The key to succession

With the economic recovery in full swing, organisations are once again determined to maximise revenue and win new business.

It’s fun and invigorating to grow a company, especially after a recession that may have dented the confidence of even the most optimistic business executive.

But one of the hazards of rapid growth and a busy working environment is that some of the pressing issues that really matter to your business may not seem quite important enough right now, in the middle of a revival.

One of the most perilous issues to ignore is the process of planning for leadership succession. It’s an issue that needs to be addressed, and never more so when we consider the rate at which senior financial staff have been moving on recently.

In recent months, the newspapers have been full of stories of once-great companies that have lost their way and drifted far from the financially successful habits ingrained in them from the early days, when their founder or senior directors were still at the helm.

Many of these organisations have come under the spotlight because their new leaders seem to be failing them. These unsuccessful leaders are sometimes recruited from outside; that is, they didn’t have any experience of working for the organisation before they were appointed as leaders. At a tactical level, leadership succession has failed.

A new leader can be a bit like a monarch coming from abroad to rule a country that has suffered a constitutional crisis. They may quickly master the culture and people issues at the organisation, but, in practice, this doesn’t often happen. A new leader often arrives with a fanfare, amid vast expectations and a giant compensation package. But something just doesn’t work out, and before long the organisation is leaderless again.

At a strategic level, organisations that don’t have a really effective leadership and senior executive succession planning scheme in place, are likely to find their self-confidence about the future teetering, even though right now they might be doing well under a good and strong leader. In practice, the tenure of a chief executive is rarely longer than four years – and some don’t make four months.

The reality is that an effective leadership succession programme is not an option – it’s a necessity, both in terms of morale and to ensure that the company’s activities are not plunged into a vacuum if the current leader, or key senior executives, suddenly departs.

But given the signs of economic recovery, there’s a danger that many organisations are growing complacent about succession planning, and the highly specialised and sophisticated nature of business means it’s worth bearing in mind that the loss of an important senior executive, without a successor being in place, can be just as damaging as the sudden loss or departure of a CEO.

In the post-Enron world, there’s another dynamic at play. Current corporate governance guidelines in the US support the fundamental belief that top-management continuity planning is crucial to good governance. The notion that leadership succession planning is an obligatory responsibility, and not an option, is likely to become an increasing part of the mindset in the UK.

As the person in charge of running an organisation, the CEO is both responsible – and strictly speaking accountable – for the continuity of the management of the business. But, in practice, it’s the responsibility of every director of the organisation.

Financial directors are no exception. They are no longer hidden in the back office to ensure the smooth financial operation of the organisation. Today, FDs are invariably at the head of an organisation, and tend to have greater longevity at organisations than other directors, due to the fundamental professional qualification at the heart of their work.

An organisation that has an effective leadership succession plan in place can expect to enjoy a number of very important benefits. First, and most importantly, it will enjoy a huge advantage over competitors that are not in a similarly privileged position of being able to engineer a smooth transition to qualified, competent, up-to-speed successors if the occasion requires it.

No West End show would contemplate launching itself without having understudies in place, and understudies are only a useful resource if they are so polished and familiar with the role that they can leap into it at a moment’s notice. Essentially, the leadership successors should be in a similar position.

Second, an organisation with a good leadership succession plan is unlikely to find any of its customers growing disenchanted with it during a transition process, where the organisation is visibly without a proper leader.

Third, in an age where stock price is crucial for the confidence of every stakeholder in the business, poor leadership succession planning can have a major detrimental effect on an organisation’s share price.

Without mentioning any of the high-profile names affected by visibly inadequate leadership succession planning during the past months, there is no doubt that their share prices have been very badly affected and, in many cases, have still not recovered.

The challenge posed by the need for an effective leadership succession plan won’t last – and it is likely to become worse. Baby-boomers born in 1945 will, by and large, be retiring from around 2010. Many of these people have risen to extremely influential positions in their organisations.

With so many expected to retire at much the same time, failure to plan for leadership succession now means you are likely to run into problems. It is also prudent to ensure your plan is effective for at least the next five years.

Research undertaken by RHR International provides overwhelming evidence that careful planning for leadership succession at major organisations has a significant impact on commercial success. A very positive correlation was found between an organisation’s ability to develop senior executives internally, and its confidence in its ability to meet future growth needs.

Our research also revealed the major criteria for success in leadership succession planning. According to a survey of 100 leading US corporations, the two activities that have the greatest potential for successful development of effective successors are developmental assignments in a company that really stretch leadership candidates, and other projects that have the personal backing and involvement of the chief executive.

Sadly, many organisations underestimate the role to be played by executives in developing a high-potential employee. Often it isn’t until stock prices start to plummet, often due to a gap in senior management, that organisations realise how important a good reserve of quality leadership potential is to their bottom line. But why wait until then?

The truth is that leadership succession planning is too important a task to delegate to human resources. The existing CEO – and ideally the FD too – needs to be involved from the very beginning, and at every stage.

Robert Kovach is a managing director of the London office of management psychology firm RHR International.

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