The media coverage of ‘The Great Resignation’ has raised the profile of the ongoing and critical role of the board in succession planning. Good boards and smart directors plan the succession of the CEO to ensure a smooth transition in the leadership of the organisation, with minimal disruption and business continuity. John Harte, Managing Director of Integrity Governance shares his thoughts.
Succession planning takes time and effort, and while the best made plans can sometimes fail, it’s always better to have one than to be caught in a position without a plan, or a clear leader. Family firms have the advantage in that they can take the long-term perspective and are not obliged to respond to the volatile sentiment swings that sometimes characterise the public listed markets. At least once per year the board should think about succession for the CEO. However, it’s not something family firms should look at shortly before a CEO comes towards the intended end of their term or reaches retirement age. What happens if they have to leave a board unexpectedly at short notice?
It could take many months, even more than a year to source a suitable replacement, particularly if looking for someone external to the business, which could have a significant impact on the effectiveness of the organisation and board.
Having a succession plan is even more important where the departing CEO may have had unique skills or experience, such as in mergers and acquisitions, which is vital to the organisation’s growth and future success.
Once boards start to create or revisit the CEO succession plan, which they should do at least annually, they need to consider four key factors:
1) Clarity on the role of the business: Family firms need clarity on the future role and direction of their business. Is it about making as much money as possible, evolving into a social enterprise, providing jobs for family members, or something else? Only then can the appropriate succession plan be formulated, along with a clear brief and job specification for the CEO.
On the theme of clarity, being transparent with candidates about what the role entails at the recruitment stage is crucial. Starting at the job specification and interview stage, through to the CEO’s appointment and beyond, role clarity is at the heart of a successful succession process and an effective board. If there is any ambiguity the CEO is set for failure.
2) Consider what’s needed to bring the strategy to life: Forward thinking boards recognise the importance of diversity on the board to help bring the strategy to life. This is vital for family-owned businesses which may have a board loaded with family members who have the same way of thinking and outlook. A CEO with a different demographic background, experience, skills, thinking styles and circles of influence is often just what is needed to breathe life into the strategy and help take the family business to the next level.
For example, if there is a lack of digital skills at a senior level it’s important to have someone on the board who has skills in this area, with digital disruption being a key driver of business success.
If the board is adamant they want the next generation of the family to take over as CEO, then prepare them properly. An important part of this may involve encouraging them to leave the firm for a number of years so they can experience different businesses, new ways of working and learn new skills.
Leading on from this, when recruiting a CEO family firms should bear in mind the importance of a good mix of thinking styles on the board, particularly across the four lines of sight – oversight, hindsight, insight and foresight. This is crucial to deliver an effective board and ensure it provides maximum value, and why it’s important that owners seriously consider appointing a CEO from outside their family.
3) Set clear performance indicators for the CEO: The new CEO will need to know how they will be expected to steward the creation of value, and therefore what they will be evaluated on. Clear performance indicators must be confirmed prior to an appointment being made. Then regular reviews of the CEO are vital to assess their effectiveness, identify opportunities to develop and ensure they are ‘fit for the future.’ After the challenging last 18 months it’s more important than ever that these reviews should take place, at least annually.
If a review highlights issues with the CEO (even if it is one of the owners) it may prompt the board to consider if a new one is needed. This makes it even more critical that a watertight succession plan is in place. It’s also worth bearing in mind that planning for the exit of the CEO and onboarding of the new one is part and parcel of the succession process.
4) Onboarding: The onboarding, or induction stage, is the final step in the succession process. With many boards operating in crisis mode and virtually due to the pandemic, it’s vital that the new CEO is able make a meaningful contribution to board deliberations from the start of their tenure. This can only be achieved via a formally structured ‘journey of learning’ induction plan over 18-24 months. This includes a programme of visits and experiences, a buddy system and governance training.
By taking these four steps boards will deliver a smooth and effective CEO succession process and help engender an effective board.