If a company’s CEO leaves unexpectedly and has no designated successor, the organization’s success can hang in the balance. An absent CEO (or a hastily chosen but unsuitable replacement) not only impacts a company’s brand, and thus its performance in the marketplace, but also employee productivity, loyalty, and morale.
Lack of an effective succession plan can also have consequences before a CEO leaves, which include exposing the company to added risk and its ability to attract and retain clients.
Despite this, though, research shows that most companies have no real succession plan. A 2015 survey by XpertHR for example found that approximately 40 percent of companies responding didn’t have one. Of these, about 20 percent indicated they didn’t have access to the right talent for key positions.
A June 2016 survey by Nationwide of approximately 500 U.S. small companies (with less than 300 employees) confirmed this trend as well. In this instance, approximately three out of five companies had no succession plan for the business owners.
Considering the costs of not planning ahead, one might wonder why companies don’t do so. How can something so critically important fall by the wayside? There are many reasons, it appears, ranging from procrastination, indecision, and other priorities to a general lack of ownership in the process and lack of expertise (and fear of getting it wrong). It can also be a reflection of a company’s culture – reactive vs. proactive – and denial of the inevitable.
Time to Get Moving
Clearly, there are few disadvantages to getting the ball rolling, sooner rather than later, when it comes to succession planning. Although strategies will vary by company, according to dynamics and needs, there are several best practices any organization can use to ensure a smoother process.
Start early: It’s never too early to begin. Consider General Electric, which took years to find a new CEO. The result, as many know, is a stellar example of succession planning done right. Longtime CEO Jack Welch, who had presided over GE’s expansion in the 1990s, began considering potential successors six years before he resigned — far earlier than most companies do. During this time, he and the company’s board created a shortlist of 24 candidates, then slowly whittled this down. By the time he was ready to retire, Welch felt confident that his replacement would do well in the role.
Ideally, companies should always be this proactive. In his book, It’s not the How or the What but the Who, author Claudio Fernández-Aráoz suggests beginning the succession planning process as soon as a new CEO is installed. Companies that do so, or that at least start the process early on, have a far greater chance of success.
Consider whether to involve the CEO: This will depend upon the circumstances; in some cases it will work, while in others it won’t. Usually, this is only a good move if the CEO is choosing to resign of his/her own accord.
One example of a company that successfully used this approach is McDonald’s. As its CEO Jim Skinner prepared to retire, he trained his chief operating officer, Don Thompson, to replace him.
“I basically felt the responsibility to the board of directors to be sure I provided them with someone who could run the company when I’m gone,” he told Fortunemagazine. “Until I was capable of doing that, I would not have left.”
Focus on the future: Succession planning efforts should focus on the future, not the past. Companies with a deeply ingrained culture or with much at stake during a transition can over-prioritize a candidate’s ability to check all the boxes when it comes to requirements, and underestimate the importance of choosing someone with the mindset and vision needed to meet the organization’s future goals.
To ensure a focus on the future and a replacement that will last, the general consensus is that candidates should be selected based on how well their experiences and expertise match a company’s strategic business objectives. This, according to Victoria Luby and Jane Stevenson (7 Tenets of a Good CEO Succession Process, Harvard Business Review), requires a three-step approach:
· Engaging the company’s board to define long and short-term priorities
· Linking these priorities to the qualities (personal and professional) required for the next CEO
· Using this information to create a blueprint for evaluating CEO candidates, both internal and external 
Value cultural fit: The most successful organizations also consider a candidate’s ability to fit their culture. At Microsoft, for example, those being evaluated to succeed CEO Steve Ballmer when he stepped down in 2014 were considered not only for their skills but also their ability to understand the company’s unique character. This is what resulted in the eventual selection of Satya Nadella as CEO.
Nadella, described as “a proven leader,” had been with the company since 1992 and had spearheaded major strategy and technical shifts. He was also, according to founder Bill Gates, “…exactly what Microsoft needs as the company enters its next chapter of expanded product innovation and growth.”
And Gates, many might conclude, was right. As of July 2017, according to The Street, Microsoft had successfully acquired LinkedIn and its shares had nearly doubled since Nadella became CEO.
Consider insider vs. outsider: Some research shows that promoting from within produces better results. According to a study by Wharton School management professor Matthew Bidwell, external hires are 61 percent more likely to be fired or laid off. Internal candidates will also have a better working knowledge of a company’s culture, processes and practices, which can make for a smoother transition.
In some instances, however, an external candidate can be the better choice, particularly when a company wants to rebrand itself, repair its image after a PR issue, or significantly boost innovation. In these situations, an external candidate can bring a fresh perspective and symbolize the beginning of a new era.
While there has been much research on succession planning, the upshot is that there’s no standard formula for success when it comes to selecting a new leader, as each company’s goals and culture are unique.
What appears to be applicable to all, though, is the need to plan ahead. Regardless of its circumstances, every company should have a concrete succession plan in place at all times, that’s shared will all relevant parties. This not only eliminates the need for hasty decisions should the unexpected occur, but will also keep the company moving in the right direction.
How has your company handled succession planning? Let us know about it by tweeting @MSIGTS.