While millions of American employees took part in the ‘great resignation,’ few CEOs left their positions at the height of the pandemic. As the pandemic subsides, experts predict a surge of postponed CEO departures is on the way.
Data from Challenger Gray & Christmas outplacement services shows that CEO departures from US public companies rose 56 per cent in this year’s first quarter from a year earlier. Data also shows that amid inflation concerns, experts believe some boards may also be looking to new leadership to weather the coming storm.
CEO turnover impacts employees and shareholders, but it especially affects the board room. When a CEO departs, the board is not just losing a valuable leader, but crucial information and knowledge about sensitive company details. Not to mention, a CEO departure can greatly impact the board composition and the board’s level of engagement as the search for a new CEO begins.
So what’s the solution?
Paroon Chadha, CEO at OnBoard and a member of more than five company boards, discusses how boards can prepare for CEO turnover by relying on sophisticated technology to manage board governance and improve effectiveness.
Dave Clark, CEO of Amazon’s worldwide consumer business, Kickstarter CEO Aziz Hasan, and DocuSign CEO Dan Springer. These CEOs have joined the ranks of what some are calling ‘The Great CEO Resignation’.
Few CEOs left their positions at the height of the pandemic as they stayed on to steer their organisations through unprecedented uncertainty. Now, a surge of postponed CEO departures has begun: data, earlier this year, from executive placement firm Challenger Gray & Christmas found that CEO departures from US public companies rose 56 per cent in 2022’s first quarter from a year earlier.
Amid economic conditions, rising inflation, and recession concerns, CEOs are rethinking if they want to take on these new challenges. Simultaneously, company board directors of their boards are also considering new leadership with new and different skills to weather the coming storm.
For many boards and the businesses, they lead, the Great CEO Resignation will be quickly followed by ‘The Great CEO Succession’.
If boards and their directors don’t take the steps to carefully prepare a succession plan – and update it regularly, surprise CEO departures can create significant costs and risk for their companies and stakeholders.
The rise of CEO departures
The latest findings in Challenger, Gray, & Christmas’ 15 June report showed that 668 CEOs overall have exited their roles in 2022, the highest January to May total since the executive search firm began tracking monthly CEO changes in 2022. The report reveals May 2022 departures were up 52 per cent from the same month last year, likely signaling ongoing upheaval in US business leadership.
The impact of a CEO departure
CEO turnover obviously creates impacts employees and shareholders, but its impact in the boardroom can be more severe. When a CEO departs, the board is not just losing a valuable leader, but crucial information and knowledge about sensitive company details and a wealth of so-called ‘tribal knowledge’. Not to mention, a CEO departure can greatly impact the board composition and individual directors’ engagement as the search for a new CEO begins.
Is your board prepared for the great succession?
In a typical year, 10 to 15 per cent of companies appoint a new CEO. However, despite the inevitable that all CEOS will eventually leave their positions, most organisations are not prepared to replace them. A 2010 survey by the search firm Heidrick & Struggles and Stanford University revealed critical lapses in CEO succession plans. Among Fortune 500 companies, only 54 per cent of boards were proactively developing a CEO successor, and 39 per cent had no viable internal candidates who could immediately replace the CEO if she or he should exit.
The cost to organisations when there’s not a strong succession plan in place
A CEO departure can cause significant turbulence for organisations that lack a plan for filling the vacancy. Poor succession planning for a CEO transition also comes at a high cost. The failure to develop a comprehensive succession plan for changes in leadership is estimated at $112billion of lost market value.
Lack of preparedness is only part of the problem. Equally challenging is that boards are not finding the right replacement. Research from the Corporate Executive Board (CEB) estimates that 50 to 70 per cent of executives fail within 18 months of taking on a role, regardless of whether they were an external hire or promoted from within.
How the CEO environment is changing
The environment for CEOs is changing. According to Spencer Stuart research, in 2020, there were 56 CEO resignations in the S&P 500. Resignations were on a record pace during the first half of the year, but the early momentum was offset by a 60 per cent decline in the second half of the year as the pandemic took hold. Of the CEOs who stepped down, 20 per cent did so under pressure, up from 13 per cent the year before. The findings also revealed that more new CEOs in 2020 were hired from the outside (29 per cent) than in 2019.
