Why succession planning is critically important

Photo courtesy of Paul Inkles on Flickr

Photo courtesy of Paul Inkles on Flickr

Rob Swystun, Pristine Advisers

Not everyone likes surprises.

The stock market, for example, is notoriously cranky when it is surprised. And many a time it can be caught off guard by a CEO’s unexpected retirement, followed by a hazy picture of who the successor is.

Not having a succession plan in place for an outgoing CEO can get the rumor mill churning and stock prices falling.

As Alberta Oil Magazine’s Alex Eldridge explains, that is what happened when Encana Corporation’s then-CEO Randy Eresman announced his retirement in January of this year but the company did not give a clear indication about how it would replace him, surprising considering the size of Encana.

“In our view it is very surprising that a company of this size and stature did not have an internal replacement suitable to step into the CEO role,” CIBC World Markets analyst Andrew Potter wrote in a research paper after the announcement.

This led to all kinds of rumors that the company was in a position for a takeover despite assertions from interim CEO Clayton Woitas and the board that the company was not interested in selling.

This isn’t an isolated case of one company, either. A survey done in 2010 by Stanford University researchers found that 39% of the private and public companies they queried had no viable internal candidates for the CEO position. They also found that boards typically spend only about two hours per year on CEO succession planning.

Not good news for surprise-hating markets.

“Institutional investors are very nervous about succession management these days and are getting much more picky about seeing really robust succession plans, because they know it can impact company performance and share price,” says Julie Naismith, director of talent and rewards with professional services firm Towers Watson.

Although some small companies may replace a CEO fairly casually, like asking a board member to step in when the time comes, it is still a good idea to have a plan in place.

“Really small companies do this quite naturally, but I do think the companies that do it well apply rigor, even if it’s on a small scale,” says Naismith.

Planned and well-communicated changes like the announcement by Enerplus Corporation that CEO Gordon Kerr would be retiring at the end of June after 12 years in the position to be replaced by COO Ian Dundas see the markets remain calm while the transition is taking place.

But benefits of planned succession go beyond just positive market reaction. It minimizes disruption to the organization and helps to maintain performance.

“When you do this, it’ll basically filter down through the organization through different levels even past the executive,” Kerr says. “It tells your people internally that you are interested in their development and you want to create pathways for them – that they can succeed into higher levels in your organization.”

Kerr says after only two years in the CEO position he was thinking about succession planning and setting up that strategy with the board.

In today’s climate of HR practitioners constantly complaining that top-notch talent is hard to find, it is becoming more important for companies to groom future CEO candidates internally.

Even if companies do manage to lure an external candidate away from their current position and get them into the fold, it is a good idea to have that person spend some time with the company gaining the necessary experiences within that unique company environment prior to taking over.

“At different points in time, there’s always a discussion about candidate readiness in the equation. Do you think they’re ready now, or do they need another year or two of development and exposure in their position?” says Kerr.

Companies should promote potential successors to positions within the company that can help them develop their skills as they move up the ladder. You also have to identify what qualities you are looking for in a potential new CEO.

“What we selected for in the past as far as what our leaders need to be really good at might not be the same going forward,” Naismith says. “One of the big shifts in recent years in the oil patch has been the need to be much better at PR, regulatory affairs, environmental affairs, and managing the external brand of the organization.”

And Naismith recommends identifying these qualities through a formal process that puts it down in writing as part of the succession plan.

And it’s not just the CEO that succession planning should be done for. Industrial psychologist and partner at The Leadership Store Laura Hambley says it is imperative to develop everyone within your organization.

“You have to make sure you’re not just focused on the high potentials – that you’re focused on everyone’s career and development,” she says. “The average performers contribute a lot to an organization.”

Letting people know that they play a part in your organization’s succession plan will help with employee retention.

“People are really motivated by development opportunities and career progress, so if they don’t know that they’re on the plan, they’re more likely to turn over,” Hambley says.

If nothing else convinces you to have a solid succession plan in place, the mass exodus of retiring baby boomers should be the kick in the pants that does it. As they begin to retire en masse, businesses will have to have plans in place to replace them or open themselves up to unnecessary risk. And, God forbid, if tragedy strikes, you’ll want to be able to at least have someone picked who could fill in on at least an interim basis.

So, don’t wait to plan for the future. Plan now.


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