What Is CEO Succession Planning?

What Is CEO Succession Planning?

A guide to how boards prepare for a change at the top and why the process starts long before a chief executive leaves.

CEO succession planning is the process a board uses to prepare for the eventual departure of its chief executive, whether that change is planned years in advance or happens without warning. A good plan identifies the qualities the next leader will need, assesses potential candidates inside and outside the business and sets out how the transition will be managed. Handled well, it protects the organisation’s performance and reputation at the moment it is most exposed.

Although the chief executive usually plays a part in the process, responsibility for succession ultimately sits with the board. In the UK, the Corporate Governance Code expects listed company boards to keep succession plans in place for both the board and senior management, and many private and PE-backed businesses now follow a similar approach.

Why CEO Succession Planning Matters

A change of chief executive affects almost every part of an organisation, from strategy and culture to investor confidence and staff morale. When a board has no clear plan, a sudden departure can leave the business without direction for months, and a rushed appointment made under pressure carries a far higher risk of failure.

Effective CEO succession planning gives the board time to think carefully about where the business is heading and what kind of leader it will need to get there. The right successor for the next stage of growth may look quite different from the current chief executive, particularly if the organisation is preparing for a sale, an acquisition or entry into new markets.

Types of CEO Succession

Boards generally prepare for three kinds of leadership change, and a complete plan will cover each of them.

• Planned succession covers an expected departure, such as a retirement or the end of a set tenure, and usually allows the board a period of one to three years to identify and prepare a successor.
• Emergency succession covers an unexpected departure caused by illness, resignation or a sudden change in circumstances, which means the board needs a named interim leader who can step in immediately.
• Strategic succession covers a change driven by the business itself, for example when a new ownership structure or growth plan calls for a chief executive with a different set of skills and experience.

Internal and External Candidates

Many boards begin by looking at internal candidates, since a successor who already knows the business, its people and its culture can often settle into the role quickly. Promoting from within also sends a positive signal to the wider leadership team about the opportunities available to them.

External candidates, on the other hand, can bring fresh perspective and experience the organisation does not yet have, which is often valuable when the business is changing direction. For this reason, most boards benchmark internal candidates against the external market, so that any final decision rests on a clear view of every realistic option.

The Role of the Board

The nomination committee usually leads the succession process on behalf of the board, working with the chief executive and the chief people officer to review the leadership pipeline. The committee typically agrees the profile for the next chief executive, oversees the assessment of candidates and recommends a final appointment to the full board.

Non-executive directors play an important part here, because their independence allows them to judge candidates objectively and challenge assumptions about who the natural successor might be. The chair, in particular, often acts as the main point of contact for the chief executive throughout the transition.

How to Build a CEO Succession Plan

While every organisation will shape its plan around its own circumstances, the strongest succession plans tend to share a few common steps.

• Start early, ideally as soon as a new chief executive is appointed, since the most successful transitions are usually the result of several years of preparation.
• Agree the future profile by considering where the business will be in five years and what experience, leadership style and skills its chief executive will need at that point.
• Assess the internal pipeline honestly, identifying which senior leaders could step up now, which could be ready in a few years and what development each of them would need.
• Benchmark against the market, using a specialist partner to map external talent so the board understands how its internal candidates compare with the wider pool.
• Name an emergency successor who could take over at short notice, and review that choice regularly as the leadership team changes.
• Review the plan at least once a year, treating succession as a standing item on the board agenda and updating it as the business and its people develop.

Succession Across the C-Suite and N-1

Although the chief executive attracts the most attention, the same principles apply across the wider leadership team. A sudden departure from the chief financial officer role or another critical C-suite position can be almost as disruptive, particularly during a transaction or a period of rapid growth.

The leaders who sit one level below the C-suite, often described as N-1, form the most important part of any succession pipeline. Investing in their development gives the board a stronger set of internal options, and it helps retain the people most likely to become the organisation’s future chief officers.

Getting Support With CEO Succession Planning

Many boards work with an external partner to benchmark internal candidates, map the market and run the search when the time comes to appoint. This outside view is especially useful for chief executive appointments, where the board needs confidence that it has considered every credible candidate.

Hanson Executive, the Board, C-suite and N-1 practice of Hanson Search, supports organisations with leadership succession across the UK, Europe, the USA and the Middle East, alongside the Group’s talent advisory team. If your board is preparing for a change at the top, get in touch to find out more about our executive search services.

Hanson Search is a B Corp certified global executive search firm, founded in 2002, with offices in London, Dubai, Abu Dhabi, New York, San Francisco, Washington DC and Paris. Over more than two decades, the firm has completed over 5,000 placements across more than 20 countries, drawing on a network of more than 100,000 professionals.