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Your CEO Succession Plan Can’t Wait

Executive Summary

CEOs tend to be older, putting them at greater risk of Covid-related illness, and adding to the urgency, succession planning has long been a blind spot for most boards. From 2015 to 2016, the authors conducted a global survey to better understand the experiences, practices, and attitudes of board members, and here they share what their work reveals about relative levels of succession preparedness across regions and industries. They also offer suggestions for approaching this admittedly delicate task thoughtfully.

HBR Staff

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“We really need to have a name in the envelope as soon as possible.” So begins many of the discussions we’ve been having lately with board members who are frantic about CEO succession planning. Given that the median age of S&P 500 CEOs is 58 — putting many executives at higher risk of Covid-19-related illness — it’s no wonder that inquiries we’ve received from companies around the world focus intensely on best practices in running a “quick” CEO succession process.

Adding to the urgency, succession planning has long been a blind spot for most boards. From 2015 to 2016 we conducted a global survey to better understand the experiences, practices, and attitudes of board members. In this article we will share what our work reveals about relative levels of succession preparedness across regions and industries. Our findings should spur directors of companies without adequate plans to act now. Toward that end, we also offer suggestions for approaching this admittedly delicate task thoughtfully.

Where the Need for Planning Is Greatest

Among the companies based in countries with the highest number of confirmed coronavirus cases thus far, those in Spain, Brazil, China, and Italy are the least prepared for an emergency succession. A startling 83% of boards we surveyed in Spain, and more than three quarters of boards in Brazil, China, and Italy did not have a contingency plan in place, failed to discuss CEO succession regularly, and lacked a process for such planning. The gaps can too easily create major leadership instabilities that may stall economic recovery.

When we looked at the industries with the greatest economic exposure to the coronavirus, media and leisure products were least prepared for an emergency CEO succession. Many of these boards did not discuss CEO succession on a regular basis prior to the coronavirus pandemic. This pandemic may fundamentally alter these industries, and boards will need a robust succession plan to ensure that they have the right person in place to lead into the tumultuous future.

We also found that 63% of private companies did not have a CEO succession contingency plan in place, and 69% of companies with less than $50 million in annual revenues lacked a plan. Succession planning was more common among larger firms, but the need for a succession plan is often more acute in small firms, especially start-ups. As one start-up director said, “We have significant key-man risk, as this is a start-up that monetizes the thought process and experience of the founder.” Moreover, when the pool of internal executives is small, boards need to think creatively about back-up plans and ways to divvy up critical responsibilities to ensure business continuity.

What Steps Should Boards Take?

Even in the best of times, succession planning can be a challenge. In the words of one director: “We find this really difficult, so [we] are ducking the issue. We know we have to address it, but keep deferring.” Such excuses are even less tenable now. Covid-19 is forcing boards and management to work together more intensively to ensure the long-term health of the firm —and this new level of collaboration decidedly includes succession planning. In particular, the pandemic necessitates more extensive contingency planning than usual and a reassessment of leadership needs within the rapidly evolving industry environment. We recommend the following steps:

  • Start by laying groundwork for the short term. Boards need to know who can take the helm on an interim basis in the event that the CEO leaves the firm, or becomes ill, or otherwise unable to fulfill their duties. Directors need to prepare a list of candidates — ahead of time! — to call if a vacancy arises. The board should collaborate with human resources to ask the CEO for a list of back-up candidates and also identify directors who could step up.
  • Don’t cut corners on the longer-term plan. When planning for the longer term, boards should devise and maintain the process of leadership development, succession planning, and CEO selection. Although the process might need to be accelerated, it is important for the board to work through the appropriate steps and to evaluate the new reality: What does the CEO role require moving forward? What is the appropriate profile?
  • Revisit existing plans and priorities. Boards that already have a longer-term plan in place cannot be complacent. A plan from a few months ago might not be relevant any longer. Given how dramatically the pandemic has affected some industries, directors should be prepared to reconsider the profile of their next CEO. For example, companies in the cruise and retail industries that were focused on growth just a few months ago are now facing the need for a turnaround. The right candidate to lead the charge might need deeper operational experience or other capabilities that were less of a priority in the past. We are also hearing that more and more boards are looking for a digitally savvy CEO and are willing to skip a generation of executives to get one (called “CEO leapfrogging”).
  • Consider all critical roles. It takes more than one person at the top to manage a crisis situation. When formulating a succession plan, look at the rest of the top team and the board. Are there back-up plans in place for all individuals in critical roles? This is a time for management and board directors to be aligned, cohesive, strong, and supporting each other both personally and professionally.

But Don’t Rush Things

While we strongly urge boards to plan succession carefully, we are equally adamant that they should take the time they need to select wisely — especially given that directors are being pulled in many different directions right now. Rushing a decision and selecting the wrong candidate can lock the firm into an even more dire and challenging situation.

