Your CEO Succession Plan Can’t Wait

Your CEO Succession Plan Can’t Wait

by J. Yo-Jud Cheng , Boris Groysberg and Paul Healy - May 04, 2020

“We really need to have a name in the envelope as soon as possible.” So begins many of the discussions we’ve been having lately with board members who are frantic about CEO succession planning. Given that the median age of S&P 500 CEOs is 58 - putting many executives at higher risk of Covid-19-related illness - it’s no wonder that inquiries we’ve received from companies around the world focus intensely on best practices in running a “quick” CEO succession process.

Adding to the urgency, succession planning has long been a blind spot for most boards. From 2015 to 2016 we conducted a global survey to better understand the experiences, practices, and attitudes of board members. In this article we will share what our work reveals about relative levels of succession preparedness across regions and industries. Our findings should spur directors of companies without adequate plans to act now. Toward that end, we also offer suggestions for approaching this admittedly delicate task thoughtfully.

Where the Need for Planning Is Greatest

Among the companies based in countries with the highest number of confirmed coronavirus cases thus far, those in Spain, Brazil, China, and Italy are the least prepared for an emergency succession. A startling 83% of boards we surveyed in Spain, and more than three quarters of boards in Brazil, China, and Italy did not have a contingency plan in place, failed to discuss CEO succession regularly, and lacked a process for such planning. The gaps can too easily create major leadership instabilities that may stall economic recovery.

When we looked at the industries with the greatest economic exposure to the coronavirus, media and leisure products were least prepared for an emergency CEO succession. Many of these boards did not discuss CEO succession on a regular basis prior to the coronavirus pandemic. This pandemic may fundamentally alter these industries, and boards will need a robust succession plan to ensure that they have the right person in place to lead into the tumultuous future.

We also found that 63% of private companies did not have a CEO succession contingency plan in place, and 69% of companies with less than $50 million in annual revenues lacked a plan. Succession planning was more common among larger firms, but the need for a succession plan is often more acute in small firms, especially start-ups. As one start-up director said, “We have significant key-man risk, as this is a start-up that monetizes the thought process and experience of the founder.” Moreover, when the pool of internal executives is small, boards need to think creatively about back-up plans and ways to divvy up critical responsibilities to ensure business continuity.

What Steps Should Boards Take?

Even in the best of times, succession planning can be a challenge. In the words of one director: “We find this really difficult, so [we] are ducking the issue. We know we have to address it, but keep deferring.” Such excuses are even less tenable now. Covid-19 is forcing boards and management to work together more intensively to ensure the long-term health of the firm - and this new level of collaboration decidedly includes succession planning. In particular, the pandemic necessitates more extensive contingency planning than usual and a reassessment of leadership needs within the rapidly evolving industry environment. We recommend the following steps:

• Start by laying groundwork for the short term. Boards need to know who can take the helm on an interim basis in the event that the CEO leaves the firm, or becomes ill, or otherwise unable to fulfill their duties. Directors need to prepare a list of candidates - ahead of time! - to call if a vacancy arises. The board should collaborate with human resources to ask the CEO for a list of back-up candidates and also identify directors who could step up.
• Don’t cut corners on the longer-term plan. When planning for the longer term, boards should devise and maintain the process of leadership development, succession planning, and CEO selection. Although the process might need to be accelerated, it is important for the board to work through the appropriate steps and to evaluate the new reality: What does the CEO role require moving forward? What is the appropriate profile?
• Revisit existing plans and priorities. Boards that already have a longer-term plan in place cannot be complacent. A plan from a few months ago might not be relevant any longer. Given how dramatically the pandemic has affected some industries, directors should be prepared to reconsider the profile of their next CEO. For example, companies in the cruise and retail industries that were focused on growth just a few months ago are now facing the need for a turnaround. The right candidate to lead the charge might need deeper operational experience or other capabilities that were less of a priority in the past. We are also hearing that more and more boards are looking for a digitally savvy CEO and are willing to skip a generation of executives to get one (called “CEO leapfrogging”).
• Consider all critical roles. It takes more than one person at the top to manage a crisis situation. When formulating a succession plan, look at the rest of the top team and the board. Are there back-up plans in place for all individuals in critical roles? This is a time for management and board directors to be aligned, cohesive, strong, and supporting each other both personally and professionally.

But Don’t Rush Things

While we strongly urge boards to plan succession carefully, we are equally adamant that they should take the time they need to select wisely - especially given that directors are being pulled in many different directions right now. Rushing a decision and selecting the wrong candidate can lock the firm into an even more dire and challenging situation.

For some firms, postponing a CEO change to maintain business continuity can be a wise choice, especially if the board is considering an external candidate who will need more time to build relationships and for on-boarding. Amid extreme disruptions in the airline and financial services industries, the International Airline Group (parent company of British Airways, Iberia, and Aer Lingus) and the California State Teachers’ Retirement System (CalSTRS) have announced that their CEOs will defer previously announced retirements.

Still, waiting it out might not be an option for some boards. Under investor pressure, Altria’s CEO, who was on temporary medical leave to recover from the coronavirus, has officially stepped down. The CEOs of ADT, Morgan Stanley, NBCUniversal, and Booking Holdings have also tested positive for Covid-19, and the list continues to grow.  Preparing for an emergency scenario with the CEO and other critical roles is more important than ever. Having an interim plan will give the board time to make a more permanent decision.

And once a new CEO is chosen, the board will need to do everything it can to help them as they faces the post-Covid reality. One way to do this is to retain retired executives who can provide valuable expertise, institutional knowledge, and support. Boards can consider transitioning the former CEO to an executive chairman role or even a co-CEO role in order to keep them involved in the company’s operations. Disney’s Bob Iger, who stepped down as CEO in February, has reportedly “reasserted control” as the company contends with park closures and extensive employee furloughs. Meanwhile, at Michaels Companies, former CEO Mark Cosby is remaining employed full-time with the company as a senior advisor, rather than as a board member as previously announced.

J. Yo-Jud Cheng is an Assistant Professor of Business Administration in the Strategy, Ethics and Entrepreneurship area at Darden.

Boris Groysberg is the Richard P. Chapman Professor of Business Administration at Harvard Business School, Faculty Affiliate at the HBS Gender Initiative, and the coauthor, with Michael Slind, of Talk, Inc. (Harvard Business Review Press, 2012). Twitter: @bgroysberg.

Paul Healy is the James R. Williston Professor of Business Administration at Harvard Business School.