Confronting an Alarming Truth: Preparing for the Exodus of Executive Talent
Most Organizations are Ill-Equipped for the Coming Wave of Executive Exits
Despite the tremendous importance of executive successions to a firm’s strategy and performance, most organizations across industries are ill-prepared for the unavoidable exodus of executive talent. The recent wave of unplanned changes in executive leadership positions across renowned public companies has drawn deeply needed attention to an alarming reality for most executive teams and boards: a failure to develop internal succession management capabilities incurs incredibly high costs and risks for the firm. Indeed, the last several years of unplanned public CEO successions illustrate the tumult and value erosion realized by organizations with underdeveloped or non-existent executive succession capabilities. In 2017 alone, the absence of succession planning at Uber, Equifax, Samsung, The Weinstein Company, Infosys, and Wells Fargo was exposed due to unexpected CEO transitions1. While the causes of these forced executive transitions varied widely—including corruption charges, sexual harassment investigations, family illnesses, data breaches, and illegal sales tactics—the common thread connecting each case was ineffective succession planning that failed to identify an internal candidate capable of leading the firm. Undeniably, the costs of neglecting to prepare for transitions in executive roles are incredibly high, as research estimates that poor or non-existent succession planning costs public companies $112 billion in market value2. In addition to the quantifiable costs of unplanned executive successions, including severance packages, executive search firm retainers, and fees for communications consultants and employment lawyers, firms incur the less tangible yet deeper losses of delayed growth initiatives, shelved strategic plans, and unwanted turnover of leadership talent.
Given the enormous costs and risks associated with the failure to develop succession planning practices, coupled with the outsized strategic impact of executive succession, why do most organizations fail to develop succession management capabilities when the stakes are so high?3 The current state of succession planning practices across industries paints a sobering picture of the chasm between the criticality of executive talent for firm performance and the development of succession management capabilities.4 Regrettably, most organizations and boards have failed to develop succession planning capabilities with the same rigor and discipline as budgeting, strategic planning, operational reviews, and other administrative processes. These research findings are particularly alarming given the increasing uncertainty facing most industries, the intensifying demand for successful executive successions, and dramatic workforce demographic changes. While global CEO turnover reached a 15-year high in 2015, only 54% of boards report actively developing CEO successors while 39% report having no single internal candidate who could replace the CEO, if necessary.5 Furthermore, most boards approach executive succession as a discrete event, rather than as a process supported by several key capabilities, which often produces unsuccessful outcomes due to the board’s tendency to delegate succession planning to the CEO and neglect the development of internal executive talent throughout the organization.6
The Business Case for Succession Management Capabilities
Irrespective of industry sector, there is a growing business case for developing strong succession planning practices that effectively identify and develop internal candidates for executive roles. A recent meta-analysis concluded that internal CEO candidates enhance long-term firm performance while implementing less strategic change, while external CEO candidates engage in greater strategic change that produces lower long-term performance.7 A cross-industry analysis discovered that internal candidates who were identified and deliberately developed for the CEO position were far more effective in their CEO roles compared to (a) external candidates and (b) internal candidates who were selected via a ‘horse race’ that pits multiple insiders for the CEO position.8 A Booz & Company analysis of numerous industries illustrated that compared to external CEO candidates, internal CEO candidates identified and developed via succession management practices delivered (a) significantly higher market-adjusted shareholder returns, (b) remained in their CEO roles for two years longer, and (c) were substantially less likely to be involuntarily terminated.9
The efficacy of succession management capabilities has been validated across a range of business performance metrics, including customer service outcomes, operational efficiency, employee turnover, and a range of executive succession outcomes.10 For example, organizations utilizing SMCs report a 68% internal/external placement rate for open executive positions (vice-president and above) compared to just 21% for those organizations with underdeveloped executive succession practices. For leadership benchstrength—the percentage of critical executive roles with at least one ‘ready now’ internal candidate—the results are even more pronounced. Organizations adopting SMCs report a 46% leadership benchstrength compared to just 7.7% for organizations with little or no emphasis on succession management capabilities. SMCs also impact executive team gender and ethnic diversity, as the C-suites of organizations with highly developed SMCs are comprised of 52% women and 43% ethnic minorities (non-white). By comparison, organizations with low utilization of SMCs report that their C-suite executive teams comprise of only 24% women and 12% ethnic minorities.
For companies competing in an increasingly uncertain business environment, there are myriad benefits of strong succession management practices. Top performing companies are 35% more likely to promote an internal candidate CEO—as opposed to an external candidate—compared to organizations with average performance on customer service and financial outcomes.11 Internal successors for executive roles benefit from numerous development opportunities including on-the-job training, mentoring, job shadowing, and other learning activities that allow executive talent to perform executive-level duties prior to assuming senior leadership roles.12 Similarly, a survey study concluded that succession planning practices drive higher profitability via greater management of operating expenses and higher proportions of patients covered by private payers or Medicare (compared to Medicaid, which offers lower reimbursement rates to hospitals).13 Overall, companies with highly developed succession management practices enjoy much stronger continuity in leadership roles due to the depth and quality of succession plans;14 substantially higher placement rates of internal candidates for executive roles;15 and significantly less executive failure or derailment.16
How Can My Organization Develop Succession Management Capabilities?
