Navigating the complexities of leadership in today's rapidly changing business environment underscores the critical need for effective CEO succession planning. This process isn’t just a transactional mechanism you can flip on when you need it, but rather a living, breathing, strategic imperative that requires long-term planning and ongoing investment from your current CEO, board of directors, and many others.
To put the need for CEO succession planning in perspective, a comparative study recently found that poor succession planning leads to $1 trillion in lost value annually for S&P 500 companies. Couple this with Egon Zehnder’s findings that an estimated 1 in 3 CEOs will likely exit with little-to-no notice, and you surely are underlining the need for CEO succession planning in red.
Yet, having a robust CEO succession planning process in place will lead to your organization’s stability, future growth, investor trust, and internal alignment. Let’s discuss why.
What is CEO Succession Planning?
For those that aren’t as familiar with this type of planning, CEO succession planning is a strategic process designed to ensure seamless leadership transitions, safeguarding the organization's operational stability and strategic continuity. The planning involves identifying potential internal successors, reviewing their potential for taking on the role, preparing them through targeted development, and meticulously planning the transition to mitigate risks and enhance governance. It also requires Board of Director alignment, ensuring that all leaders for your organization are on board with the requirements for your next CEO.
After all, it’s their responsibility to help keep an eye out for the next potential external candidate.
How Long Does CEO Succession Planning Take?
Typically, CEO succession planning should begin up to two years before the expected transition – but truthfully, starting even earlier than that is optimal.
A longer time frame allows for the thorough identification, assessment, and development of potential candidates, whether internal or external. Starting early provides the board and current CEO ample time to align on the strategic vision for the company's future, ensuring that the chosen successor is fully prepared to lead the organization forward. This is often why CEOs will give their notice or retirement news years in advance of actually leaving the company they’ve serving.
CEO succession planning should be a continuous, integral part of a company's strategy, not just an episodic response when a change is imminent," shares Gabi Carvalho, Co-Leader of Egon Zehnder’s Global Financial Services Practice. "Treating it as an ongoing process helps ensure that the organization is always prepared for the future, fostering a proactive rather than reactive approach to leadership transitions.
Gabi Carvalho, Co-Leader of Egon Zehnder’s Global Financial Services Practice
However, because it’s a long-term play, CEO succession planning may be sidelined by immediate business pressures or perceived as a future issue that does not require immediate attention. Putting off CEO succession planning is not recommended for future success.
What is the Difference Between CEO Search and CEO Succession Planning?
While both CEO search and succession planning aim to secure leadership continuity, CEO succession planning is inherently proactive, focusing on developing internal candidates and preparing for an eventual transition. In contrast, CEO search often occurs reactively, usually triggered by an unforeseen vacancy, and tends to focus on external recruitment to fill leadership gaps swiftly.
Early CEO Succession Planning Is Imperative with Today’s Complex CEO Role
Given that today’s CEO role is more complex than ever before, taking a proactive approach to CEO succession planning is foundational to maintaining operational stability and ensuring the strategic trajectory of the organization. This heightened complexity is reflected by a rapidly evolving business landscape where leaders must navigate accelerated change.
According to a comprehensive study by Egon Zehnder involving 972 global CEOs, today's CEOs are at the center of a confluence of louder, more diverse, and diverging voices, requiring them to adapt their strategies while also being flexible themselves. Nearly 80% of these leaders recognize the need for personal transformation alongside organizational change to effectively lead in this dynamic environment.
This complexity is further amplified by the pressures of integrating social and environmental considerations with traditional financial metrics, demanding a new kind of leadership that is adaptive, relational, and self-aware. CEOs are now expected to cultivate these skills actively, embracing self-reflection and openness to diverse viewpoints to steer their organizations towards sustainable success – so when a CEO decides it’s time to move on, having a successor in place that is capable of stepping up to the plate and fill those shoes becomes all the more important.
And an exceptional sitting CEO will understand the imperative need to start mentoring potential internal candidates as soon as today.
Having a CEO who understands that succession planning is integral to their role is critical in today’s fast-paced, ever-evolving business environment – they must embrace it as an opportunity to ensure the organization's longevity rather than viewing it as a threat to their current position," explains Lisa Blais, Co-Leader of Egon Zehnder’s CEO & Board Practice. "This forward-thinking approach secures the future of the company while also demonstrating a commitment to good governance and leadership continuity that is critical for sustained success.
