Best Practices for Creating a CEO Succession Plan

STRATEGY ORGANIZATION TALENT

Best Practices for Creating a CEO Succession Plan Aaron Sorensen, Ph.D.

This material was previously webcast by ExecSense in Jan. 2014. The webcast is available at http://bit.ly/1a3yXtx

http://bit.ly/1a3yXtx

Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 2

Aaron Sorensen, Ph.D., Principal, Axiom Consulting Partners

Successfully led numerous succession planning processes in partnership with boards of directors at some of the world’s most prominent brands/companies

Approaches CEO succession planning from a future needs perspective – “what got you here won’t get you there”

Utilizes leading-edge practices from psychology and business to build a robust and objective process and unassailable fact-base on succession candidates

Approaches CEO succession planning from an integrated perspective that ties together strategy, organization and workforce

Veteran of the social and political battles that often accompany CEO succession decisions


Overview

Poor CEO succession planning can erode greater value in a much shorter period than other competitive threats

Developing a deep pipeline of leadership talent can provide a distinct competitive advantage

Activist shareholders, institutional investors, and the SEC are now showing a renewed interest in understanding the economic risk associated with leadership departures


What to Know

Succession planning is a business process designed to manage risk

Effective governance is critical for successful CEO succession planning

Just as businesses adapt to stay relevant and compete in their markets, so should the succession plan for the types of leaders needed to achieve future success

Leadership talent reviews form the backbone of the succession planning process

Leadership is a complex and dynamic phenomenon, is difficult to measure and should be examined through multiple “lenses”

Linking succession planning with leadership development is a critical success factor and can create incredible long-term value for the business


WHAT TO KNOW:

Succession planning is business process designed to manage risk

Human capital risk should be managed as rigorously as financial, reputational, supply chain, and IT risks

CEO succession planning ensures business continuity, but can also be a competitive advantage

CEO succession planning is a dynamic and continuous process

It creates improved understanding and transparency of the leadership talent portfolio and the strong pipeline of future leaders

Effective succession planning is much more than simply having a slate of candidates to address the “hit by the bus” scenario


WHAT TO KNOW:

Effective governance is critical for successful CEO succession planning

Clarifying accountabilities and ownership for CEO succession planning is paramount

Boards of directors of public companies are accountable for CEO succession

CEO engagement in the process is critical, but this practice varies significantly by company

Transparency is critical…up to a point

Private companies, not-for-profit institutions and family businesses may not have an external mandate, but must navigate through challenging social and political forces


WHAT TO KNOW:

Just as businesses adapt to stay relevant and compete in their markets, so should the succession plan for the types of leaders needed to achieve future success

Aligning the board and management around the criteria for success is imperative—that criteria must evolve with the strategy

Many businesses are evaluating leaders solely on the competencies that are needed now versus needed in the future

The leader who “got you here won’t necessarily get you there”

Greater versatility and breadth of capabilities in leadership talent pools are frequent pain points for Boards when considering CEO successors


WHAT TO KNOW:

Leadership talent reviews form the backbone of the succession planning process

Most performance management systems do not yield the type of data needed to make decisions about leadership readiness

Boards often rely on false assumptions, old data, loosely defined selection criteria and inadequate assessment techniques when it comes to CEO succession

Talent reviews provide a forum to discuss leadership talent through a common nomenclature that provides a sense of fairness, objectivity, and transparency

Talent reviews establish common talent standards

Board involvement may be limited, but members are keenly interested in the outputs


WHAT TO KNOW:

Leadership is a complex and dynamic phenomenon, is difficult to measure and should be examined through multiple “lenses”

Leadership is a behavior that requires agility and coordination of various competencies

Complimentary methods are needed for reliable and valid assessment of dynamic and complex phenomena

A leader’s motives, values, and psychological needs are paramount to assess role and organizational fit

There is a gap between the science and practice of leadership assessment


WHAT TO KNOW:

Linking succession planning with leadership development is a critical success factor and can create incredible long-term value for the business

Emphasizing the developmental focus helps to mitigate the “horse race” effect

Development assignments that have the greatest impact are those most closely related to the job (e.g., stretch assignments, special projects and developmental jobs)

When leadership development is integrated with strategy execution, not only do leaders emerge with greater competence to lead the business, they become more facile with strategy


Tips and Strategies

Make succession planning a priority

Establish governance process for CEO and other leadership succession decisions

Identify the leadership capabilities needed to support the long-term strategic plan

Bring greater objectivity into the process through the science of leadership assessment

Link succession, talent review and leadership development processes


WHAT TO DO:

Make succession planning a priority

Focus your time on talent—“talent masters” spend 30-40% of their time on people decisions

