How And Why Companies Should Prepare Now For The Departure Of Their CEOs
Commentary From Crisis Management Expert Edward Segal, Bestselling Author of the Award- Winning Book “Crisis Ahead: 101 Ways to Prepare for and Bounce Back from Disasters, Scandals, and Other Emergencies” (Nicholas Brealey)
Howard Schultz’s announcement this month that he will end his third run as Starbucks’ CEO early next year was a reminder for boards of directors about the importance of having and updating corporate leadership succession and transition plans.
Like Starbucks, some boards will know when and why they will have to launch a search for a new CEO. Schultz said the timeline of his planned departure “provides the company the ideal runway for a seamless transition and continuity of leadership through the 2022 holiday season,” The Seattle Times reported.
Other boards can be taken by surprise when the death, resignation, retirement or termination of CEOs creates a crisis. Directors who delay in preparing for the next vacancy at the top of the organizational chart run the risk of extending the crisis or making matters worse.
A lot can be at stake when, how—and how well—the succession and transition of CEOs are handled, including the morale, recruitment and retention of employees and the impact on the corporate bottom line. Succession, HBO’s popular series about a fictional multinational conglomerate, provides insights and lessons about the importance of preparing and implementing succession plans.
“The uncertainty caused by the early days of the Covid pandemic led many CEOs to stay in place and for companies to put their leadership succession plans on hold, according to James M. Citrin, the leader of Spencer Stuart’s North American CEO practice, told G100 Network.
Between mid-March and April of 2020, “as pandemic-induced lockdowns began, we saw almost everything related to CEO succession plans, both from the CEO and board perspectives, come to a halt,” he noted. Now, as the pandemic continues to fade and more businesses return to normal, “The pent-up demand and overdue leadership changes could slingshot to record CEO turnover in 2022-2023,” Citrin said.
CEO Departures Are Ramping Up
“A high rate of Americans are quitting their jobs each month, and CEOs are no exception. Meanwhile, inflation concerns may have some boards looking to new leadership to weather the coming storm,” Andrew Challenger, senior vice president of Challenger, Gray & Christmas, a global outplacement and executive coaching firm, said in a press release.
The departure of CEOs appears to be ramping up. First-quarter CEO exits from U.S. public companies rose 29% from the same quarter in 2021, with 395. It is the highest quarterly total since Q1 2020, when 441 CEO exits were recorded, according to a report by the company.
One of the most important early decisions boards must make about hiring a new CEO is whether to hire from inside or outside the organization. Starbucks, for example, is only considering external candidates to replace Schultz, according to the Wall Street Journal.
As I wrote in January, when choosing new CEOs, boards of directors often decide to go with what they may consider to be the safer route by promoting in-house candidates who are near the top of the organizational chart versus other so-called ‘leapfrog’ internal candidates. But the results of a study by Spencer Stuart challenge that approach.
The company noted that “Over the last 20 years, four roles—chief operating officers, divisional CEOs, chief financial officers and ‘leapfrog’ leaders promoted from below the second layer of management—represented the last-mile experience of 85% of freshly minted CEOs.
“Among them, leapfrog CEOs were most likely to outperform their peers. Former CFOs were the least likely to be among the top performers. And divisional CEOs presented the safest bet to avoid underperformance.”
Although the average tenure of a CEO is 6.9 years, according to M&A Executive Search, boards should not wait to make succession and transition planning an important part of the organization’s crisis management plans. The plans should be reviewed and updated as needed on a regular basis.
There are several steps boards of directors should take now to ensure they are fully prepared when they must find a new CEO.
Prepare And Update Succession Plans
Establish or update policies and procedures for finding the company’s next CEO. This includes deciding whether to hire a consultant or recruiting firm to handle the search and whether to appoint a committee or board member to oversee or handle the process.
“Succession planning is one of the main responsibilities of a board of directors,” according to Chester Spatt, a professor of finance at Carnegie Mellon University’s Tepper School of Business said in an email interview.
“A board should always have succession in mind—absent a full-blown search, it is natural to be evaluating the senior executives (partially through the CEO, but partially independently) and also have in mind whom on the Board could serve, at least as an interim leader,” he observed.
Factors To Consider
“The exact succession plan might be influenced by the circumstances—if the succession is in response to an internal problem that might preclude some or all of the internal candidates. The circumstances also might influence the type of leader needed and whether an interim or permanent CEO is most appropriate. If the need for succession is related to the CEO’s situation, that has different implications than if succession is motivated by a business problem,” Spatt advised.
If there are no succession plans in place when a company announces the departure of the CEO, let people know when those protocols will be implemented. That’s what happened this month when Amazon announced in a regulatory filing that Dave Clark, CEO of Amazon’s worldwide consumer business, will resign on July 1.
The company did not name a replacement for Clark. In a blog post announcing his exit, Amazon CEO Andy Jassy said the online retailer is in the process of firming up a succession plan for Clark and will announce an update “over the next few weeks.”
Practice Responding To Vacancy Scenarios
Boards should work with staff or consultants to conduct tabletop exercises to practice responses to different scenarios that could create the need to look for a new CEO. The scenarios should include death, illness, leave of absence, resignation, retirement and termination of the top corporate officer.
Edward Segal is a crisis management expert, consultant and the bestselling author of the award-winning Crisis Ahead: 101 Ways to Prepare for and Bounce Back from Disasters, Scandals, and Other Emergencies (Nicholas Brealey). Order the book at https://www.amazon.com/gp/product/B0827JK83Q/ref=dbs_a_def_rwt_bibl_vppi_i0
Segal is a Leadership Strategy Senior Contributor for Forbes.com where he covers crisis-related news, topics and issues. Read his recent articles at https://www.forbes.com/sites/edwardsegal/?sh=3c1da3e568c5.