CEO exits continue to rise, and shareholder activists are exerting ever more pressure on boards to make leadership changes. Yet many boards have failed to adjust to the new uncertainty at the top, and may not be fully prepared for CEO changes despite succession planning being one of their core responsibilities. In fact, some companies have had to resort to “boomerang CEOs” to navigate transitions. In today’s complex environment, in which disruptions are the norm and emergency successions are ever less surprising, the board’s engagement in CEO succession planning has become essential for keeping operations and sustainable growth on track.
With accelerating CEO turnover, traditional ways of approaching succession planning may no longer be effective. In our latest report, we outline important steps directors can take to be proactive and better prepared for both planned and unplanned departures.
CEO succession planning is a critical process for any organization. With CEO turnover on the rise, having a robust succession plan in place is more important than ever for retaining stability and continuity during leadership transitions. But how exactly does CEO succession work? Let’s take a closer look
Why CEO Succession Planning Matters
Recent statistics paint a concerning picture of CEO turnover trends:
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In 2022, CEO turnover in the US hit a 5-year high of 11.2%.
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In just the first 9 months of 2023, 1425 CEOs left their roles – nearly a 50% increase over 2022.
This level of churn can be extremely disruptive if an organization is not prepared. A poorly executed transition puts business continuity, employee morale, customer relationships, and even stock price at risk during a leadership change.
That’s why having a thoughtful succession plan is so critical. When developed effectively over time, it can minimize disruption and provide stability when the time comes to appoint a new CEO.
Key Elements of the CEO Succession Process
While each company will have its own unique approach successful CEO succession planning generally incorporates the following elements
1. Identify Future Needs
The first step is gaining alignment on the future strategic needs and vision for the company. This provides clarity on the profile and capabilities required in the next CEO. Key questions to answer include:
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What will be most important for driving strategy 3-5 years from now? Growth? Efficiency? Transformation?
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What expertise, leadership style and experience will be needed in the next CEO to align with future goals?
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Will internal or external recruitment be preferred?
2. Assess Internal Candidates
Next, identify and evaluate potential internal CEO successors. Thorough assessment provides critical insights including:
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Internal bench strength and readiness levels
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Development areas to focus on for CEO preparation
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How internal candidates compare to external recruitment possibilities
Internal assessment techniques can include 360 reviews, executive coaching, and simulations of CEO-level challenges.
3. Develop a Talent Pipeline
Once high potentials are identified, the focus shifts to deliberately developing and preparing them for the top role. Companies should provide stretch assignments, board exposure, and formal training tailored to each candidate’s strengths and gaps.
Mentorship from the current CEO can be invaluable during this extended readiness phase.
4. Define the Transition Process
Clarifying the succession timeline and process well in advance ensures smooth coordination. Key elements include:
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Defined milestones for selection, announcement, and handoff
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A plan for the outgoing CEO to brief the successor and transfer knowledge
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Introduction of the new CEO to key stakeholders, internally and externally
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Clear communication plan for employees, customers, shareholders, and the public
5. Onboard the New CEO
Finally, the new CEO must be fully onboarded over an extended period of at least 6-12 months. Even internal candidates require thorough onboarding to assume new responsibilities. This phase should provide coaching from the outgoing CEO and immersion across the business.
When Should Succession Planning Begin?
Ideally the process begins right away after appointing a new CEO. For long-term planning, boards should monitor and develop potential successors continuously.
More urgently, boards should act promptly if the current CEO shows signs of underperformance. Waiting too long can negatively impact the business. According to BCG research, companies with poorly performing CEOs had 50% lower total shareholder return in the 18 months before transition, compared to that CEO’s earlier tenure.
Who Oversees the Process?
While HR provides critical input, CEO succession planning should be driven at the board level. The board is responsible for aligning succession with business strategy and making the final CEO selection decision.
Key players in the process include:
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The Board: Provides direction, evaluates/selects candidates, and oversees the transition plan
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Outgoing CEO: Offers coaching and mentorship to prepare successors
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CHRO: Assesses internal candidates, designs development plans, and recruits externally
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Executive Team: Participates in assessing/developing internal candidates
What Makes for a Successful Transition?
There are several hallmarks of an effective handoff to a new CEO:
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Smooth operations: Business continuity and performance are stable throughout the transition.
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Thoughtful messaging: Clear communication to stakeholders reassures that a purposeful, orderly process is underway.
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Cultural continuity: The organization’s identity and values are preserved, even with leadership change.
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Quick productivity: The new CEO can quickly assimilate and begin effectively driving strategy forward.
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Engaged employees: Workers feel informed about changes and confident in new leadership.
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External confidence: Customers, shareholders, and partners retain trust in the company’s direction.
Following a robust succession planning process from the outset increases the likelihood of seamlessly transitioning to strong new CEO leadership.
Key Takeaways on CEO Succession Process
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CEO succession planning should begin immediately once a new CEO is hired. Waiting until transition is imminent can hurt the business.
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Thorough assessment and development of internal candidates is crucial but external recruitment should also be evaluated.
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The outgoing CEO plays an important role through mentoring and briefing the new leader during onboarding.
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Boards are accountable for aligning succession with strategy and ensuring a smooth leadership transition.
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Effective succession planning maintains operational continuity, culture, and stakeholder confidence during CEO changeover.