Scan your business to identify where the leadership pipeline is strongest and weakest

Align incentive systems to focus on grooming leadership talent

Treat high potential leaders as you would any other corporate asset

Remove organizational barriers that inhibit growth and exposure to other high potential leaders


Example: Succession Bench Strength Chart

Leadership Strengths:

• Competencies: Coaching and Developing Others, Fostering Collaboration and Teamwork, Supply Chain Management

Other Data:

• In ambiguous and complex business situations, Joe can easily link together complex concepts and ideas

• Joe adopts a holistic perspective and systems view when approaching complex problems

• Reacts proactively and aggressively when challenged by competitors

Development Areas:

Competencies: Investor and Public Relations, Strategic Business Planning and Implementation, Business and Financial Acumen

Other Data:

• Tends to “fall down” on questions from analysts if he is not prepared for the question, specifically in the area of finance

• Hasn’t had the opportunities to interact with certain financial bodies and participate in a significant role during investor calls

• Prepared Board presentations have been perceived as being too scripted, void of creativity, and lacking insights

John Doe Capability Profile:

Development Activities Progress

Serve as primary interface with the investor community by demonstrating business and financial acumen

Complete

Adopt a more flexible decision-making style that considers the balance of various ideas

Lagging

Identify opportunities to lead the presentation of results with key investment and financial community

NotStarted

Potential Upward or Lateral Moves: Readiness

Chief Executive Officer 5+ yrs

Chief Operating Officer Now

Divisional SVP (Asia Pac) 1-2 Yrs

EVP Strategic Planning Now


WHAT TO DO:

Establish governance process for CEO and other leadership succession decisions

Understand how your Board wants to engage in the CEO succession planning process and the expectations of management

Clarify what board committee will be responsible for recommending the slate of candidates

Establish a cadence and succession planning process that links to strategic planning, operational planning, and talent reviews—management processes should link to the board-level process

Understand your requirements

Develop a set of decision rights for the succession planning process


Example: RACI for CEO Succession Planning

Succession Planning DecisionsBoard of Directors

BoardCommittee

CEOExternal Advisor

1. Succession process design A R C C

2. Development of the success profile and leadership competencies A R C C

3. Nomination of internal candidates to participate in succession process A R R I

4. Agreement on the prioritization and readiness of internal succession candidates based on assessment data A R C C

6. Creation and management of candidate development plans to close gaps A R C C

4. Determination (and management) of external search if warranted A R C C

7. Initiate transition and communications plan when a succession event is determined A R C I

R = Recommend A = Approve C = Consult I = Inform


WHAT TO DO:

Identify the leadership capabilities needed to support the long-term strategic plan

Engage key stakeholders in a process to clarify the leadership capabilities required for success now and in the next five years

Update your succession plan as your strategy changes to ensure alignment

Confirm the business/technical, leadership, and interpersonal competencies that leaders are expected to demonstrate, and the work experiences needed for success


Step 1 – “Unbundling” the strategy

Organizational CapabilitiesFactors that are critical to execute

the strategy and deliver results

Pricing Excellence

Market Insight

Community/External Relations

Marketing & Branding

Customer Intimacy

Channel Management

eCommerce

Operational Excellence

Leverage Technology

Margin Management


Step 2 – Linking capabilities to leadership competencies

Organizational Capabilities

Sample Leadership Competencies Associated With Organizational Capabilities*

Pricing Excellence Business Acumen

Decision MakingMarket Insight Intellectual Horsepower

Community/External Relations

Executive Image/Presence

Acts with Integrity

Public Affairs

Marketing and Branding

Vision

Brand Building

Customer Intimacy Customer Focus

Channel ManagementForging Synergies

Leading Change

eCommerce Technology Savvy

Operational ExcellenceOperational Discipline

Systems Thinking

Leverage Technology Innovation

Margin ManagementValue Management

Results Orientation

*Other competencies associated with interpersonal and intrapersonal effectiveness are also typically included in leadership assessments.


WHAT TO DO:

Bring greater objectivity into the process through the science of leadership assessment

Most selection techniques rely heavily on interviews—make sure interviewees are trained in behavioral interview techniques and calibrate their ratings

Use complimentary methods to maximize the validity of the process

Leverage personality assessments early in the process, but not as a primary decision factor for selection

Know the science that underpins the assessments you are using—not all assessments are created equal

The leader “beneath the surface” is the most difficult to assess, but are important predictors of cultural fit


Effectiveness of various assessment methods

Assessment Interviews

Leadership In-Basket Exercise

Business Simulations

Cognitive Ability Test

Abstract Reasoning Test

Personality Assessment

Special Job-Related Assignments

Assessment Method

Technical & Functional

Skills

Leading the Enterpise

Building Teams &

Leading Others

Leading By Example

(Intrapersonal Skills)

Motives, Values, &

Psychological Needs

Learning Agility &

Intellectual Horsepower

Leadership Competencies Cultural Fit Intelligence

LowHigh

Method Effectiveness

Leadership Capability Spectrum

© Axiom Consulting Partners. All rights reserved.

