Succession Planning—What Businesses Can Do Before the Black Swan Lands

Succession Planning—What Businesses Can Do Before the Black Swan Lands

Almost a decade ago, two McDonald’s Corporation CEOs died within nine months of each other. Last year, the CEO of Deloitte Israel tragically lost his life in a plane crash. Unfortunately, such tragic events occur more often than you might think. A study conducted by the Stanford Graduate School of Business found that approximately seven CEOs of public traded companies die each year.

  Succession planning is smart business—and not just for unanticipated black swan events like these that arrive with great surprise, magnitude, and impact. Succession planning shapes and accelerates executive development and enables boards to respond effectively to a sudden CEO departure that could be driven by anything from hostile takeovers and disruptive technology to failures both strategic and human.

  Yet many boards and companies fail to do the succession planning that can be vital to brand protection and business continuity:

     
  • A 2013 Deloitte survey found that 49 percent of family-owned businesses review succession plans only when a change requires it; 41 percent do not have leadership contingency plans.
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  • In 2012, the Standard & Poors 500 CEO turnover rate was 10.9 percent—and 14.1 percent for its poorly performing companies. However, a joint study by Heidrick & Struggles and Stanford’s Rock Center for Corporate Governance found that corporate boards dedicate only two hours to succession planning annually.

  These facts suggest that boards should continually plan for succession. How? Let me suggest three actions within every board’s purview.

A framework for succession planning

1. PREPARE: Establish a board committee to continually review executive readiness.

  While boards at nonprofits, public companies, and private partnerships each have unique requirements to navigate, all of them may find it beneficial to establish a committee focused exclusively on succession. Ours at Deloitte used this blueprint for action:

     
  • Define committee mission: to help our board oversee management’s identification, development, and exposure of sufficient qualified candidates.
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  • Determine committee’s membership: limited to those who are nonmanagement members not seeking consideration as a senior leadership candidate.
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  • Specify replacement process: under black swan scenarios or other conditions and ensure that the board understands the process.

  However, such board committees shouldn’t shoulder a board’s entire responsibility for succession oversight. Boards also can monitor management’s talent strategy and the current and future state of executive readiness.

2. SEARCH: Define requirements for the CEO and prospect for candidates who meet or exceed them.

  Creating an initial pool of candidates can be challenging. Nonprofit boards often rely on job boards and external networking to find a new executive director. Public company boards may use their familiarity with in-house executives or turn to search firms to find external CEO candidates. At Deloitte, every partner has both a voice and a vote—making our Nominating Committee process of extensive surveys and interviews across our partnership an important step in identifying and selecting a slate of candidates for our senior leadership positions.

  Determining what’s most preferred in a leader helps organizations choose the right one. Creating a detailed CEO role profile can help. Before I became a candidate to serve as Deloitte LLP Chairman, our board compared me and others to a list of specific core capabilities, attributes, skills, expectations, and desired experiences. This exercise enabled our board to compare, contrast, and ultimately identify and rank the most qualified candidates for further consideration.

  Whether your organization is nonprofit, public, or private, one aspect of the vetting process that doesn’t get sufficient attention is cultural fit. Conducting a frank assessment of culture can influence which candidates to consider. The board of a broken organization, for example, may favor external prospects that can bring the seeds of a new culture with them—although, according to a corporate governance expert quoted last May in the New York Times, hiring from the outside can be three to five times more expensive than promoting from within.

  Likewise, an unbroken culture may influence a board to focus on internal candidates who already know and understand the organization. To better gauge cultural fit, think about implementing an evaluation system that measures performance against preferred norms. At Deloitte, we assess potential leaders by how well they support behaviors we hold dear—such as mentoring, generating positive client impacts, strengthening our communities, and serving as a steward for our brand and resources.

3. DEVELOP: Grow and replenish your roster of candidates.

  A black swan can arrive at any time—tomorrow morning, perhaps, or years into the future. The roster of potential CEO candidates, therefore, must be continually invigorated, nurtured, and restocked.

  Board succession committees can make sure management identifies appropriate internal and external CEO candidates and assesses them against specific role criteria. They also can confirm that management is preparing internal candidates appropriately by overseeing training, mentorship, and challenging assignments. Our development plans at Deloitte have the following sections: key development needs, support network, actions and timeframes, and comments/risks.

  Exceptional organizations have their succession processes hard at work from campus to C-Suite. GE developed the first corporate university, its famed Management Development Institute at Crotonville, in 1955 to prepare future leaders in the context of its culture. Today, 4,000 businesses worldwide operate their own campuses. Our curriculum at Deloitte University includes instruction devoted to projecting an executive presence, mastering negotiations, influencing for results, and improving personal productivity.

Plan, sustain, grow

  Exceptional organizations recognize that successful succession planning is a process with no beginning or end. They also understand that it’s vitally important for their boards to know who may take the reins of leadership next. At Berkshire Hathaway’s recent annual meeting, for example, Warren Buffett announced that its board has already identified his future successor.

  Having Plan B ready to activate is a board’s first line of defense against a black swan event. We need look no further than McDonald’s and Deloitte Israel for proof. McDonald’s ongoing planning ensured that the succession of two CEOs who passed away was immediate and seamless. At Deloitte Israel, the late CEO had anticipated his own retirement and had groomed his successor for many years. A sorrowful yet smooth transition occurred with minimal impact on business operations.

 

  Succession planning is like having a continually renewing corporate will—one that can provide peace of mind, protect enterprise assets, and enable organizations to move forward with confidence when it’s needed most.

  Mr. Renjen is chairman of the board, Deloitte LLP.