CEO Succession Planning: How To Create A CEO Transition Plan

As the corporate landscape continues to evolve, the process of CEO succession planning is undergoing substantial changes. The year 2020, marked by significant shifts, saw 56 S&P 500 CEOs stepping down. A PwC report noted an increase in the percentage of those resigning under pressure to 20 percent, compared to 13 percent in the preceding year.

With the changing dynamics of businesses, there’s a clear trend of organizations seeking leadership externally. PwC’s data reveals that 29 percent of S&P 500 companies that replaced their CEOs in 2020 chose an outsider, marking a substantial rise from 21 percent in 2019. These evolving conditions necessitate a strategic shift in CEO appointments, emphasizing specific skills such as merger transactions, digital transformation, and managing flexible workforces.

Given these changing parameters, creating a robust CEO transition plan becomes essential for organizations. This plan should begin with the board of directors reaching a consensus on the skills, experience, and personal qualities a new CEO should embody to execute the organization’s strategic plans effectively.

CEO succession planning is a continuous process that ensures a company has a suitable successor if the current CEO leaves, cannot perform their duties, or is unexpectedly dismissed. This process involves identifying and developing talented executives capable of filling the leadership role, preventing a potentially damaging leadership  gap.

This article will guide you through the best practices in CEO succession planning and how to create a CEO transition plan that ensures a smooth leadership change.

Who Manages CEO Succession Planning?

CEO Succession Stakeholders and Their Roles:

CEO succession planning is a collaborative process involving vital organizational stakeholders rather than a solitary task. Here’s a brief look at who typically handles the job of CEO succession planning.

• Board of Directors: The Board of Directors takes the lead in succession planning. They are responsible for establishing the criteria for the new CEO, identifying potential internal and external candidates, and ultimately choosing the successor.
• Outgoing CEO: The current CEO plays a significant role in succession planning. They often provide input on potential successors, assist in the transition process, and sometimes mentor the successor after the transition.
• Human Resources: The HR department is instrumental in the succession planning process. They handle the administrative aspects, such as coordinating interviews, facilitating assessments, and ensuring that the process is fair, transparent, and in line with the company’s policies and culture.
• Executive Search Firms: Some organizations engage executive search firms in the succession planning process. These firms have vast networks and expertise in identifying and recruiting senior executives, which can be valuable in finding the right CEO.
• Executive Leadership Team: The top management team, including CFO, COO, and other C-suite executives, often have a say in succession planning. They provide insights into internal candidates’ abilities and the company’s strategic direction.

With so many stakeholders involved, managing CEO succession planning can be complex. This is where OrgChart comes in. By providing a visually engaging and up-to-date view of your organization’s structure, talent pool, and critical metrics, OrgChart streamlines the succession planning process and ensures effective stakeholder collaboration.

The Role of the CEO in Succession Planning

A potential obstacle to initiating succession planning early is the good performance of the current CEO. Boards can overcome this by engaging CEOs in succession planning from their first day, setting clear expectations, and making succession planning a regular conversation. This approach can alleviate much of the anxiety around the succession process and ensure smooth transitions.

The CEO plays a critical role in succession planning. This involves identifying potential successors and ensuring these individuals receive the right experience and exposure to step into the CEO’s shoes when needed. Accordingly, the board should ask for regular updates from the CEO and head of human resources on any progress toward identifying and developing internal candidates.

The Key Elements of CEO Succession Planning

The process of selecting a new CEO should consider several factors. Key focus areas may include adapting to changing customer demands, climate change, and technological advancements. The selection process must consider the present and future strategic needs and company culture.

Another significant aspect of a CEO transition plan is preparation for emergencies. The corporate world is fraught with uncertainties, and a robust succession plan should identify potential interim candidates who can take charge in case of a sudden CEO departure.

Successful transition planning also depends on the clarity of roles within the board. While CEO succession planning is generally a full board responsibility, defining who leads the process can be challenging. Some boards form specialized committees for this purpose. PwC’s data suggests that manufacturing and financial services sectors often have a dedicated CEO succession planning committee.

