best candidates. It is always better to promote before it becomes an absolute necessity.
A Possible Cause of Failure
Retirement is never an easy time for any individual. There is reluctance to transition into the period of life where one has nothing to do, nothing to add and seemingly no value. It is therefore perfectly normal for people to put all thoughts of retirement off. A CEO who is ten years away from the dreaded day does not necessarily want to confront it on a day-to-day basis, by talking about succession planning.
Some business leaders will merely bury their heads in the sand and refuse to confront it. That is all well and good for them, but it can be devastating for a company. Psychologists call this low-adjustment. Those affected can often suffer from depression and anxiety attacks. This is where long term succession planning comes into its own. It is imperative that any company has a long line of succession candidates so it becomes the norm.
Source: Havard Business Review
Best Practices and Summary
To summarise, it is important to recognise talent already within your organisation and work towards their future promotional chances. At the same time keeping existing managers and CEOs is extremely important. Build an ethos of trust and talent reward. This mutual trust will ensure that your people are happy in their positions and confident for the future.
Most of all though, plan ahead, every time. Days spent succession planning now, can save months of anguish in the future.
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