Succession management is defined as a structured process that involves the formal identification and preparation of potential successors to assume new leadership roles.17 This academically grounded definition underscores the formal, structured elements of succession planning practices, as opposed to the more common informal, ad hoc practice of identifying successors as the need arises. This definition also reflects the key assumption that internal leadership development and assignment-based learning experiences prepare candidates for advancement to new leadership roles.18 As such, succession management capabilities help organizations develop and retain intellectual capital through leadership assessment activities aimed at diagnosing employees’ advancement potential and planned leadership development activities to groom high-potential employees for vacancies in senior leadership positions.19
The Succession Management Capabilities (SMC) framework captures three integrated sets of evidence-based executive succession practices and associated performance outcomes: Enabling, Assessment, and Transition Capabilities.20 Enabling Capabilities include Top Management Team Engagement, Leadership Development Culture, and Talent Management ROI, which serve as foundational succession planning practices. A firm’s ability to develop competence across these foundational practices enables the execution of Assessment Capabilities, which consist of advanced Performance Feedback and Talent Assessment processes. Transition Capabilities, including New Leader Onboarding and Role-Based Leadership Development practices, are critical for sustaining performance outcomes in volatile, rapidly changing business environments.
Top Management Team Engagement is the extent to which the senior leadership team formally describes succession management as a strategic priority for the organization and actively participates in leadership development and succession planning processes. Leadership Development Culture, an organizational culture that values fairness, enforces transparency, and seeks to maximize employees’ leadership potential, involves consistent communication of the outcomes of talent review sessions—thereby avoiding the perception of a ‘black box’ approach to succession—and formal training of managers to engage their direct reports—particularly high-potential leaders—in career planning discussions. A distinctive element of Leadership Development Culture is a climate that encourages managers to ‘release’ strong performers and high-potential leaders for developmental assignments across the enterprise. Finally, Talent Management ROI comprises the ability to develop and utilize a set of metrics to assess and communicate the efficacy of the firm’s succession management practices to the governing board and management teams across the firm. Overall, Enabling Capabilities establish a compelling business case for succession management and help ensure management team accountability for succession outcomes.
The Assessment Capabilities of the SMC framework include both advanced Performance Feedback processes and Talent Assessment practices that provide the necessary data for effective succession decisions across key leadership roles. The Performance Feedback capability includes 360-degree or multi-source feedback processes that provide leaders and high-potential employees with powerful data that inform leadership development opportunities. A cornerstone capability, Talent Assessment practices comprise the formal processes through which high-potential leaders and successors to critical leadership roles are identified via standardized assessment instruments, nine-box grids, selection tools, and other methods. The centerpiece of Talent Assessment practices include annual talent review meetings across management levels that consist of robust, data-driven assessment of successors to key roles and emerging leadership talent. Organizations that develop strong Assessment Capabilities effectively match the best development opportunities for leaders and high-potential employees across each combination of performance and potential levels, which provides managers across levels a set of leadership development tools to present to their team members following the annual talent review meetings.
Finally, Transition Capabilities, the succession management capabilities that are particularly critical in highly uncertain business environments, include New Leader Onboarding and Role-based Leadership Development. New Leader Onboarding reflects the quality and depth of practices aimed at socializing individuals into leadership positions, including formal onboarding programs for all leaders in new roles (internal promotions and external hires) that consist of comprehensive stakeholder analyses and leader assimilation activities. The final SMC capability, Role-based Leadership Development, includes a range of high-quality leadership development experiences assigned to successors and high-potential leaders, including job rotations, action learning projects or leadership academy programs in which team projects address company-wide challenges, and strategic job assignments. Organizations with strong Role-based Leadership Development practices effectively develop leadership talent through practical assignments that are outside of their respective ‘comfort zones’, including functional, product/service, and/or geographic role-based experiences.
Practice Recommendations & Conclusions
Irrespective of industry sector, organizations seeking to further develop executive succession capabilities may utilize the SMC framework as a template for identifying where to focus their efforts and resources. Whether an organization is at the nascent stages of developing a succession management process or reinvigorating an existing program that has stalled or lost support from key stakeholders, application of the SMC framework can effectively guide the agenda of board members and executive teams. The development of strong Enabling Capabilities, including substantively engaging top leadership teams, establishing a set of succession metrics that unifies key stakeholders, and cultivating a culture centered on leadership development, provides organizations a foundation from which Assessment and Transition Capabilities may be leveraged in increasingly uncertain business environments. As noted, nonexistent or underdeveloped foundational capabilities will hamper efforts to implement more advanced and targeted succession management practices. The lack of genuine commitment from executive team members or the absence of a basic metric strategy for evaluating succession management outcomes will ultimately obstruct the impact of talent assessment practices, leadership development programs, onboarding practices, and other succession activities.
