Guide to CEO Succession Planning
Companies need a smart succession plan to avoid high CEO turnover. Read our CEO transition checklist to learn about talent-building, strategy and CEO onboarding.
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Guide to CEO Succession Planning
Does your company have a CEO succession plan?
CEO turnover has been escalating at an unprecedented pace. In 2022, rates of turnover in the U.S. hit a five-year high at 11.2%, and in 2023, CEO departures increased month on month—up nearly 50%. In the first nine months of 2023, a total of 1,425 CEOs left their roles.
Arguably, no factor has greater impact on a company’s success than the selection of a new CEO. Yet, according to the Harvard Business Review, fewer than half of U.S. companies have an adequate plan or process for CEO succession. This article explores what boards and leadership teams can do to ensure an effective CEO succession planning process, from setting the stage for an effective transition to choosing the right candidate and successfully onboarding.
The major strategic initiative of appointing a CEO impacts the entire business and its stakeholders. This is why the most successful organizations follow these best practices:
Identifying and developing potential internal CEO successors is time-consuming—it can take years. Ideally, CEO succession is a multifaceted, long-term planning process that starts as soon as a new CEO is appointed. If that isn’t possible, succession planning should start sooner rather than later. When developed over time, an effective succession plan fosters partnerships among directors, management and potential internal candidates. This also gives the company time to build a complementary and supportive team around one or more favored CEO candidates.
The board needs to make CEO succession planning a strategic priority and include it in any long-term plans of action. After all, the capabilities that the CEO will eventually require depend on the kind of future that the board has planned. As the company vision evolves, CEO succession should be kept top of mind, with the criteria for future CEOs adjusted as needed.
Many top organizations opt for an internal candidate when selecting a new CEO. That can't happen without creating a culture of development—not just among the executive team, but two or three levels deep in the organization—as it sustains a company’s performance at all levels and ensures the retention of key talent. Even if the board goes outside the organization to select the next CEO, a corporate culture that identifies and develops its talent is more likely to have committed, effective and trusting employees.
Failing to remove a poorly performing CEO can have a disastrous financial impact. According to a BCG study, companies whose CEO have the right profile to successfully tackle evolving strategic priorities generate total shareholder return (TSR) three times higher than companies with a poorly performing CEO. What's more, in the final 18 months of an underperforming CEO’s tenure, companies generate TSR 50% lower than they did earlier in the CEO’s time with the company.
Defining and agreeing upon the steps of a CEO succession planning process will help stakeholders prepare for what’s next. Whether or not your CEO is planning to leave, creating a formal plan streamlines collaboration, fosters alignment, increases efficiency and mitigates risk.
Although there is no one way to plan for CEO succession, an effective strategy requires the following elements:
Long before discussing potential candidates, the board and CEO should agree on the essential future CEO capabilities. Gaining alignment among directors on CEO attributes can be a challenge, but one that is worth the effort. It starts with asking simple questions, such as:
After identifying the CEO criteria, it’s time to highlight potential internal candidates and start preparing them for the job. Ideally, the organization can provide a mix of on-the-job learning, relationship-building, and formal training specifically designed around each candidate’s strengths and weaknesses. For example, the candidates could:
Even if the internal candidate is a known top performer, it’s essential to thoroughly evaluate their ability to take on CEO responsibilities. Performing comprehensive evaluations for internal candidates will help the organization:
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. Conducting external benchmarking every two years helps inform the development and readiness of internal successors against external candidates. It also helps the organization keep an eye on potential external candidates as their careers progress. About six months before a timed succession, external candidates should be considered in earnest, even if the organization has good internal options.
Every new CEO, even those who have been with the company for years, needs an onboarding plan. Whether they’re new to the company or new to the role, onboarding is an important part of the process.
A well-planned transition that spans a full year will provide a new CEO with a solid start. Follow these four onboarding best practices.
Gleaning insights from senior leaders is crucial for all incoming CEOs, even those who were promoted from within the organization. The CEO onboarding plan should include frequent in-depth discussions with the outgoing CEO that provide:
Following a briefing period, the incoming CEO should be introduced to the company’s stakeholders in a series of information-gathering sessions. This allows the outgoing CEO to gracefully pass the baton, while simultaneously building support and goodwill from other constituents—especially stakeholders with whom the incoming CEO has not yet interacted.
Continue the CEO transition checklist with a detailed timeline, developed with the help of senior management, that outlines an orderly transition of roles and responsibilities. If the appointment is internal, this should include the elevation of the executive moving into the new CEO’s former position. If the outgoing CEO is staying on as a chairperson, that role needs to be clearly defined to avoid interference with the new CEO.
It’s important that the new CEO be seen as a new leader, even if they are already known to the board. The new leader can be phased into board meetings over time, while the outgoing CEO, to the extent possible, provides coaching and feedback throughout the board introduction process.
When planned effectively, CEO succession is more than a changing of the guard—it’s an opportunity for the entire organization to grow and evolve. Developing CEO succession planning best practices and a clear process will ensure the CEO and the organization advance and thrive together.