Effective risk management demands a multidimensional, strategic approach.
Succession planning is a critical component of enterprise risk management. Getting succession planning right can mitigate adverse impacts on a company's ongoing operations, stock price, employee morale and investor confidence. Executive succession planning has historically had a singular focus — identifying a successor CEO. But in today's dynamic business environment, in which companies are faced with rapid movement in the workforce (particularly within the C-suite), succession planning has evolved to entail a more strategic and multidimensional focus. Boards are now focused not only on identifying an immediate successor CEO, but also on identifying and developing a bench of candidates for other roles within the C-suite. The following outlines best practices and key considerations for boards as they confront C-suite succession planning.
"Evergreen" approach to C-suite succession planning. A well-developed C-suite succession plan is one that takes an "evergreen" approach to succession planning, so that succession planning is a regular board agenda item. This, in turn, puts a company and its board in a better position to address near- and long-term goals and withstand unexpected departures, which are required to maintain short-term stability and business continuity. A robust "evergreen" approach not only assists in identifying and developing one or multiple potential successors for roles within the C-suite (or, conversely, identifying any expertise gaps), but also ideally identifies a successor's successor, which is an integral part of C-suite succession planning.
C-suite succession planning team. CEO succession planning is typically led by the entire board or a board committee. When the full board is responsible for CEO succession planning, they may want to consider delegating non-CEO executive succession planning to a committee. This may be particularly critical in business environments with rapid C-suite turnover, as it allows a more nimble group to focus on broader C-suite succession planning, as well as planning for an internal successor's successor.
For non-CEO succession planning, boards should consider the extent to which the CEO and human resources personnel (e.g., the CHRO) should be involved. Generally speaking, given the CEO's knowledge of the management team and industry expertise, it is customary for the C-suite succession planning team to be driven by the CEO as to both internal and external candidates. Furthermore, a company's CHRO (or other senior HR personnel) may provide valuable input on candidates and help guide the non-CEO succession planning team in determining the impact of internal promotions on the company's organizational structure, including whether any significant gaps in expertise need to be filled at levels below. Boards should also consider the role of external advisors, such as executive search firms and consultants.
C-suite succession planning for various time frames and scenarios. An effective C-suite succession plan is also one that addresses various time frames and scenarios — long-term (more than five years), mid-term (one to five years), near-term (within one year), emergency and other unexpected departures. Boards should structure C-suite succession planning both with a view to the company's long-term strategy and with contingency planning to address unexpected departures within the C-suite. Therefore, effective risk management requires a multidimensional focus on identifying those individuals within the organization who have the skills and experience to immediately and effectively fill any gaps, as well as individuals who may have a long-term trajectory for a C-suite role.
In situations where a company is faced with an unexpected departure, if the company has an announced or obvious successor who is capable of immediately providing the requisite guidance and stability to the company, it can be relatively smooth. There is always risk, however, when elevating an individual to a C-suite role earlier than anticipated. Putting a promising talent in a role too early or in a time of crisis may result in foot faults that could lead to the loss of a promising leader (or other team members). Where there is no "ready now" successor, a more seasoned interim successor (such as a board member who is a retired senior executive of the company or of another company in a similar industry) could more immediately fill gaps and provide short-term stability, even if there is no expectation that such person will continue in that role permanently. Ideally, the interim executive can also serve as a mentor to the eventual long-term successor.
Identifying candidates. In order to develop a sufficiently robust and flexible C-suite succession plan, boards should continually reassess and identify current and potential future skills and expertise required to fulfill the company's strategy. Doing this on an ongoing basis will allow boards to identify and develop multiple internal candidates for C-suite roles or, alternatively, inform the board where there is a lack of internal candidates. Where there are potential internal successors to C-suite roles, boards should also consider the organizational impact of elevating an internal candidate to a C-suite role, and whether there is a suitable successor to the successor. This effectively requires a multilevel approach to succession planning, which is key to maintaining stability through the organization and avoiding potential disruptions within the company's operations resulting from internal promotions.
When there is no obvious internal candidate for a role, boards should consider the availability of external candidates. To do so, boards can use external advisors to perform market checks.
Integrating DEI Into succession planning. C-suite succession planning also provides boards an opportunity to focus on DEI within the C-suite and other senior leadership roles, as well as the entire company. Boards can use succession planning to build a diverse network of potential candidates that more closely reflect its workforce, customers and clients. Over time, this can help develop a more diverse leadership team and deeper bench of diverse talent.
Successor development and executive compensation program. The development of internal candidates is a critical component of effective succession planning. In addition to traditional executive development programs, boards should consider using the company's executive compensation program to support its succession plan, for instance, by creating pay incentives that are tied to development goals and internal promotions. Integrating C-suite succession planning and compensation can bolster development and demonstrate the company's investment in developing a deep bench. Using long-term incentive programs to promote the development of C-suite candidates also creates retentive value, since long-term awards generally require continued service to the company over multiple years by design.
Putting It All Together
Taking a multidimensional and strategic focus on C-suite executive planning is critical in today's business environment to ensure effective risk management. Boards should reexamine their current processes to ensure alignment with the company's short- and long-term strategies and development of a bench of C-suite successor candidates under various timeframes and scenarios.
Originally published by Directors & Boards.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