Lisa Blais, Co-Leader of Egon Zehnder’s CEO & Board Practice
6 Benefits of Early CEO Succession Planning
Initiating CEO succession planning well before the need arises embeds strategic foresight into the governance processes and ensures that leadership transitions are thoughtful. This includes looking at it from both a replacement and strategic enhancement perspective, which will lead to stronger business continuity when the time comes.
The benefits of early succession planning encompass a range of critical organizational needs, including:
1. Risk Mitigation
By starting the succession process early, organizations can significantly reduce the uncertainties associated with unexpected CEO departures. This proactive strategy ensures that potential leadership vacuums are addressed long before they can impact the organization's functioning. It enables the board and current leadership to consider various scenarios and prepare contingency plans, thus safeguarding the company against sudden leadership voids that can destabilize business operations.
2. Board Alignment
Engaging in succession planning discussions well ahead of time allows your board of directors to achieve a critical alignment regarding the organization’s future and the qualities needed in the next leader. These discussions help in building a consensus on the leadership capabilities essential to steer the company forward, considering the evolving business landscape. Early engagement also keeps the board proactive rather than reactive, fostering a governance culture that continuously evaluates and plans for future leadership needs.
Good governance practices that include regular exposure of potential successors to the board and investors can mitigate risk. This transparency helps ensure that all potential leaders are evaluated fairly and that the board is prepared with viable options when a succession event occurs.
3. Development of Internal Candidates
In 2023, 77% of appointed CEOs for international, public companies were promoted from within, underscoring a preference for internal candidates who already understand the company's culture and operations. This trend highlights the perceived risks of appointing external candidates, who, despite potentially bringing fresh perspectives, may face steep learning curves and integration challenges.
Early, proactive planning enhances the leadership pipeline, helping to maintain stakeholder confidence and position the business for continued success. Delaying this planning can force a company to look externally, potentially during a crisis, which significantly increases the risk. Companies that hastily choose a “shiny” external CEO often experience declines in market value, particularly if the company was previously performing well.
Given the evolving nature of the CEO role, it’s crucial to develop candidates now, as their previous experiences might not equip them for the heightened expectations and broader leadership responsibilities they will face
In thinking about this from an employee morale perspective, failing to develop internal candidates can lead to significant retention issues. High-potential leaders might seek advancement opportunities elsewhere if they perceive a lack of investment in their growth. This not only deprives the company of a possibly ideal successor but also can be financially costly due to the loss of experienced leaders.
4. Recognition of the Need to Explore External Candidates
At certain points in a company's journey, such as during a strategic pivot or significant redirection, it becomes crucial to introduce fresh perspectives. Hiring externally often proves beneficial in these scenarios. Initiating the succession planning process early—and periodically benchmarking against external talent—enables a clearer assessment of the readiness and suitability of internal candidates. This proactive approach not only facilitates timely decisions but also ensures that internal talent development aligns with the highest industry standards.
5. Smooth Leadership Transitions
Early planning facilitates a smoother transition by providing ample time for the designated successor to thoroughly understand the intricate dynamics of the company. This period allows the successor to assimilate the organizational culture, align with strategic objectives, and establish relationships with key stakeholders. This integrative approach is crucial in maintaining continuity and momentum in leadership, ensuring that the new CEO can effectively lead from a position of strength and familiarity.
6. Strategic Continuity and Renewal
Early succession planning encourages a strategic evaluation of the company’s long-term goals and leadership requirements. It prompts the board to regularly review and refresh the CEO role to respond to market and technological changes. This dynamic process helps ensure that the company’s leadership strategy remains relevant and capable of navigating future challenges.
Overcoming Common Obstacles in CEO Succession Planning
While we’ve demonstrated the many benefits of CEO succession planning, the process is never seamless and can be fraught with challenges that complicate the transition process and impact organizational stability. Here’s how companies can address some of the most prevalent obstacles:
Obstacle #1. The Board Delegates the Process to an Incumbent CEO with Conflicting Interests
Often, boards delegate the succession planning process to the incumbent CEO, who may have personal biases or an agenda that doesn't align with the organization's best interests. To counteract this, it is crucial for the board to maintain an active role in the process, ensuring a balanced and objective approach. External advisors can also be employed to provide impartial insights and help steer the process away from individual agendas.
