I received a call from a board chair the other day. He wanted to see pay arrangements for his company’s C-suite executives to confirm that potential CEO successors heading business units were properly compensated. He felt entitled to this information but wanted to check with me first.
I said that the board should see any compensation of any individual within the company, as the board deems appropriate, to ensure that individuals are not taking inappropriate risks, based on new regulations (PDF, at page 8093). I have written about implementing risk-adjusted compensation.
That the board had not seen, much less approved, the pay and leadership development of potential CEO successors is a risk. TSX boards are responsible for succession planning under the regulations. If potential CEO successors are not compensated properly, they may be retention risks. Leadership development blockages may exist, but the board has no way of knowing this without a viable plan.
CEO succession planning is poorly carried out in many boards because CEOs drag their feet and ineffective boards accept this. The choice of CEO is the most important decision a board makes. Leadership can make or break an organization.
The reasons for poor CEO succession planning are simple. The current CEO is conflicted and so is the board. CEOs are conflicted because they are planning to replace themselves, which no one wants to do. Boards are conflicted because they are assessing their own work, namely their decision to hire the CEO in the first place.
Here are some of the telltale problems, solutions and red flags for poor CEO succession planning:
1. Problem: Dominant CEOs refuse to plan or unduly influence the process
Solution: The board should own CEO succession planning, not the CEO. The current CEO’s views are important but should not override. If a CEO is not being helpful, CEO succession planning should form part of incentive compensation, with specific objectives. CEO succession planning should start the day the new CEO is hired.
Red flags: Chair and CEO roles held by the same person (see my recent paper on separate chairs); a CEO who is a founder; large pay gaps between the CEO and direct reports; limited board exposure to high potential talent; limited management bench strength; and other signs of CEO entrenchment.
2. Problem: Boards of directors do not make CEO succession planning a priority
Solution: The board should have a private session without the CEO to discuss and assign the leadership and scope of CEO succession planning. A robust CEO and leadership development plan from management should be requested. A board committee of independent directors should oversee the identification of executives matched to paths and time-frames, and make recommendations to the board.
Red flags: A board that is not independent; low director turnover; minimal external benchmarking; lack of knowledge and information.
3. Problem: CEO succession planning relies on informality rather than concrete plans
Solution: The next CEO profile and development leadership ladders for near, mid and long-term high potential talent, both internal and external, should be documented. Boards should understand the availability, quality, action plans, and special compensation arrangements for candidates. The board should provide input on, approve, and regularly discuss the CEO succession plan.
Red flags: Plans are seen as personal rather than good governance; limited resources and advisors for the board; limited proxy disclosure of CEO succession planning; and lack of even immediate successors.
No one is irreplaceable or immortal
Directors often tell me when I ask about their biggest mistake that they waited too long to replace a CEO. Poor succession planning can adversely affect the morale and performance of any organization.
Organizations change and strategies change. Generally, people don’t, so the skills of a CEO and even directors may be outdated or not suited for the organization as it evolves.
CEO tenures have gotten much shorter.
You can’t replace someone without a viable alternative. It becomes a lot easier for a board to “pull the trigger” when proper succession planning is done. If there is dissatisfaction with CEO succession planning, that is the fault of the board.