With strong board leadership and commitment to proactive planning, companies can successfully navigate one of the most important processes for sustaining long-term performance. A clear succession roadmap helps qualified leaders step up at the right time to guide the business into its next chapter.
Nine leading practices in CEO succession planning
Boards that prioritize CEO succession planning find ways to lay the groundwork for smooth CEO transitions. How do they do this despite the more immediate pressures of overseeing quarterly performance and strategy execution? We’ve identified nine actions that may make them successful.
Successful succession discussions often stall due to differing opinions on how the companys strategies and future demands should shape the choice of the next CEO. To find common ground, boards should begin by assessing factors likely to impact the business in the next few years. Once aligned on strategy, they can identify the dynamic skills and experience required for the next CEO and plan for multiple succession scenarios. This includes defining qualities for a good cultural fit and involving the current CEO and management team in the process.
Overseeing CEO succession planning is widely considered a full board responsibility. But determining who does what within that mandate can be challenging. Most boards designate the nominating/governance or compensation committees to lead these efforts. Some create a special ad hoc committee for this purpose. No matter the structure, what’s most important is to establish clearly defined roles and responsibilities.
To keep CEO succession planning a priority, directors need to lay out the goals of the process, the cadence for discussion, the plan’s short- and long-term aspects, and the details of the candidate development program. They should also determine how often CEO succession planning appears on the board agenda. And although the current CEO can provide valuable input, the board should regularly discuss succession in executive sessions.
Developing an emergency succession plan requires identifying strong interim candidates who could step in quickly, such as the CFO, COO or other senior executives. Having emergency CEO candidates spend time with the board and the current CEO to better understand the business will help smooth the transition.
If there is no clear internal or external candidate, the board should discuss whether a former CEO or director could temporarily step into the CEO role while the board searches for a longer-term replacement. As part of this discussion, it’s important to assess their comfort level for stepping into the role as well as the anticipated time horizon.
A board that makes it clear to its CEO from day one that planning for succession is a critical part of the board’s job can circumvent much of the anxiety about whether the CEO will feel threatened by the process. The CEO’s responsibility, much like the board’s, is to avoid the disruption of a messy transition.
Maintaining a strong pipeline of CEO-level talent can be a significant challenge in succession planning. If and when a transition becomes necessary, a weak pipeline can result in a scramble to fill the role or in choosing someone who’s not yet ready for the challenge. The first step is a thorough assessment of the company’s leaders — going beyond CEO direct reports — with the aim of identifying individuals poised to become the company’s future leader.
Boards should consider their methodology for evaluating candidates and use the resulting information in their decision-making process. The most effective boards leverage data to aid impartiality and objectivity. Adopting an analytical and evidence-based approach to assessing CEO candidates can reduce bias, allowing boards to avoid evaluating candidates based on personal preferences and familiarity. Simultaneously, leveraging data in the succession process can effectively highlight outlying opinions and possible favoritism against objective facts about each of the candidates.
In the era of activist investors, it’s important to establish and maintain transparency. Boards should consider outlining their CEO succession process in the company’s proxy statement. This could include a description of who is responsible for leading the process, how the company identifies and assesses CEO candidates, how often the board reviews the succession plan, and how the board would respond to an emergency departure.
Directors also need to plan to promote a new CEO to lay the groundwork for a successful tenure. If and when the succession plan is put into effect, the media, employees and other stakeholders should all hear the message that the board fully supports the new executive.
The best boards have an onboarding plan that helps the new CEO get up to speed on company goals, strategy and culture, with directors investing time in listening to and guiding the new CEO. Onboarding details should be shared with key stakeholders and senior business leaders, and the plan should include the division of responsibilities of the outgoing CEO should they remain in the role for a period. Having a well-structured plan will ultimately contribute to the success of the incoming CEO.
Why CEO succession planning is so important
Planning for who will be the company’s next leader has long been one of a board’s most important responsibilities. Without the right person at the top, even established companies with solid business models and innovative strategies may struggle. And that’s even more true in the post-pandemic business landscape — the way organizations operate, adapt and thrive has been profoundly transformed. This transformation, marked by unprecedented disruptions and accelerated digitalization, necessitates a fundamental re-evaluation of which skills and attributes a CEO needs today. Boards must proactively re-think and recalibrate the skills they seek for long-term viability and growth.
Creating An Effective CEO Succession Process
What is CEO succession?
CEO succession is the process that occurs when one CEO leaves and another person moves into the CEO role. The board of directors of a company works to select a new CEO and transition from one CEO to the next to make sure that the company continues to have excellent leadership.
What makes a successful CEO succession planning process?
An effective CEO succession planning process includes external benchmarking to compare external candidates against internal successors. This benchmarking is typically done without notifying candidates to preserve confidentiality.
What happens at a CEO succession meeting?
At each meeting they hold, they can discuss possible options, review or identify potential candidates and keep updated on any developments in the CEO succession process and how that affects the business. 8. Stay committed to the process
Does your company need a board of directors for CEO succession?
Although many companies already have a board of directors in place, every CEO succession needs to have an active board committee that’s responsible for overseeing the CEO succession process. If your company doesn’t have such a board already, consider creating one well in advance of your anticipated CEO succession.