Obstacle #2: Starting the Process Too Late
Starting succession planning only a year or less before it's needed leaves limited options, rushing decisions, and potentially compromising on the quality of leadership continuity. To avoid this pitfall, organizations should treat succession planning as an ongoing strategy, beginning the process at least two to three years in advance. This allows ample time for potential candidates to be identified, assessed, and developed appropriately.
Obstacle #3: Insufficient Board Exposure to Internal Candidates
Boards often lack sufficient interaction with potential successors, which can lead to uncertainty in decision-making. Regular updates on leadership development programs and strategic involvement of potential candidates in board meetings can enhance familiarity and confidence in internal talent. Structured exposure initiatives, like leadership presentations and strategic project leadership, can also bridge this gap.
Obstacle #4: Bias Toward External Candidates
The allure of bringing in an external candidate with a seemingly perfect resume and fresh ideas can be strong, especially when internal candidates are not well-known to the board. However, external hires carry their own risks and often involve longer adjustment periods. Combatting this requires a balanced view of both internal and external candidates, supported by thorough vetting processes that consider cultural fit, leadership style, and strategic vision alignment with the company’s goals.
Obstacle #5: Resistance to Change
Resistance from various stakeholders, especially if a popular CEO is leaving, can hinder the succession process. Building a transparent, communicative strategy that involves all stakeholders early in the process can mitigate resistance. This includes regular communication updates, involving key team members in the planning phases, and ensuring that all parties are aware of the succession criteria and process.
By proactively addressing these obstacles, organizations can enhance the effectiveness of their CEO succession planning, ensuring smoother transitions and sustained leadership success.
Putting it Into Practice: How Egon Zehnder Navigates CEO Succession Planning [Examples]
For decades, the Egon Zehnder team has taken part in thousands of successful CEO succession planning engagements and transitions that showcase the need for solid CEO succession planning – and every scenario has been wholly different from the next. For example:
- A major payment company undertook an extensive internal and external CEO search after recognizing the need for a leadership change to adapt to rapidly evolving market conditions. Despite a strong pool of internal candidates, the decision was made to appoint an external candidate who was already serving on the company’s board. This blend of insider knowledge and fresh perspective proved instrumental in steering the company through a significant strategic shift, as detailed in an industry-leading business review article.
- In a scenario where a technology firm faced an urgent need for CEO succession due to the incumbent’s health issues, the CFO was seamlessly transitioned into the CEO role. The CFO had been closely involved in strategic decisions and was well-prepared through internal development programs, ensuring continuity and stability during the critical transition period.
- For a manufacturing company known for its robust internal leadership development, the CEO announced an early retirement due to personal reasons. Although initially planning to look only internally, the board expanded its search to include external candidates to align with a broader change agenda. This proactive approach highlighted the necessity of flexibility in succession planning to adapt to unforeseen changes.
- Today, a consumer goods company is evaluating two internal executives for their potential to assume the CEO role within the next year. These candidates are undergoing a series of development assessments and strategic planning exercises to ensure they are ready for the possible transition, illustrating a long-term, integrated approach to leadership development.
- Currently, a specialty products company is preparing a COO, recently brought in as the second in command, for a potential future role as CEO by 2027. The COO is engaged in intensive on-the-job training and strategic leadership tasks to build the necessary skills and insights required for the top position.
These examples underscore the importance of both preparing internal candidates and considering external options as part of a comprehensive CEO succession strategy. They highlight how different scenarios can influence the need for internal development or external recruitment and the benefits of starting succession planning early to ensure a smooth and effective leadership transition.
Partner with Egon Zehnder’s CEO Succession Planning Experts
In navigating the complexities of CEO succession planning, partnering with seasoned experts can provide your organization with the strategic insight and support needed to ensure a seamless transition. Our extensive experience and tailored approach empower companies to overcome common succession challenges, enhance leadership continuity, and align future leadership with long-term business goals.
Need support for your company? Contact Egon Zehnder today to fortify your company's future with a well-planned and executed CEO succession strategy, setting the stage for sustained success and growth.