Further Reading

For some firms, postponing a CEO change to maintain business continuity can be a wise choice, especially if the board is considering an external candidate who will need more time to build relationships and for on-boarding. Amid extreme disruptions in the airline and financial services industries, the International Airline Group (parent company of British Airways, Iberia, and Aer Lingus) and the California State Teachers’ Retirement System (CalSTRS) have announced that their CEOs will defer previously announced retirements.

Still, waiting it out might not be an option for some boards. Under investor pressure, Altria’s CEO, who was on temporary medical leave to recover from the coronavirus, has officially stepped down. The CEOs of ADT, Morgan Stanley, NBCUniversal, and Booking Holdings have also tested positive for Covid-19, and the list continues to grow.  Preparing for an emergency scenario with the CEO and other critical roles is more important than ever. Having an interim plan will give the board time to make a more permanent decision.

And once a new CEO is chosen, the board will need to do everything it can to help them as they faces the post-Covid reality. One way to do this is to retain retired executives who can provide valuable expertise, institutional knowledge, and support. Boards can consider transitioning the former CEO to an executive chairman role or even a co-CEO role in order to keep them involved in the company’s operations. Disney’s Bob Iger, who stepped down as CEO in February, has reportedly “reasserted control” as the company contends with park closures and extensive employee furloughs. Meanwhile, at Michaels Companies, former CEO Mark Cosby is remaining employed full-time with the company as a senior advisor, rather than as a board member as previously announced.

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Does Your Family Business Have a Succession Plan?

Executive Summary

When a family business assumes that the next generation can simply take over where mom or dad left off without pausing to consider the CEO job description, governance, or the evolving business context, they may be setting themselves up to fail. Families have broken up, reputations have been lost, and businesses have collapsed because the generation in control did not consider how to set the next generation up for success. Just as a business must reinvent itself as markets shift, so must a business family reinvent (or at least thoughtfully revisit and refresh) its ownership and leadership model. Seek to understand the changing players and dynamics so that you have better context for what your business, family, and owners need in the future.

Fuse/Getty Images

A day before his 35th birthday, Hampton Berger*, a fourth-generation member of a successful family-owned manufacturing business, stood outside his father’s office, anxiously waiting to discuss his father’s succession plan. Hampton had spent his life “checking the boxes” that he hoped would position him to take over the family business someday: he obtained an MBA and received several promotions in his R&D role at a global car manufacturer before joining the family business.

Much to Hampton’s relief, his father announced that Hampton would inherit ownership control and become CEO of the business, just as his father and grandfather had done, effective immediately. As Hampton realized his childhood dream had been fulfilled, he thought to himself: “What could possibly go wrong?”

A lot, it turned out.

As is true in many well-intentioned family businesses, succession in Hampton’s family business was built around the idea that leaders from the next generation can simply step into the large shoes of their predecessors and run the business (and the family) exactly as mom or dad would have done. But that fails to take into account that each new generation of leadership likely has different skills and interests, and that business contexts and needs inevitably shift over time. When a family business assumes that the next generation can simply take over without pausing to consider the CEO job description, governance, or the evolving business context, they may be setting themselves up to fail. We like to call this the “Sequel Fallacy.”

Insight Center

In Hollywood, many sequels were created in the 1910s as a cost-saving measure that allowed directors to reuse sets, costumes, and props. Sequels have become big business in Hollywood because they build pre-awareness — the audience’s sense of comfort and familiarity with the concept that often leads to big box office numbers today.

Family business sequels have similar traits to cinematic sequels. But in family business, it’s not sets and costumes that are reused; it’s ownership structures, role descriptions, and decision-making processes. On paper, defaulting to a family business sequel makes perfect sense. After all, what worked for the senior generation should work for their children, right? Enacting sequels also often offers the path of least resistance: it doesn’t require the senior generation to change their own responsibilities in anticipation of succession (or after), or to change how their organizations make decisions. But that path can lead to significant challenges.

In our example above, the Berger family traditionally passed controlling ownership and the CEO position to the eldest male in each successive generation, without even considering other candidates. Other siblings of that generation became co-owners, but were not given the chance to lead the business and were expected to be passive as owners. In Hampton’s father’s generation, that arrangement had worked well, and his father was allowed to run the business as he saw fit.

But Hampton’s leadership wasn’t as smooth. After his father passed away, Hampton and his siblings became co-owners of the business, with Hampton remaining in the CEO position. Following his father’s traditional playbook, Hampton made several critical decisions without consulting his siblings. Hampton’s unilateral decision to replace several long-serving board directors was the proverbial last straw. Though his intentions were good — he was bringing in new board members with expertise in a growing segment of the business — Hampton’s siblings were enraged by his actions, not only because they held close relationships with the replaced directors, but because they feared that their opinions as co-owners had been ignored. Hampton’s relationship with his siblings devolved into infighting, significant business losses, and eventually lawsuits. This succession sequel was a flop.

