Synopsis: Succession planning, including CEO succession plans and leadership pipelines, is crucial for company stability and success. Companies with robust succession plans outperform peers by 20% in revenue growth. Neglecting leadership pipelines can cost companies nearly $1 trillion annually, emphasizing the importance of effective planning.
One of the most critical decisions a company takes is to plan the succession of a CEO. So companies have to explore all the ways this can be done seamlessly and carefully select the best method to ensure a smooth transition.
Succession planning is crucial for strategic business management and remains a top priority for boards, alongside fundraising and maintaining balance sheet health, says Ishwa Consulting “Our research indicates that companies with robust succession plans outperform their peers by 20% in revenue growth and shareholder returns. However, promoter-driven companies continue to lag behind. In 2024, 27% of promoter-driven companies have formal CEO succession plans, up from just 9% a decade ago,” it adds.
The benefits of strong CEO succession planning
Harold D’Souza, Co-founder and Director of WalkWater Talent Advisors, quotes a study by the Harvard Business Review that found that in the S&P 1500 index, companies that neglected their leadership pipelines and succession planning practices collectively lost nearly $1 trillion annually. The biggest costs were underperformance at companies that hired ill-suited external CEOs, the loss of intellectual capital in C-suites of organisations that executives left and, among companies that promoted from within, the lower performance of ill-prepared successors.
Given that effective CEO succession planning is critical to ensure a company’s long-term stability and success, Somdutta Singh, Founder and CEO of Assiduus Global Inc, says companies should not wait for a crisis to initiate succession planning. Ideally, this should be an ongoing process that starts early in a CEO’s tenure.
Ishwa Consulting says the “corner office hustle” goes beyond filling a vacancy; it’s about ensuring a seamless leadership transition that aligns with the company’s long-term vision. Effective succession planning involves early identification of potential leaders, investing in their development, and providing them with diverse experiences across the business. Ishwa’s research indicates that proactive succession planning leads to a 30% higher retention rate among senior leaders.
The key ways to plan ahead
Singh says a key question companies should answer in a succession planning process is “how are you defining successor criteria”.
Organisations should define the skills, experience and leadership qualities they want to see in future CEOs. Consider the companies’ future goals and industry trends when crafting this profile, he says. Look within your organisation for talented individuals who demonstrate leadership potential. Invest in their development through mentorship, coaching and exposure to diverse experiences.
While internal talent is often ideal, the CEO of Assiduus Global says it is advisable to not rule out external candidates. They can bring in a fresh perspective and valuable industry expertise. It is also important to keep stakeholders informed about the succession planning process to ensure a smooth transition.
Singh says research suggests effective planning should start 3-5 years before a CEO’s anticipated departure.
Studies show companies with strong internal pipelines are more likely to succeed in CEO transitions. However, the optimal mix depends on factors such as industry, company size, and available talent.
Practical planning steps
Effective succession planning involves several key steps. D’Souza says it starts with the identification and development of high-potential employees who show promise of being effective leaders. Implementing proper performance management systems at the senior leadership level can ensure the right leaders are groomed and identified. Establishing a panel of senior leaders, both internal and external, is necessary to regularly review high-potential leaders’ growth.
Appointing the most promising executives to the board and providing them with exposure and experience will prepare them to take on top leadership roles. The board plays a key role in the continuous evaluation of identified potential candidates, says D’Souza.
The director of WalkWater Talent Advisors says both internal and external candidates should be considered to find the best possible fit for the CEO role. Once an internal successor is identified, the incumbent should be encouraged to learn the systems and processes in place. Regular training, coaching and interventions are essential to groom identified high-potential leaders, including identifying the right academic and professional training methods for these leaders.
Search consultants can bring a lot of value in the process as they provide expertise in identifying top talent, offer valuable insights into industry trends and best practices, leverage extensive networks to access a diverse pool of candidates, and facilitate objective assessments to ensure the best fit for the organisation’s needs and culture.
Shalini Gupta, Partner, Ishwa Consulting, says multinationals have a process whereby a succession plan is in play for CEO, “CEO minus one” and “CEO minus two”. Therefore, every role has two identified “high pots” — high potential leaders — who are made ready to take on the role when the current person in that role moves on. Moreover, the promotion cycles move in a way that at a senior leadership level, everyone gets a full rotation of different functions, roles and geographies. And a part of the rotation process is people moving to international roles and profiles in other categories, business size, etc.
So not only does the CEO succession plan get formalised, there is a CEO-minus-two level succession plan also in place. This is fairly standard in all multinationals in India.
Family offices and succession planning
Family managed companies work differently. In India, says Gupta, the partner at Ishwa Consulting, more than 80% of family managed companies have a CEO who is from the family. The person can be a direct successor of the promoter, a relative or someone not in the direct family line but is related. When the CEO reaches a certain age, typically above 50, or when the identified successor finishes their master’s degrees, the person gets inducted into the business. Most start either with a strategy, business head or a P&L role. The successor is taken through a few functions and leadership roles and then inducted onto the board in the capacity of an executive member. Then it is just a matter of time as to when that person is announced as the CEO.
How can today’s companies plan better when it comes to CEO succession?
D’Souza says each company’s context and needs differ based on the industry and various other aspects. But a structured method is needed, and it should involve continuous identification, training and evaluation of internal candidates.
Board involvement is critical in all stages of the process. It will also be beneficial to seek feedback from employees through internal surveys.
Case studies
Here are some case stories that D’Souza shared with us to show how companies have managed succession planning
Microsoft
In August 2013, Steve Ballmer announced his departure as Microsoft’s CEO, sparking a CEO search. Despite being a top company, Microsoft lacked a clear succession plan for Ballmer. Although potential internal candidates existed, the focus was mainly on external ones at the start. The search identified more than 100 candidates across industries and skill sets, which was then narrowed down to 20. However, when the first two favourites, Steve Mollenkopf, the COO of Qualcomm, and Alan Mulally of Ford, turned down the offers, Microsoft shifted its focus to internal candidates as part of its Plan B strategy. Satya Nadella, an insider, was appointed as CEO in February, six months after Ballmer’s announcement.
Nadella transformed Microsoft’s culture, emphasised collaboration, expanded the cloud-computing business and successfully led acquisitions like LinkedIn. Under his leadership, Microsoft’s stock surged by 30% in his first nine months, adding $90 billion to its market value. Seven years later, Microsoft ranks as the world’s second-most-valuable company.
HDFC Bank
In India, the transition of leadership at HDFC Bank from Aditya Puri to Sashidhar Jagdishan in October 2020 was notably smooth. With a longstanding tenure at HDFC Bank, Jagdishan joined in 1996 as a manager within the finance function, eventually ascending to the role of group head. In 2019, he was designated as the “change agent” of the bank. His appointment signalled a sense of continuity, which was well-received by the markets. Following his appointment, the bank’s stock experienced a 5% increase, reflecting investor confidence in the leadership transition.
Source: The Economic Times