Succession management critical for business continuity

"Succession is perhaps the most difficult job a board can do – it is also one of the most important things a sitting CEO has to focus on,” says Indra Nooyi, the immediate past chief executive officer of PepsiCo. She said this in an exclusive interview with The CEO Magazine. In the interview she also said, “Your success is not going to be decided by how well you ran the company; it’s going to be determined by how good your successor ran the company.”

While reflecting on her days as CEO, Ms Nooyi categorically mentioned she was more worried about her legacy than she was about her performance as CEO. The statement “If the company collapsed after I left, it meant I didn’t build a company with a solid foundation and a solid team” from one of the most successful business leaders of her time explains the importance of succession management for sustained business successes.

According to a survey conducted by the Society for Human Resources, top executives of renowned companies believe two of the biggest challenges they have to face in next few years are: attracting the best talents and retaining them. In the backdrop of this reality of scarce resources, succession management has become an extremely important strategic issues for the enterprises.

Let’s try to have a deep dive into this all-important topic. In simple words, succession management is a process through which an organisation identifies and develops its future leaders who are ready to take over the responsibilities of any critical position as and when it gets vacant.  Any critical position might get empty at any given point of time for numerous reasons like retirement, resignation, termination, transfer, promotion or even for the sad demise of the employee. 

Statistics shows each year 10 to 15 percent of the organisations replace their existing bosses with new ones.  Yet study suggests not many companies are well-prepared to fill up the vacancies immediately.  A survey conducted in 2010 jointly by Stanford University and a headhunting firm Heidrick & Struggles reveals that 54 percent of the companies were grooming a successor, while 39 percent did not have any suitable internal candidates who can replace their existing chiefs if the need arose. Dominic Barton, Ram Charan and Dennis Carey in their book “Talent Wins” stated that almost 66 percent of the companies didn’t have any formal succession plan.

It is quite evident from different incidences that the cost of not having a proper succession plan can be significant. For example, in 2010 when Hewlett Packard announced that their CEO had stepped down, its share price took a nosedive. This sudden vacancy in the leadership role caused uncertainties among the investors and consequently the stock price took an 8.3 percent plunge. Another study conducted on 2,500 largest public companies unveiled that companies that struggle to find replacements for the outgoing CEOs relinquish $1.8 billion in shareholder value. The more time a company spends on finding replacement for its departing leaders the worse it subsequently performs relative to its competitors.

Besides financial losses, there are other risks as well. They are: (1) Loss of knowledge and experience: the outgoing employees take away loads of knowledges and experiences along with them; (2) Internal conflicts: to fill up the vacancies of a critical position, employees might compete with each other and might end up in power struggles which can result in conflicts among the colleagues; (3) Disruptions in day to day work:  if people at the top leave and there is no immediate replacement, naturally there would be disruptions in day to day activities and decision-making may also get slowed down; and (4) Risks of losing other talents: when a senior leader leaves an organisation, quite often it happens that a few other employees follow suit which can be very costly.  

For succession planning, an organisation generally focuses on the senior positions which are extremely important for the company’s profitability and success as a whole. Organisations having a proactive succession planning can ensure smooth transition of critical leadership positions. This process starts with identifying the critical roles; identifying the internal talents who can fulfill the vacant positions if there is any; devising a development plan for the identified talents; and monitoring the progress periodically in a structured manner.

Many organisations use a tool called 09 Box Grid to assess their existing talent pool. In this tool, the X axis refers to the performance of an employee, while the Y axis denotes the potential of that person to grow within the organisation. There are a total nine boxes and based on the assessment an employee is placed in one of the boxes and accordingly development plan is chalked out.

Employees falling in the top right corner box labelled “Top Talent” are the best performers and have the highest potential to take over the senior management roles. Special attentions should be given to these employees to get them ready and constantly engage with them to keep them motivated so that they do not leave. Employees falling in the category of “Top Potential”, “Emerging Talent” and “Top Performer” are also the bunch of people require lots of attention and focus to prepare them for the future.

Off late visionary companies and their leaders have started to invest more time on effective succession planning. A study on 1,300 organisations worldwide shows that 99 percent of senior leaders participated in succession planning meetings and 95 percent take part in regular reviews. There is no shortcut to developing leaders for future. An age-old Chinese proverb says, “The best time to plant a tree was 20 years ago, the second-best time is today.” This is absolutely true for organisations to plan for the successors for business-critical positions.  Some management experts rightfully suggest succession planning for a CEO start five years before the current CEO plans to retire. 

The writer is the chairman and managing director of BASF Bangladesh. Views expressed here are personal.