Why is Succession Planning Important?
One of the most disruptive things that can happen to a company is the sudden need to replace a leader. A CEO Succession Planning Survey from Heidrick & Struggles and Stanford University found that more than half of companies today cannot immediately name a successor to their CEO should the need arise. Furthermore, KPMG conducted a global survey of 2,300 directors that showed that only 14% of them had a detailed Board succession plan.
Without a defined plan in place, a leader’s departure can create confusion and massive risk to an organization’s stability. To be truly effective, succession plans must be created long before they are to be enacted. Among the many benefits to having a defined strategy, there are five key reasons to create your succession plan as soon as possible. By defining a succession plan, your company affords itself the time and preparation necessary to ensure a smooth leadership transition.
Let’s take a deeper look at each of the five reasons for creating a succession plan and the benefits of taking a proactive approach.
1. Succession Planning Mitigates Risk of Sudden Leadership Changes
According to the Harvard Business Review, each year 10 – 15% of corporations must appoint a new CEO.
What causes these positions to become vacant? Retirement, leaving for a new position, termination, and even death can all create a vacancy.
In the case of an anticipated retirement, there is often a period of a few months, or even a year, of awareness in which successors can be considered. However, if the position is vacated due to a resignation, dismissal, or ill health, the change can be sudden and disruptive.
Companies shouldn’t begin planning for a transition after the announcement is made. Rather, the best time to plan for leadership transitions is actually years in advance. By identifying a pool of internal and external candidates (and keeping it up to date), your company will be prepared for a much easier transition — even if it’s a sudden one.
When you’re looking to replace a senior leader, starting from scratch can be costly. It might require contracting a talent scout to find someone fast. It’s also more likely to result in a bad hire. Estimates suggest that up to 40% of all new CEOs fail to meet performance expectations in the first 18 months. A rushed search can be a recipe for disaster, and make it even more likely that you will choose a disappointing candidate.
2. Continuity Planning Helps Maintain Board & Shareholder Trust
Whether publicly traded or privately held, maintaining the trust of your Board and shareholders is critical to your company’s success. Having a clearly defined and communicated succession plan demonstrates to invested parties that you are proactively managing current staff and planning for the future.
Some Boards mandate that a CEO must name a successor, but what about other key leadership positions? The departure of other decision-makers such as vice presidents, directors, major division leaders, and heads of departments can create a power vacuum and confusing upheaval. An unexpected vacancy in any of these positions can distract a business from focusing on growth and create costly discord that clouds focus.
If it is unclear who owns the process of identifying and determining successors — the CEO? the Board? — uncomfortable dynamics can ensue. By setting clear goals, roles, and boundaries, you can avoid any confusion or duplicated efforts that can result in inefficiency and hurt feelings, which leads to the third reason why succession planning is so important.
3. Succession Planning Creates Clear Communication & Alignment
Succession planning is crucial for family businesses because it can help avoid the hurt feelings and estrangements that can flare up when emotions are heightened during a transition of leadership. For example, if the founder of a company has identified an heir apparent, this should be clearly communicated to all family members. By the time a transition is necessary, everyone in the family should be on the same page about what will happen. An owner or leader who hides his or her intentions sets everyone up for mistrust, disagreement, and failure.
Key leadership must be in accord about the way forward to ensure they are operating as a unit and not undermining each other’s efforts.
Ideally, a succession plan should fit into a larger defined strategic vision developed by organizational leadership. By definition, creating a succession plan forces company leadership to look ahead and estimate where their organization is going. By considering factors like your industry and your competition, your organization can determine what its leadership will need to look like 5, 10, and 15 years from now.
See how your succession plan stacks up by taking our succession best practices survey. You’ll see where your plan is strong and receive suggestions if there are any areas that might need some shoring up.
4. Succession Management Enables Successors Time to Prepare
Another benefit to identifying potential successors is that it gives your organization time to provide the resources that will prepare high-potentials for a new role. During this period of evaluation, each candidate can be assessed for strengths and gaps and receive proper development opportunities.
When high-potential leaders know the company is interested in them, they’re more likely to remain engaged with the organization. By communicating that someone is part of the succession plan, the company is telling its high-potentials that they are valuable and worth investment. Employees who feel valued and appreciated are more likely to stick around to see what the future holds.
Identifying high-potentials also gives them the opportunity to interact with company leadership, ask questions, get a firm grasp of the role, and truly consider if they would be a good fit.
It is much better for candidates to determine that they aren’t interested in a role before committing to it. A bad hire can take an emotional as well as a financial toll on an organization, so it’s in everyone’s best interest to take the time necessary to choose wisely.
By grooming a pool of high-potential candidates, your organization has options worth considering when a leadership position becomes available.
5. Leadership Pipeline Planning Provides Freedom to Focus on Business Goals
No matter the size or structure of your organization, having a defined plan allows everyone to focus on top-line goals like growing the business. A succession crisis due to lack of planning can cause your organization to operate below capacity or fail to fully compete in the market, creating opportunity for competitors to gain advantage.
This can become especially costly if an ineffective CEO or leader is left in place for too long simply because a replacement hasn’t been identified.
Identifying successors for senior positions is a critical undertaking for any business. You need a fair and objective process to select and develop the best leaders.
At Psychological Associates, we use our proven suite of data-driven solutions to create robust and individually tailored Succession Planning processes.
We take the time to:
- Understand your current culture, strategy, goals, and challenges to create a profile of the role you will need to fill.
- Integrate executive development programs with CEO succession planning so the best internal candidates (even those outside the C-suite) are identified and assessed early.
- Determine skills, competencies, qualities, educational background, and other desirable candidate traits and establish a leadership development program to grow these strengths in future candidates — in essence, grow the candidates you want to have available when the time comes.
- Create a pool of exemplary candidates ready to realize their potential and take on a new role if a key position becomes vacant.
To learn more about how Psychological Associates can help you fill your succession pipeline, please contact us. Download a copy of the full article at the link below.