CEOs urged to focus on succession plans
Clear, well-managed strategies for replacing leaders on the brink of retirement cited as crucial to preparing companies for long-term survival
Powerful watchdog the National Association of Pension Funds (NAPF) has urged its corporate members to avoid rough transitions to new CEO teams, and to implement properly considered succession plans. The group made its recommendation as it emerged that Carpetright founder Lord Harris will stay on as the struggling retailer’s chairman until a full-time successor was found: a U-turn from his earlier plan to step down in September.
In addition, NAPF – whose members hold a collective £900 billion in pension funds – have argued that it is also vitally important for investors to push leading blue-chip firms to carefully outline how they plan to cope with departures of longstanding chiefs or senior board figures without damaging growth or other financial prospects. Further to the Carpetright announcement, the recent dismissal of American Apparel CEO Dov Charney for allegations of misconduct has also brought the issue to the fore, illustrating the shock that a sudden departure can cause to a firm.
NAPF head of stewardship and corporate-governance policy Will Pomroy told the Guardian: “With many companies becoming ever more global and complex, management succession is a primary shareholder risk in a number of circumstances. The development of detailed succession plans, including an internal pipeline of talent, coupled with strong independent boards is vital in ensuring smooth transition. There is an increasing desire for greater reassurance to be provided via transparent reporting and open dialogue.”
Other outbreaks of leadership turmoil in the past few years have demonstrated how choppy succession can disrupt companies – such as 2010’s internal disputes at HSBC, when the board refused to promote Michael Geoghegan from chief executive to chairman; or confusion among Burberry investors after creative head Christopher Bailey was picked to replace Angela Ahrendts, despite having no boardroom experience. Pomeroy stressed that departing bosses should not leave their replacements with messes to clear up. “As recent examples have demonstrated,” he said, “the impact of management decisions often come to light post-departure. Ensuring executives are focused on creating a sustainable legacy is vital.”
NAPF’s message coincided with research by US asset-management group SEI, which reported the astonishing finding that 99% of independent financial services and advisory practices in America go bust following the exit of their founders. While almost one third (32%) of firms in that bracket say they have a succession plan, only 17% have binding and actionable agreements.
SEI practice-management solutions head John Anderson stressed that boards should see succession not merely as a retirement strategy, but a growth strategy. “Advisors are beginning to realise that succession plans and continuity plans can actually become growth tools,” he said. “By taking the time to plan for the future, advisors are giving themselves a key competitive advantage in the present. The process gives them a clearer picture of their firms’ overall health, prioritises finding a new generation of talent, and sends the message to clients that the firm will be viable for years to come.”
Management consultancy FP Transitions partnered with SEI on the research. Its president and founder David Grau said: “Succession planning isn’t just about figuring out who’s going to take over when you’re gone. It’s about building a business that will support your long-term vision, and which will continue to serve clients even when you’re not around as much. Whether that means preparing the firm for acquisition or extending ownership to the next generation, continued growth is essential to a successful transition.”
On the other hand, Dr Reshmi Paul – partner of the CEO Succession Practice at leadership advisory firm ghSMART – blogged at Harvard Business Review earlier this month that companies should give up the notion of a “smooth transition” between CEOs, and instead be prepared to endure tough times in progressing their businesses in the long term. “There is a way for directors to ask the tough questions without undermining the sitting CEO or the company,” he said. “But that means giving up on smooth succession as the overriding goal. It’s time for boards to accept and prepare for the bumps and bruises that come with successions geared to serve the company’s long-term interests – rather than the current CEO’s comfort.”
Paul argued: “Ideally the work starts as soon as a new CEO arrives. The board emphasises their interest in ongoing succession planning. While the CEO should own the process for most of his or her tenure – focused on developing a strong bench and informing the board of progress – the board should gradually take on ownership of the process as the timing of the transition nears … The board has to be ready and willing to dive into potentially challenging conversations with the outgoing CEO about future strategy.”
In Australia, meanwhile, following a restructure of the land’s biggest department store Myer’s this month to put in place possible candidates to succeed chief executive Bernie Brookes, Professor Ian O Williamson from the Melbourne Business School shared with SmartCompany three key steps that small business owners must consider in their own succession strategies.
1. Start to think about your own mortality
“Part of succession planning is accepting you’re not going to be there anymore. Have the conversation early on: ‘what is the reality of how long I’ll be here?’”
2. Start to look for possible succession candidates as early as possible
“If you are in the business of grooming someone for the role, rather than seeking them out, that will be at least a 10-year journey.”
3. Balance the current needs of the business with future needs
Taking an employee out of their current role to prepare them to lead can be risky. “You made an obligation to this person to give them a leadership role and then you end up punishing them because they are so successful in their current role. You must balance the needs of the organisation, which can sometimes be counter to its development.”
For more thoughts on human resources issues, check out CMI’s checklist book Organisational Essentials.