All good things come to an end. The longevity of an organization depends on key roles in leadership. The people holding those roles can't do that forever. It's critical that the next generation can carry on the business and overcome future challenges. Leadership changes require careful planning. The world witnessed what happens when change is rushed when Bob Iger stepped down as CEO at Disney only to step back into the role two years later. When the time comes for someone to make way, the change and its impact need to be attentively managed.
The act of planning the transition from one person to another holding a critical role in an organization is called succession planning. Succession planning tends to focus on leadership and C-suite roles. However, at times, it can extend to other vital positions. There are two types of succession planning: long-term and short-term planning. Long-term planning is the proactive action organizations take to identify and prepare people to step in when the moment is there. Short-term planning involves the response to a sudden change in ranks ensuring business continuity. Organizations naturally have a strong preference for the long-term approach. According to the Society for Human Resource Management (2023), succession planning is a process that normally takes 12 to 36 months. Yet, for the most essential roles, there's is no such thing as starting too early. Succession planning is the process of timely preparing a smooth handover from one leader to the next.
The frequency of leadership changes has gone up. Data by Spencer Stuart (2023) shows that the number of CEO transitions among S&P 500 companies increased by 16.7% from 2021 to 2022. The year 2021 was a bit of an exception because of the COVID-19 pandemic. Organizations were less inclined to take risks which resulted in fewer leadership changes. In the post-pandemic era, organizations are regaining their risk appetite. The Global CEO Turnover Index by Russell and Reynolds Associates (2023) confirms CEO turnover reaching a five-year high of 11.2%. According to Fortune (2023), the average tenure of a leader is 7-9 years and is likely to get shorter as pressure on boardrooms shoots up due to more dynamic market situations, social issues, and shareholder activism. A study by Harvard Law School (2023) showed that 32% of executives mark improving their succession planning practices as "very important". Leaders see the priority of succession planning rise in the face of a future of work that will see more leadership changes than at any time in the past.
Failing in succession planning can have serious consequences. During the two-year period at Disney in which Bob Chapek initially took over from Bob Iger as hand-picked CEO to eventually be fired from the job and replaced by Iger, the company suffered from dysfunctional leadership. That was in part because Iger stayed on as executive chairman throughout Chapek's tenure, a term negotiated in the succession plan. Reporting by CNBC (2023) stresses that the tumultuous time didn't do the organization any good, exacerbating weaknesses in Disney's media businesses. Another leadership succession story that broke the news was that of Starbucks. The two-time return of Howard Schultz as CEO of Starbucks showed that succession planning isn't easy. Harvard Business Review (2021) estimates excessive leadership turnover among S&P 1500 companies destroys $1 trillion in value per year. The damage done to organizations' value is explained by the loss in intellectual capital from departing leaders as well as the underperformance of their ill-prepared successors. The high cost of failure gives leaders enough reason to take succession planning seriously.
Succession planning done right enables organizations to continue and potentially accelerate their growth trajectory. Phasing in new leaders is not just a necessity but also an opportunity. Each key role requires a carefully crafted succession plan that is initiated early after someone takes on the role. In other words, sudden short-term succession exercises should be avoided to protect organizational longevity. Picking the right candidates in a succession plan is vital. Questions around internal versus external hiring, inexperienced or experienced hires, and demographic features are important. Organizations can benefit from internally built-up intellectual capital or new external insights. A fresh perspective from a first-time holder of a role may have preference over a more seasoned executive. Social awareness is calling for more diversity at the top. A report by Heidrick & Struggles (2022) showed that most CEO appointments are internal (64%) and 69% are first-time CEOs. Their data and that of Russell and Reynolds Associates indicate there's plenty of work to do on the diversity front. Once succession is on the horizon, the focus on communication must intensify. Confidentiality and transparency are essential to communicating change. A good succession plan protects the core business and retains high-performing talent.
It's inevitable that a person, sooner or later, abdicates from a role. Organizations need a long-term succession plan for when that happens to mission-critical roles. The chances of such an event taking place are increasing because of increased pressures. As a result, a large group of leaders believes succession planning practices need to be improved. The cost of poor succession planning is immense but can be prevented by focusing on long-term planning, comprehensive and objective candidate selection, and clear communication. Organizations engaged in good succession planning protect their core and prevent mistakes leading to negative news stories.