Recently, there have been numerous instances where companies have decreased shareholder value with poor succession planning and increased value with well-planned and deliberate actions. Shareholders and the public become nervous when there is change at the top, and this is reflected in share price volatility. For example, shareholders from Yahoo were demanding CEO Scott Thompson resign due to falsification of his educational credentials and he announced his resignation yesterday. In 2009 Yahoo had a very public firing with Carol Bartz, their former CEO.
Companies need to be prepared at all times to have a “ready-now” successor in place for emergencies. Company insiders who ascend to the C-level suite are more successful than outsiders according to Joseph Bower. However, most companies do not have people ready to move up into senior roles, especially CEO. Some surveys show as little as 35% of companies have adequate succession planning in place. In order to protect your company’s shareholder value, here are some best practices to ensure an effective succession plan is in place:
BUSINESS ALIGNMENT – SUCCESSION PLANS MUST SUPPORT THE BUSINESS REQUIREMENTS.
• Linking the succession plan to the business imperatives is essential. It’s not enough to plan for the CEO role as it exists today. Companies need to outline the competencies required for the next 3-5 years to be sure the new CEO is able to handle the strategic opportunities.
• CEO presence and involvement is essential to success. CEOs should spend personal time coaching their direct reports and especially any high potential successors.
HR FUNCTIONAL EXCELLENCE – GREAT HR SYSTEMS IN PLACE TO DRIVE EFFECTIVE SUCCESSION PLANNING.
• Broadcasting leadership competencies are very helpful for leaders to better understand the requirements and expectations for their success.
• Multi-faceted assessments using inside and outside experts helps identify where the leaders have strengths and where they fall short of expectations.
• Employee input is more popular now to the process. So many times leaders have rejected the chosen career path designated by the company due to personal and financial costs from moving all over the globe to get the necessary experiences.
• Rigorous management of performance and potential separates the great companies with leaders. The famous “nine box” approach when used properly really does identify the leaders with high potential and the ability to move up in the organization.
IMPLEMENTATION – IT’S NOT ENOUGH TO HAVE ALIGNMENT AND EXCELLENCE, EFFECTIVE IMPLEMENTATION IS REQUIRED.
• Multiple methods of leadership development are best. The 70%/20%/10% formula for development is essential. We know from years of research that the best way to develop leaders is on the job and through experiences (70%).
• Measure leader results and track these to be sure that they are producing the outcomes required to succeed. A balanced scorecard including financial, people, customer, and operational metrics is essential to success and communicates to leaders what is most important.
• Accountability – Quarterly and semi-annual CEO reviews of progress helps show the organization what’s important. People do what the CEO spend time monitoring.
• Track key metrics for success of the succession planning process. Multiple metrics are used for outcomes (e.g., back-up in place for key roles) to process (e.g., development plans in place for high potentials).
Using these best practices will help create robust succession plans that can make the difference in increasing or decreasing shareholder value when the CEO changes, even unexpectedly.