What to do before your CEO leaves: the importance of succession planning

10 February 2016 -

With CEO tenure shortening, new research from Armstrong Craven reveals the importance of having a well thought out succession plan in place and how it could save you millions

Jermaine Haughton

With only a month of 2016 already passed, the turnover of industry leaders continues as leading business figures Football Association Chairman Greg Dyke and Marks & Spencer chief executive Marc Bolland both announced that they are stepping down in the coming months.

And with increasing pressure from investor activists, employees and the media, it is likely many more chief executives are likely to also fall as we travel through 2016, pointing to the importance of companies having a thorough, active and well-devised succession plan.

From Bill Gates at Microsoft to Steve Jobs at Apple, succession planning has always been a head-scratcher for many boards in replacing long-term leaders who have become the iconic face of the brand.

However, The Butterfly Effect: CEO Movement and the Chain Reaction report highlighted how the growing trend of short-term chief executives also poses a significant need for employers to constantly identify and nurture future leaders from within their company.

The research showed that the tenure of leading bosses is shortening each year finding that that the average tenure of a CEO had dropped from 11.3 years in 2002 to 8.1 in 2012.

Planning ahead

Furthermore, 61% of chief executives are planning to leave their posts in the next five years, many with no clear succession plan in place.

In the case of Bolland, the chief executive’s decision to leave the British retailer in April came to the surprise of many observers, both inside and outside of the company – despite third-quarter sales of M&S general merchandise down by 5.8% % for the 13 weeks to 26 December.

Incredibly quickly, the retailer announced the appointment of internal candidate Steve Rowe as Bolland’s successor through a "rigorous" five-year succession plan, according to Chairman Robert Swannell.

Experts argue the methodical and assured manner in which M&S dealt with the shock CEO exit has avoided calls of crisis and retained the trust and confidence of shareholders, as Marks and Spencer shares rose more than 1% following the media statement.

Matthew Mellor, CEO of Armstrong Craven, said: “On the face of it, it looks as if the Marc Bolland succession has been handled in an exemplary way with a five-year succession plan being agreed at the start. They have also seamlessly appointed a strong internal candidate, Steve Rowe, as the successor but also benchmarked external candidates before making a final decision on Bolland’s replacement.

“The research we carried out for our Butterfly Effect report demonstrated that the M&S experience is extremely unusual in the corporate world. With the average tenure of CEOs decreasing each year, the need to continually identify today’s and tomorrow’s leaders through a robust process of talent mapping and pipelining has never been greater.”

One of the common consequences of failing to have a succession plan is that many boards panic and spent large amounts of money and time on external replacements, with no affinity to the workings of the firm, rather than a current employee with extended knowledge of the company.

Alongside the unpredictable effects of the new chief executive’s strategy on the firm’s direction, and the reaction of the markets to their new leader, this factor often causes a chaotic turnover of important staff in positions below the chief executive, the Armstrong Craven research shows.

With 64% of businesses poaching their new hire from a direct competitor, the study shows that the vast majority (85%) of CEO moves led directly to at least one external hire, as well as resulted in further recruitment at less senior levels.

Equally, a wide range of past studies have shown how non-existent succession planning can lead to reduced performance, market share loss to more aggressive and focused competitors, irreparable reputational damage, and scepticism among institutional investors.

Then there’s the added issue of cost.

More than £25million was spent on external hires on 20 chief executive moves studied by Armstrong Craven, with a typical search fee at this level about 30% of base salary plus 50% of the package.

And with the standard base salary of a FTSE 100 chief executive totalling more than £4m, mirrored by multi-million pound severance pay packages, corporations can expect a hefty bill when they decide to look elsewhere for their next leader.