Only about half of large companies have a written succession plan, and approximately one-third of family businesses have one. Boards are becoming more vocal about the need for a plan, creating a significant risk for business continuity.
A prominent example of the good and awkward sides of succession planning was the 2013 announcement by Steve Ballmer that he was stepping down. The initial search was heavily focused externally. After several misfires, an internal candidate, Satya Nadella, became a successful CEO who changed the culture from a know-it-all to a learn-it-all culture.
Poor C-suite transitions wipe out $1 trillion in market value annually, impacting even everyday investors. External hires are much more likely to fail and only have an edge in the case of a company that needs a turnaround. For successful firms, the probability of destroying value and the 84% higher exit rate makes a compelling case for internal talent.
The need for the development of internal talent to prepare them for CEO roles is critical. With support from the current CEO, the organization’s board should identify the critical success factors. Assessments, including 360 feedback assessments provide deep insight and feedback to the organization and the potential successors that allow for meaningful development experiences, assignments, and education to fill in gaps. Best practice begins with the assessment process three to five years in advance to allow potential successors to try on new leadership assignments and demonstrate that they are ready. Ideally, development for potential successors is concurrent with leadership development for the top levels of management, increasing retention, engagement, and team performance.
A typical process will provide objective data and success criteria to form a development program that may involve outside learning, cross-functional assignments, coaching, and mentoring. Our 360 process provides a targeted re-measurement of competencies flagged for growth, and the on-the-job assignments allow for a real-life evaluation of capabilities.
We have frequently seen top successors not be ready, resulting in the risk of an external hire. Or they leave because they did not feel they were receiving signals that the organization valued them. CEOs have a responsibility to their organizations and boards to build a capable bench, making an external search an option.
Cultivating internal successors is a win for the organization, less risky for investors, career-building for those developed, and a win for the culture. Except in case where there is a need for a turnaround or the CEO’s skill sets cannot be grown internally, there is a tremendous advantage in developing a ready pool of successors for C-suite roles.