As organizations of all sizes and industries confront the challenges of heightened competitive pressures and unprecedented workforce demographic shifts, the risks and costs associated with underdeveloped or nonexistent succession management capabilities will remain very high.
1Lien, T. (2017) Uber’s search for new CEO is a bumpy ride. Los Angeles Times. Retrieved August 1, 2017 at http://www.latimes.com/business/technology/la-fi-tn-uber-ceo-search-20170801-story.html. Kiesnoski, K. (2017). Succession planning: Passing on the corporate baton. CNBC. Retrieved September 26, 2017 at https://www.cnbc.com/2017/09/26/succession-planning-passing-on-the-corporate-baton.html. Kapoor, A. (2017) What Infosys crisis reveals: Poor succession planning, hesitance to innovate Mar India Inc on world stage. FirstPost. Retrieved August 28, 2017 at http://www.firstpost.com/business/what-infosys-crisis-reveals-poor-succession-planning-hesitance-to-innovate-mar-india-inc-on-world-stage-3980929.html. Fortune (2017). Ahead of Lee verdict, Samsung group lack leadership ‘plan B’. Retrieved August 24, 2017 at http://fortune.com/2017/08/23/lee-verdict-samsung-group/. Fortune (2017). Wells Fargo has fired and cut bonuses for four executives over its sales scandal. Retrieved February 22, 2017 at http://fortune.com/2017/02/21/wells-fargo-sales-scandal-fired/. CNBC (2017). Harvey Weinstein fired by The Weinstein Company after sexual harassment allegations. Retrieved October 9, 2017 at https://www.cnbc.com/2017/10/08/harvey-weinstein-fired-by-weinstein-company-board.html.
2 Favaro, K., Karlsson, P., & Neilson, G. (2010). CEO succession 2000-2009: A decade of convergence and compression. Strategy + Business, 59.
3Ibid. Hooijberg, R., & Lane, N. (2016). How boards botch CEO succession. MIT Sloan Management Review, Summer: 14-16.
4Hooijberg, R., & Lane, N. (2016). How boards botch CEO succession. MIT Sloan Management Review, Summer: 14-16.
5Harrell, E. (2016). Succession planning: What the research says. Harvard Business Review, December, 71-74.
6Favaro, K., Karlsson, P., & Neilson, G. (2010). CEO succession 2000-2009: A decade of convergence and compression. Strategy + Business, 59. Fernandez-Araoz, C., Iqbal, S., & Ritter, J. (2015). Leadership lessons from great family businesses. Harvard Business Review, April: 83-88.
7Schepker, D., Kim, Y., Patel, P., Thatcher, S., & Campion, M. (2017). CEO succession, strategic change, and post-succession performance. The Leadership Quarterly, 28 (6): 701-720.
8Zhang, Y., & Rajagopalan, N. (2010). CEO succession planning: Finally at the center stage of the boardroom. Business Horizons, September-October, 455-462.
9Favaro, K., Karlsson, P., & Neilson, G. (2010). CEO succession 2000-2009: A decade of convergence and compression. Strategy + Business, 59.
10Groves, K. (2017). Winning strategies: Building a sustainable leadership pipeline through talent management and succession planning. Bozeman, MT: Second River Healthcare Press. Groves, K. (2017). Developing and validating a succession management assessment for healthcare organizations. Academy of Management Annual Conference, Atlanta, GA.
11Wilson, L. (2005). Inner strength: top-performing hospitals are more apt to promote from within and take a more strategic approach when recruiting executives. Modern Healthcare, July, 8-25.
12McAlearney, A. (2010). Executive development in U.S. health systems. Journal of Healthcare Management, 55 (3): 206-222.
13Kim, T. (2012). Succession planning in hospitals and the association with organizational performance. Nursing Economics, 30 (1): 14-20.
14Rothwell, W. (2016). Effective succession planning. New York: American Management Association.
15Fegley, S. Succession Planning: A Survey Report. Alexandria, VA: Society for Human Resource Management, 2006.
16Nadler, D. A. (2007). The CEO’s second act. Harvard Business Review, 85: 66-72.
17Garman, A., & Glawe, J. (2004). Succession planning. Consulting Psychology Journal: Practice and Research, 56 (2): 119-128.
18Cappelli, P. (2011). Succession planning. Handbook of Industrial and Organizational Psychology (Volume 3: Maintaining Expanding, and Contracting the Organization). American Psychological Association.
19Patidar, N. Gupta, S., Azbik, G., & Weech-Maldanado, R. (2016). Succession planning and financial performance: Does competition matter? Journal of Healthcare Management, 61 (3): 215-227. Groves, K. (2011). Talent management best practices: How exemplary health care organizations create value in a down economy. Health Care Management Review, July-September, 227-240.
20Groves, K. (2017). Winning strategies: Building a sustainable leadership pipeline through talent management and succession planning. Bozeman, MT: Second River Healthcare Press. Groves, K. (2017). Developing and validating a succession management assessment for healthcare organizations. Academy of Management Annual Conference, Atlanta, GA.