How to avoid these succession challenges

Your family business might avoid the sequel fallacy by sheer luck. Superstars in the next generation can have just the right relationships with their siblings to smooth over jealousies. Or the business context might create opportunities for other family members to find their niche and coexist within the existing structure, or pursue their passions elsewhere, thus avoiding jealousy or a power struggle.

But in our experience, such success stories are the exception. Families have broken up, reputations have been lost, and businesses have failed all because the generation in control did not pause from tradition consider how to set the next generation up for success. Neither Hampton nor his father recognized that in successive generations, family businesses typically need to involve different people, with different interests, relationships, and aspirations, operating in a different business environment, with a different ownership context and culture — and even family as new spouses are added. When company and family have changed, but the approach to owning and managing them has not, it almost always has an unhappy ending.

Just as a business must reinvent itself as markets shift, so must a business family reinvent (or at least thoughtfully revisit and refresh) its ownership and leadership model. In our experience, families should take five steps in advance of succession decisions:

  • Articulate the changing dynamics. As families grow, they inevitably become more complex. What once happened all under one roof in one generation can quickly span to multiple households. Growing up with different experiences often results in a group of individuals with a much wider set of interests, expectations, and behaviors. Coordinating these more diverse groups presents much different challenges. Seek to understand the changing players and dynamics by updating your family tree and analyzing the changes from the last transition period to today so you have better context for what your business, family, and owners need in the future. And once you understand those differences, name them explicitly and have several discussions with your family and owners to explore how those differences might affect the future.
  • Look outside the company for advice. Engage with other business families to understand how they have managed their transition process. While their situation may be different from your own, getting insight into their approach and the reasons they chose their path can shed light on your own challenges and decisions. For example, how did they decide to transfer ownership to the next generation and why? Whose expertise did they seek in the process? How did they build alignment in both the current and future generations? Be open during these discussions, as they often introduce new perspectives that you haven’t previously considered. And seeing examples can often help build the courage you need to break tradition.
  • Be open-minded. Respect tradition and understand why decisions were made in the past. But don’t get stuck in conversations that start with “but that’s how we’ve always done things here.” Instead, talk with your fellow owners about what you would do in the absence of tradition. Can you stay true to your past and simultaneously embrace new ideas? Can you chart a better path forward if you remove some preconceptions that no longer apply? The Antinori family in Italy did just this when, after 25 generations of passing ownership and leadership of their winemaking business to sons, they split ownership equally between three daughters and divided leadership of the business according to each daughter’s strengths. They were able to do so in part because they removed preconceptions about how succession worked and started with a blank slate. In the end, tradition may guide you, but don’t let it be the primary reason for continuing down your succession path.
  • Don’t commit to succession decisions too early. The pride that comes with bringing the next generation into the business, and as a next generation family member honoring your family’s tradition, can lead some individuals to make their decision about succession too early. Committing prematurely as either a senior or junior generation family member can put undue pressure on the successors and alienate talented — maybe even more talented — family members. Instead, develop a plan and process that can evolve over time — one that takes into account new information as it is available and course corrects as needed. Put simply, make succession planning a topic that owners discuss regularly and continue to ask: “Do we have the right people in the right places working well together to make the right decisions with the right information for our ownership and family?”
  • Talk openly about plans for the future. Succession planning is a process, not an event, and it equally affects the family, the business, the owners, and the communities where each of these groups operate. Engage with each — especially your next generation — during the succession planning process. Talk with them about the past, what worked well, and what was challenging. Share your aspirations and views on what an ideal future would look like. Acknowledge the traditions, the differences, the new innovations, and the personal aspects of succession. For example, while a current generation leader is able to unilaterally make most decisions about the business as controlling owner, perhaps the next generation would fare better with a governance process that delegates some decisions to an independent board and requires significant decisions to be approved by a majority of co-owners. The next generation may support this sequel or may have different ideas. Doing all of this will not only create a shared view of the future and drive commitment from both generations, but it will also provide the next generation with a roadmap for how to eventually transition to their own children.

In cinema, Marvel Studios provides an excellent example of how to avoid the sequel fallacy. Marvel Cinematic Universe has released more than 22 titles in just over a decade, grossing more than $18 billion during that time, without rebooting itself or replacing its cast. But each subsequent movie has evolved slightly, with individual characters becoming more or less prominent, new superhero talents being developed, and the context of the challenge they’re up against shifting so that different superheroes have a chance to play important roles. As business families and owners, it’s your job (and opportunity) to assume the role of director to create a future in which each of your own characters can survive and thrive for generations to come.

*All identifying details have been changed.

Source: HBR.org