The average CEO tenure also continues to fall, increasing the likelihood that boards will conduct more CEO successions during their service.
As we approach the end of the pandemic and face new economic challenges ahead, boards will need to focus on appointing CEOs with a vast range of skills: from M&A transaction and merger integration experience to those able to confront economic difficulties. Leaders with digital transformation proficiency to the ability to lead flexible workforces will also be valuable skills.
Planning for the next CEO
Planning for the next CEO is one of the boards most important responsibilities. Having a CEO succession plan in place is insurance for an emergency or crisis, especially if a CEO departs suddenly for unexpected reasons. Thorough board succession planning helps organisations:
- Minimise potential disruption from unexpected departures
- Ensure smooth leadership transitions
- Plan for future leadership needs
- Assure the CEO is aligned with organisational needs and strategic objectives
- CEO succession is not a one-time task, it is an ongoing risk management plan that guarantees the success of a company.
Best practices for CEO succession planning
Creating a succession plan is not a one-time responsibility. As economic conditions change, war, and supply chain issues take hold in the world around us, it means boards need to revisit their succession plans periodically to make sure it’s accurate and up to date.
In particular, the board should consider:
- Find common ground when evaluating goals. A major roadblock to finding the right CEO is assessing where the company is now and considering what circumstances will impact the relevance of the existing model of short- and long-term goals of the company over the next three to five years. Are there potential risks with how the outside world is changing? Is the company culture changing? It’s critical that the board come to a consensus.
- Identify skills of the next CEO. When the board comes to an agreement on a company strategy then it can identify professional characteristics and skills the next leader will need to possess to achieve its target objectives. With economic environment conditions changing rapidly, boards need to routinely revisit the CEO’s job description as outside influences could greatly impact if that leader’s skills are right for the current climate to lead the company.
For example, the right CEO you had to get the company through the pandemic may not be the right CEO to take the company through a recession. The skills you were looking for in a CEO just a few months ago may have changed. It’s important that the CEO job description remains up to date so the board can find the right person for the job, at the right time.
- Identify a pipeline of talented candidates. Having a shortlist of candidates who meet the updated job requirements is an assurance that a successor or interim successor can move into the position without any material loss of continuity in organisational leadership. Having a pipeline of candidates with a development plan for each that coincides with the end of the planned tenure of the current CEO will also ensure a smooth transition.
Many boards take advantage of leadership development programmes that train potential candidates with coaches and mentors within the organisation to create a seamless transition when the time comes. It’s critical that boards perform periodic executive preparedness assessments to gauge whether those candidates remain prime successors for the CEO position.
- Have a backup, emergency succession plan. Considering the recent rise in CEO departures, boards without a backup plan for a sudden, unexpected departure could risk a company’s financial future and relationships with stakeholders. It’s critical for the board to identify strong interim candidates who can move into the job quickly, whether it’s the CFO, COO or external candidates who are being developed for the position. In many cases the replacement includes a board director who steps into the role short-term while the board searches for a long-term solution.
How technology is streamlining the succession planning process
Board succession planning should not be done using spreadsheets or other rudimentary tools. It is too complex and too important of an activity. Modern board management software platforms such as OnBoard offer purpose-built tools to streamline the board succession planning process. These software tools help boards find candidates by assessing skillsets, identifying gaps, and making it easier for boards to plan for recruitment goals.
Board management solutions also provide organisations with a centralised location to house all succession planning activities. This allows for better communication as well as clear transparency into exactly what the established board succession planning process is, and how and when it occurs. It also provides a traceable roadmap for how succession decisions are made.
Succession planning is a difficult task. If done right, it has enormous benefits to companies and shareholders. If done unsuccessfully it can have devastating consequences. Utilising technology tools make overall succession planning more efficient, saving time for busy board administrators to focus on other priorities.