The Vital Role of the Board in CEO Succession Planning: Unveiling the Truth

**Creating a Solid CEO Succession Plan: Why It’s Crucial and How to Do It Right**

**The Importance of CEO Succession Planning**
When Peter Gleason assumed the position of CEO at the National Association of Corporate Directors, his board wasted no time inquiring about his immediate succession plan. Gleason emphasizes that boards cannot afford to wait when it comes to CEO succession planning. This sentiment is echoed by industry experts, who recommend starting the process early to ensure a smooth transition.

**Hiring an Executive Recruiter**
To facilitate the CEO succession process effectively, most experts recommend engaging the services of an executive recruiter. Their role goes beyond immediate succession needs—they also help boards stay connected to external talent. Given that a CEO’s average tenure is around seven years, it becomes critical to choose a leader who can navigate future market dynamics and shifts in the company’s competitive position.

**Selecting the Right CEO**
The responsibility of selecting the CEO falls on the board, as they ultimately determine who will shape the company’s management team. Carey Oven, the national managing partner of Deloitte’s Center for Board Effectiveness, emphasizes that boards must seat a CEO capable of leading the company both now and in the future.

**Delicate CEO Transitions**
High-profile CEO transitions serve as reminders of the delicate nature of the process. Examples include Bob Iger returning as CEO of Disney after his chosen successor was ousted, and Howard Schultz temporarily taking the reins of Starbucks multiple times. While some companies prioritize external candidates during the search process, most CEO succession experts advocate for internal candidates.

**The Advantages of Internal Candidates**
Wendell L. Willkie II, an adjunct professor of law at New York University, asserts that internal candidates are more likely to succeed than those brought in from outside the organization. Jane Stevenson, vice chair of board and CEO services at Korn Ferry, agrees, stating that in case of a tie, the official stance is to go with an internal candidate. However, Nancy May, founder and president of the BoardBench Companies, points out that both internal and external candidates have their risks, emphasizing the importance of leadership abilities.

**Defining the Role of CEO**
According to May, a successful CEO understands the future trajectory of the company and anticipates potential pitfalls. The primary goal of a corporation, May asserts, is to “acquire and retain customers, profitably.” May further contends that boards should not hesitate to make necessary shifts in leadership, as they often hold onto CEOs for too long.

**Supporting the CEO**
Deloitte emphasizes that the board not only has the responsibility to seat the CEO but also to support them throughout their tenure. This includes providing development opportunities, counsel, mentorship, and overall support for the CEO’s success. The board’s fiduciary duties extend to ensuring the well-being of shareholders.

**Key Themes in Succession Planning**
Deloitte recommends focusing on several key themes when developing a succession plan. These include identifying the necessary attributes and skills of a successful leader, having a clear succession plan playbook, staying up to date on the competitive marketplace and benchmarks, and taking ownership of finding and mentoring the next CEO.

**Challenges in CEO Succession Planning**
While a PwC survey found that 32% of directors deemed improving CEO succession planning practices “very important,” this sentiment is not universal. Mistrust among directors is prevalent, with nearly half admitting they would fire a colleague. The dynamic between CEOs and boards is increasingly strained, likely due to longer director tenures. Directors seem more comfortable firing a CEO than a peer, indicating a misalignment of perspectives between the two groups.

**The Importance of Alignment**
Lyndon A. Taylor, a partner at Heidrick & Struggles, highlights the importance of alignment between directors and CEOs. A lack of alignment often results in issues arising in the present and future. To address this, companies should prioritize building a cohesive team and ensuring directors and CEOs share a mutual vision for the company’s future.

**Trends in CEO Appointments**
Heidrick & Struggles’ analysis of CEO data across 25 markets reveals significant trends. The report indicates that between 2021 and 2022, 64% of CEO appointments were internal, up from the previous year. Additionally, 69% of appointees were first-time CEOs, the highest percentage in three years. Furthermore, the number of female CEOs increased.

**Shifting Responsibilities of CEOs**
Traditionally, CEOs focused primarily on financial performance, but their responsibilities have expanded. In 2019, many CEOs acknowledged the need to advocate for a broader range of stakeholder interests, including employees and environmental concerns. Consequently, CEOs now require a broader set of skills, including judgment skills in navigating cultural issues.

**Considering the Future**
Korn Ferry advises clients to adopt a multigenerational approach to CEO succession planning. This involves identifying individuals who can assume the CEO role immediately and cultivating others for future leadership positions. By doing so, a company can ensure it has the right leaders in place when the need arises.

**The Prudence of Scenario Planning**
Korn Ferry’s Jane Stevenson cites the example of a pharmaceutical company that faced uncertainty about patent expirations and FDA approval for its new drug pipeline. To mitigate risk, the company’s board developed multiple leadership options and ultimately chose a commercially focused leader. This decision proved crucial when the patents expired and critical FDA approvals were obtained.

**The Benefits of Teamwork**
Building a successful CEO succession plan requires strategic thinking, akin to a game of chess. Jane Stevenson explains that having the right individuals in key positions and making the right moves is vital. Ultimately, CEO succession planning is a team effort that extends beyond any one individual.

In conclusion, CEO succession planning is a critical responsibility that boards must undertake. By starting early, engaging an executive recruiter, and carefully considering both internal and external candidates, companies can ensure a smooth transition of leadership. The board’s role does not end with selecting a CEO—they must also provide ongoing support and mentorship. CEO succession planning should encompass themes such as identifying the necessary leadership attributes, creating a succession plan playbook, and finding and mentoring the next CEO. By focusing on alignment, considering future needs, and building a cohesive team, companies can improve their CEO succession planning practices and set themselves up for continued success.