Best Practices for CEO Succession Planning

• Start Early: Planning for a successor should begin when a new CEO takes charge. This gives ample time to identify potential candidates, groom them for the role, and adjust the plan as the organization’s needs change.
• Identify Key Skills and Competencies: Define the essential skills and attributes that the next CEO must have to drive the company’s strategic goals. These competencies should be based on the organization’s future needs rather than replicating the existing CEO’s skill set.
• Develop Internal Candidates: External hires can bring fresh perspectives, but internal candidates are often preferable for CEO roles. They already understand the organization’s culture, operations, and market position, making the transition smoother. To this end, create leadership development programs that prepare high-potential employees for future leadership roles.
• Involve the Current CEO: The existing CEO plays a crucial role in identifying and grooming potential successors. They can provide invaluable insights into the job’s challenges and expectations and help mentor promising candidates.
• Regular Reviews: Review the succession plan and update it regularly, ideally annually, to account for changes in the organization’s strategic direction and the potential candidates’ development.
• Smooth Handover: Plan for a transition period where the outgoing CEO can hand over their responsibilities gradually and guide the new CEO. This reduces disruption and allows the new CEO to adjust more effectively.
• Post-Transition Support: Even after the new CEO has taken over, provide them with continued support and mentoring. This could include regular check-ins with the outgoing CEO or the board, leadership coaching, and ongoing feedback and  evaluations.

Creating a CEO Transition Plan

• Identify a Successor: Based on the skills and competencies defined in the succession plan, identify the most suitable candidate for the CEO role. This could be an internal candidate or an external hire.
• Plan the Transition Timeline: Determine when the new CEO will take over and the duration of the handover period. This timeline should allow the successor enough time to familiarize themselves with their new role and responsibilities.
• Training and Mentoring Program: Develop a comprehensive training program for the successor, tailored to their individual needs and the unique challenges of the CEO role. This could include job shadowing, leadership courses, outgoing CEO or senior executive mentoring, and cross‑functional projects.
• Communicate the Plan: Once the successor and the transition timeline are finalized, communicate this to all relevant stakeholders. This includes the board, top management, employees, customers, suppliers, and shareholders. Transparent communication helps manage expectations and reduce uncertainty.
• Support the New CEO: After the transition, provide the new CEO with ongoing support to help them succeed. This could include leadership coaching, mentoring, regular check-ins with the board or outgoing CEO, and access to professional development opportunities.
• Review and Learn: Review the process and gather feedback from all involved parties after the transition. Use these insights to improve future CEO succession planning and leadership development practices.

CEO succession planning is a continuous process that evolves with your company’s needs. It’s an essential best practice for ensuring the long-term success of your organization and creating a leadership pipeline that drives sustained growth. Organizations can navigate the ever-evolving business landscape effectively and efficiently by adopting a proactive, regular, and transparent approach to CEO succession planning.

Implementing a Documented CEO Succession Plan

Having a well-documented succession plan with a clear timeline is of paramount importance. The board should lay out the goals of the process, the frequency of discussions, and the steps of the selection process. The succession plan should undergo regular reviews and updates to ensure continued alignment with the company’s evolving needs.

A CEO succession plan should ideally include:

• An outline of the desired skills and experience of potential CEO candidates.
• Detailed steps of the selection process.
• Frequency of board discussions about CEO succession.
• Mechanisms for regular reviews and updates to the plan.
• Strengthening the Succession Pipeline and Onboarding Process

Establishing a solid pipeline of potential CEO candidates is vital for any organization. Directors should understand internal and external talent markets deeply and prepare for the implications of competition among internal candidates for the position.

Onboarding the new CEO effectively and transparently communicating the succession process to stakeholders is essential. A comprehensive transition plan and regular communication can pave the way for the new CEO’s success and maintain transparency with stakeholders.

A well-planned succession strategy can significantly contribute to a company’s stability and success in an era of frequent CEO transitions. Organizations can navigate the ever-evolving business landscape effectively and efficiently by adopting a proactive, regular, and transparent approach to CEO succession planning.

Secure Your Legacy with OrgChart

CEO succession planning is a critical process defining your organization’s future. Yet, while vital, it doesn’t need to be a daunting task. By leveraging the right tools, like OrgChart, you can streamline your succession planning process and make it a natural part of your company’s growth journey. OrgChart provides an intuitive interface and robust features to help you create, manage, and visualize your CEO succession plan. Don’t leave your organization’s future to chance. Secure your legacy and pave the way for a future of continued success with OrgChart.

Sources:

• Castañón Moats, M., & DeNicola, P. (2021, September 20). How the Best Boards Approach CEO Succession Planning. Harvard Law School Forum on Corporate Governance. https://corpgov.law.harvard.edu/2021/09/20/how-the-best-boards-approach-ceo-succession-planning/
• PwC Governance Insights Center. (2021, September). How the Best Boards Approach CEO Succession Planning. PricewaterhouseCoopers. https://www.pwc.com/us/en/governance-insights-center/publications/assets/pwc-how-the-best-boards-approach-ceo-succession-planning.pdf