Competency-based 360 Survey


Complimentary methods are needed in CEO succession planning

1 Table adapted from Schmidt & Hunter (1998). Copyright © 1998 by the American Psychological Association. 2 Referred to as the training & experience behavioral consistency method in Schmidt & Hunter (1998).

Assessment MethodValidity of method

used alone (r)Incremental validity

(Multiple R)

% increase in validity from combining tool with cognitive ability

Tests of general cognitive ability 0.51Work sample tests 0.54 0.63 24%Structured interviews 0.51 0.63 24%Job knowledge tests 0.48 0.58 14%Accomplishment record² 0.45 0.58 14%Integrity/honesty tests 0.41 0.65 27%Unstructured interviews 0.38 0.55 8%Assessment centers 0.37 0.53 4%Biodata measures 0.35 0.52 2%Conscientiousness tests 0.31 0.60 18%Reference checking 0.26 0.57 12%Years of job experience 0.18 0.54 6%Training & experience point method 0.11 0.52 2%Years of education 0.10 0.52 2%Interests 0.10 0.52 2%

Validity of Various Assessment Tools in Predicting Job Performance


WHAT TO DO:

Link succession, talent review and leadership development processes

Expectations

What it means to be an effectiveleader

Assessment

Measurement of Leader capabilities and potential

Development

A plan for each Leader to reach their full potential

Talent ReviewsForums to discuss Leader progress and actions to strengthen the benh

The behaviors and skills that Leaders are expected to demonstrateAnd the work experiences needed to develop key capabilities tied to the strategy.

Valid assessments to identify leadership strengths, potential and readiness for movement, and areas for development.

Individual development plans aimed at measurably improving leadership effectiveness through the 70/20/10 model (e.g. 70% special/stretch assignments or role expansion; 20% coaching or mentoring and 10% execution education).

Forums to discuss the strengths and weaknesses of the current leadership talent portfolio and tactics to deepen the bench of current and future leaders.


Do’s and Don’ts

Do1. Clarify decision rights

2. Link succession to business strategy

3. Utilize validated psychological assessments

4. Integrate talent reviews and leadership development with succession decisions

5. Establish a cadence to support the ongoing process

Don’t1. Create a horse race

2. Use non-validated assessments

3. Rely solely on data from performance management systems

4. Assume that the numbers tell the whole story

5. Send signals to the external stakeholders until you have communicated the decision to candidates


Ten-point checklist of best practices for creating a CEO succession plan (SP)

1. SP is an essential business process to ensure business continuity and stewardship of human capital

2. SP must be linked to the current and future business drivers and strategic capabilities

3. SP is not “replacement planning”

4. SP for the CEO should be owned by the Board

5. SP is an inherently subjective process. A well-designed process and the independence of an external advisor can bring objectivity and validity

6. SP is a sociopolitical process with high stakes, which elevates the importance of effective stakeholder and change management

7. SP should be an ongoing initiative with periodic, formal check-ins, and report-outs on leadership pipeline strengths and risks

8. Employee performance and employee potential are often confused and should be assessed independently

9. There are multiple dimensions to development, with emphasis on building experiences and competencies necessary to step into broader roles

10. SP must be integrated with executive development and staffing


FAQs: Common misconceptions about CEO succession planning

1. CEO succession is event driven

2. The emergency succession plan is the same as the CEO succession plan

3. The CEO chooses his or her replacement

4. The Chairman of the Board selects the CEO

5. Boards only step in when succession planning goes awry

6. Insider CEO succession is always the best option

7. You can’t accurately assess cultural fit of outsider candidates

8. Executive search firms will always provide an objective assessment of candidate capabilities

9. The CEO succession planning process should mirror succession at other levels in the organization

10. Candidates should not be told that they have advancement potential


Conclusions

CEO succession planning is critical to ensure business continuity, yet many organizations still get a failing grade when it comes to managing this risk

There is an opportunity to align leadership talent with strategic needs over a longer-term planning horizon

Utilizing complimentary assessment methods and integrating succession decisions with talent reviews and leadership development is the key to building a deep bench of leadership talent


Contact Information

Aaron Sorensen

Email: [email protected]

Phone: 312.343.4644

Website: www.axiomcp.com

Best Practices for Creating a CEO Succession Plan

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