In January, the abrupt announcement of Philipp Rickenbacherâs departure as CEO of Julius Baer sent shockwaves through the corporate world. A sharp 52% fall in annual profits linked to the Swiss wealth managerâs exposure to the crisis-hit Signa property group, plunged Julius Baer into a leadership crisis, leaving the company without a clear successor. In response, the firmâs board appointed Nic Dreckmann as the interim CEO, highlighting the critical importance of proactive CEO succession planning.
Thatâs a concern many corporations will be grappling with, as recent data reveals that more than 1,135 CEOs stepped down from their roles in the full year 2023, according to executive coaching firm Challenger, Gray & Christmas. This represents a 51% increase compared to the year before and is the highest number of annual CEO exits on record, a trend that will be concerning for boards and shareholders alike.
The CEO succession plan serves as the bedrock of a companyâs long-term leadership strategy. It involves identifying, developing, and transitioning potential CEO replacements. When executed effectively, it guarantees leadership continuity and minimizes disruption, whether the transition is anticipated or unforeseen. The absence of a well-established succession plan can lead to significant risks and consequences, particularly for publicly traded companies with discerning shareholders.
Without a succession plan in place, companies are left with limited options in the event of a CEOâs sudden departure, often resorting to external candidates or interim appointments. Such reactive measures are unlikely to result in a permanent, well-suited successor. And such companies may experience a drop in market capitalization. BPâs shares closed 1.3% lower on the news that its CEO Bernard Looney resigned without warning in September last year.
Given the high stakes, it is essential for all stakeholders â employees, shareholders, customers, and business partners â to understand the core components of a successful CEO succession planning-process, and how boards can adhere to best practices.
The process should commence at least two years before the expected transition of the incumbent CEO. During this lead-up period, the board should conduct an objective evaluation of internal candidates, typically around three of them, from various functions or business divisions. This evaluation should focus on their readiness for the role and the identification of skill gaps.
The process should include interventions to address these gaps, often requiring candidates to acquire additional experience or skills to prepare adequately for the CEO role. These interventions are tailored to the unique needs of each candidate. Itâs important to emphasize that this entire procedure is not a mere selection process; it serves as a risk mitigation exercise.
CEO succession planning frequently faces challenges, particularly in publicly listed companies with institutional shareholders, where bias can play a role. To mitigate this, many organizations establish a formal CEO nomination committee to oversee the impartial transition of the CEO.
The lack of effective management in the succession planning process can result in situations where a subset of supervisory board directors or institutional majority shareholders exerts undue influence over the CEO selection and hiring process. This can lead to candidates being selected based on personal preferences rather than their suitability for the role.
Bias is a wider challenge that boards need to address. Often, there is a prejudice in favor of candidates from within the same industry, leading to a conservative choice even when candidates from other sectors may be better suited.
Another potential pitfall is when the outgoing CEO, assuming the transition is a friendly one, has a preferred protege in mind and uses their influence to advocate for their candidate. This can significantly influence the boardâs decision-making process. In any of the above cases, an independent evaluation process becomes essential to ensure objectivity and fairness, rather than appointments made based on personal preferences.
One critical decision in CEO succession planning revolves around choosing between internal and external CEOs. Each option has its advantages and disadvantages. Internal CEOs bring in-depth knowledge of the company, aligning with its culture and history, which can lead to quicker impacts and cost efficiency. However, they may face resistance to change and have limited external networks, while they are unlikely to have been in the top job before.
External CEOs, on the other hand, offer fresh perspectives and broader networks. When Alain Jope, the CEO of Unilever, unveiled his plans to retire in 2023, it prompted a call from investors for an external candidate to take the reins of the global consumer giant.
Jope, a seasoned 35-year veteran within the company, delivered a mixed performance. Analysts noted that the organization had grown less agile and somewhat introspective. Consequently, the board appointed Hein Schumacher, the leader of a Dutch dairy cooperative, to succeed Jope as CEO, spearheading a review of its extensive portfolio of brands that includes Ben & Jerryâs ice cream and Hellmannâs mayonnaise.
Yet, external hires like Schumacher may face a longer learning curve, challenges in fitting into the companyâs culture, recruitment costs, and potential disruption. The choice between internal and external CEOs depends on the specific needs and goals of the organization.
Many companies opt for a dual-track succession planning process to maintain a balance between internal and external options, involving a rigorous evaluation process spanning 18 to 24 months and assessing both internal and external candidates with the assistance of executive search firms.
Lastly, it is imperative that boards effectively communicate their succession planning strategies and decisions to shareholders and the public to maintain a transparent and trustworthy relationship. This communication should emphasize adherence to governance principles and procedures, while maintaining confidentiality regarding individual candidate names.
As the CEO transition draws near, a public announcement will eventually be required. This is the stage where the board reveals the names of potential successors or the final nominated candidate. This strategic approach accounts for significant changes, as backtracking on previously disclosed information can erode confidence in the succession planning processâs effectiveness.
Ultimately, succession planning for a companyâs board of directors is more than just a corporate formality; it is a strategic imperative that dictates the future viability and sustainability of the business.
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