Why Is CEO Succession Planning Important?

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Martin Crapper.



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In the dynamic and ever-evolving world of business, the role of a CEO holds immense importance in steering the success of an organisation. A Chief Executive Officer (CEO) is not only responsible for guiding the company's strategic direction but also for embodying its values and vision.

Therefore, ensuring a seamless transition of leadership is of paramount importance. This is where CEO succession planning comes into play, serving as a strategic process that safeguards a company's stability, continuity, and long-term growth.

Often boards are not adequately prepared for a CEO to depart, despite being a primary responsibility many boards do not have thorough CEO succession plans in place. Businesses can be unpredictable and preparing for planned and unexpected CEO departures is crucial. Otherwise, the company is at risk of being without leadership in turbulent times.

Despite it being one of the key responsibilities of a board, a growing number of companies are without a successor. In fact, even those with innovative strategies regularly fail to have the next leader lined up and prepared, ready for when a CEO decides to move on. There are important steps the board can take to be better prepared for both planned.

Many Businesses Are Unprepared for CEO Succession

Initiating the conversation about CEO succession can be a challenging, somewhat daunting task. Directors might be hesitant to broach the topic, as it could lead to the current CEO feeling as though they are being pushed out or that the board is seeking a replacement. Similarly, directors might want to refrain from discussing CEO succession planning to prevent the current CEO from feeling insecure. Whilst a CEO is focusing on devising and implementing strategic measures, it can be difficult to simultaneously plan for their eventual departure.

So, often the board put off the painful conversation and does not initiate a process.

Why CEO Succession Planning is Vital

When a CEO is performing well, succession planning doesn’t feel as though it’s an urgent task, but finding the next leader is always in a company’s best interests. Businesses are always evolving and facing new challenges, and this is accelerated by evolving technologies and flexible working arrangements. To successfully navigate a competitive industry, a company needs strong leadership, which is why CEO succession planning is so important.

In 2020, 56 S&P 500 CEOs resigned, and a fifth of these (56) did so under pressure. This was a considerable increase from 13% the previous year. The length of time that someone stays in the role of CEO is decreasing, meaning that directors are likely to oversee more CEO successions than they might have in previous years. Without a succession plan in place, a smooth transition of leadership is unlikely, and the change is likely to be a lot more disruptive to the business.

There comes a time in every CEO's career when they need to exit their position. There are numerous examples of CEOs who keep the post for 30 years or more. But the average tenure for a chief executive is just five years, according to PWC, and there's a reason for that, such as:-

  • Poor shareholder return
  • CEO has run out of ideas
  • They’re low on energy
  • They feel their package is not commensurate with the work
  • Merger and/or acquisition
  • Retired
  • Legal or Regulator issues

While reducing the impact on the stability of the company, CEO succession planning also reduces the damage that comes with unexpected departures. Having a successor decided beforehand, and a structured plan in place to transition from one leader to another, enables the company to be prepared.

Tim Cook the successor at Apple

A great example of a well-planned process was Steve Jobs at Apple. As the founder and later CEO of Apple, Jobs revolutionised both the design and function of personal computing devices, disrupting major industries, such as the mobile phone arena, and creating entirely new ones e.g., digital music players, watches, etc.

He led with unprecedented vision, saving Apple from bankruptcy, and pushing it to become one of the highest market capitalised businesses worldwide. His fingerprints were all over the products and their unique design. But in October 2011, Steve Jobs passed away after 14 years as CEO, and the company had to continue without its founder.

Jobs left the company in the hands of his COO, Tim Cook, who commented on Jobs’ passing, saying, “Steve leaves behind a company that only he could have built, and his spirit will forever be the foundation of Apple.”

Many wondered following his death if the business would continue to thrive without its founder. In Apple’s case, the answer was ‘yes’. Apple has continued to grow. Its brand valuation more than tripled from 2011 to 2014, giving it the highest market value of any company worldwide. Gross revenues increased from $65 billion in 2010, to $108 billion in 2011, to $394 billion by 2022.

Apple has been named one of the most valuable billion-dollar brands in the world and one of the world’s most admired companies. All this without Jobs at the helm.

The key to Apple’s continued success was an iconic succession plan that sustained Jobs’ vision beyond his time as a leader. This succession plan took the form of a close relationship with Tim Cook, Apple’s COO and primary succession candidate, as well as the establishment of a world-class executive education system known as ‘Apple University’.

Jobs became the CEO of Apple in 2000, at which point he immediately hired Tim Cook as head of operations. Cook streamlined Apple’s facilities and supply chain, dramatically increasing margins. He formed a strong partnership with Steve Jobs and acted as his right-hand man for nearly a dozen years. Cook had a test run as CEO in 2009, and again in 2011 while Jobs was managing his health. All of these opportunities were facilitated to give Cook a wealth of experience and equip him to step into the role of CEO when the time came.

Perhaps more incredible than the effort Jobs put into preparing Cook was the establishment of Apple University. This institution was the mark of a succession plan that went beyond a single successor. Apple University intended to retain top talent and help Apple employees think like Steve Jobs. It was created in 2008 under the oversight of Joel Poldony (former Dean of Yale Business School) and inspired by Hewlett Packard’s “The HP Way” (core values that Jobs was exposed to during his time as an intern at HP). The university uses case studies based on important decisions the company has made over the years, and the curriculum includes courses such as “What Makes Apple Apple.”

Many Companies Need to Improve Succession Planning Efforts

Effective succession planning provides stakeholders, investors and shareholders with confidence in the company. This is also the case for employees, clients, and customers. A clear and communicated succession plan, as demonstrated in the Apple story shows that the company is prepared for the future and can effectively navigate leadership transitions.

A transparent and well-communicated succession plan portrays a company as forward-thinking and well-prepared. This positive perception can attract top talent, potential investors, and partners. Internally, succession planning encourages the identification and development of potential leaders within the organisation. By nurturing internal talent, companies can retain their best performers, boost employee morale, and create a culture of growth and advancement.

An abrupt departure of a CEO or MD can lead to disruptions in operations and investor confidence. Succession planning minimises these disruptions by having a well-defined roadmap for the transfer of leadership. According to survey data, more than half of board members felt that they needed to improve their CEO succession planning. Of course, this is easier said than done, as directors and board members need to find an approach that works for them despite the more immediate pressures of overseeing quarterly performance and strategy execution. Though planning for the future can be complex, it’s key for businesses large and small, in any industry.

Stay tuned for part 2 on succession planning, with some vital strategies on how to get it right within your organisation.

In the meantime, why not get in touch with us for information about how we can help you to find the executive leader you seek? Give us a call on 01582 450054 or email info@RedlineExecutive.com.

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