CEO Succession: Prepare, Prepare, Prepare

It is the most important job of any Board. Find the next CEO.

Yet, complacency by Boards is common. Many are just unprepared for managing CEO succession.

When unprepared, they tend to hire from outside. But, over the long-term, insider CEOs provide higher shareholder returns.

The Economics of CEO Succession

Why It's Important

CEO Transitions Are On The Rise

Average CEO tenure has declined to an average of 4.6 years.

CEOs are retiring at earlier ages.

CEO dismissal rate among S&P 500 was 23.8% in 2013.

Supply Dynamics Favor Internals

Insider CEO appointments among the top 2,500 global public companies increased from 71% in 2000 to 76% in 2013.

Internal CEOs return greater long term value to shareholders over time.

Transitions Can Be Risky

The average cost of replacing a CEO after 18 months ranges from $12m for small-cap to $52m for large-cap companies.

High profile terminations and sudden exits can cause share price downturns and reputational damage.

Preparation Protects Value

Executing a successful CEO succession is neither glamorous nor rocket science. It just takes time and hard work by the incumbent CEO, the board and the internal candidates who are developing the skills required to take the helm.

Succession planning is best achieved when high quality assessment and rigorous, intensive development is offered. The type of development must match the need and must be intense, varied and accelerated in nature.

Must Haves: Ask the Right Questions

Know what you need tomorrow, not just what’s available now. Don’t just ask, “Who’s ready to succeed the incumbent?” Also ask, “What does the company need in future CEOs, and do our first-, second- and third-generation internal candidates fit that profile?”

Experience matters. Don’t just ask, “How long until they are ready?” Also ask, “What specific experiences are internal candidates being given to prepare them for a job they’ve never done before?”

Know the external market. Don’t just ask, “Which executive search firm would we use if we went outside?” Also ask, “Which executives in other companies/industries fit best with our future CEO profile, and how likely would they be to come on board?”

Firsthand knowledge beats talent reports every time. Boards shouldn’t just ask for names of internal candidates; they should get to know them formally and informally, beyond presentations.

Don’t fear the horse race.

The River Strength Meter: CEO Succession

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