Private Company Director

New Study Shows Succession-Planning Gap

A new study about CEO succession by the Stanford University Rock Center for Corporate Governance and The Institute of Executive Development (IED) shows that a large percentage of top companies are not paying enough attention to succession planning.

  The report is based on in-depth interviews with executives and directors at 20 companies regarding their succession and executive development practices. The researchers found that only 46% of respondents have a formal process for developing successor candidates for key executive positions. What’s more, only 25% of respondents agreed that there was an adequate pool of ready successor candidates for the CEO position at their companies.

  In a statement, Stanford Graduate School of Business faculty member David Larcker said: “The corporate leaders we interviewed all believe that succession planning is vitally important, but the majority do not think that their organizations are doing enough to prepare for eventual changes in leadership, nor are they confident that they have the right practices in place to be sure of identifying the best leaders for tomorrow.”

  Key findings of the report include:

  • Companies do not know who is next in line to fill senior executive positions. According to respondents, organizations often do not make the connection between the skills and experiences required to run the company and the individual candidates who are best suited to eventually assume senior executive positions.
  • Companies do not have an actionable process in place to select senior executives. According to the study, half of boards believe they have an effective succession plan in place, yet only 25% report having an adequate pool of successor candidates for the CEO role and other key C-suite positions. “The problem tends to be cultural,” observes Founder and CEO of IED Scott Saslow, co-author of the report. “The majority of companies do not have honest and open discussions about executive performance, nor do they allocate sufficient time to the process of identifying and grooming successors.”
  • Companies plan for succession to “reduce risk” rather than to “find the best successors.” Respondents were most likely to view succession planning in terms of its potential to reduce future downside risk rather than producing shareholder value benefits through the identification of strong and appropriate leadership.
  • Roles in the succession planning process are not well defined. Companies agree that succession planning involves the combined efforts of the board of directors, the senior management team, and support staff, such as the human resources department. Most, however, do not structure an evaluation process that formally assigns roles to each of these groups and requires their participation, and many respondents claim that the groups do not spend sufficient time meeting together.
  • Succession plans are not connected with coaching and internal talent development programs. Succession planning and internal talent development are treated as distinct activities rather than one continuous program to gradually develop leadership skills in the organization. Tellingly, only 46% of respondents report that the board is involved in succession planning and talent reviews for key executive positions. As a result, “The board of directors does not have sufficient insight into the skills and capabilities of the senior management team and is not prepared to determine which executives are most qualified to replace an outgoing CEO or C-suite member when a succession event occurs,” says Saslow.

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