Succession Planning for C-Level Executives

A great deal of attention is properly devoted to succession planning for the CEO; however, the directors and the CEO should also be mindful of the impact of the sudden departure of unavailability of other C-level executives who oversee essential areas of the business including marketing, operations, information technology, human resources and finance.  Studies among Fortune 500 companies have quantified the risk that companies may have to replace one or more of the top executives.  For example, turnover among chief financial officers is increasing due, in part, to the escalating demands placed on that position by new laws and regulations pertaining to corporate governance, accounting procedures and internal controls.  It is now common for larger firms to go through multiple CFOs in a relative short period of three to five years.  The CEO of a Fortune 500 company can also expect that he or she will need to find new C-level executives for marketing and information technology multiple times during the typical CEO tenure.

A significant percentage of large firms—Fortune 1000 companies—do not have any formal succession plan in place for executives other than the CEO and typically plead that they simply do not have the time and budget to establish and maintain a leadership development program that will ensure that the company has a pool of qualified and informed candidates who can step easily and quickly into new roles as heads of important functional and business units.  The problem is even more urgent for smaller companies since the senior executives generally have little or no staff support and therefore horde most of the knowledge about key projects relating to the departments.  If they become unavailable there is no one who can quickly fill the gap.  For example, if an emerging company suddenly loses its CFO in the middle of negotiations for a new round of venture capital financing or an expansion of the company’s line of credit with its bank the impact may be disastrous since it will take weeks or months to recreate the knowledge and information that the departed CFO should have been able to provide easily to the funding sources.  The result may be a failure to close a deal or a closing on terms much less favorable to the company than would have been the case if the CFO was still on board or a qualified replacement was readily available when the CFO left.

A sudden loss of a C-level executive followed by a long period without a replacement can have other adverse effects on a company’s business.  For example, studies show that a lack of a smooth transition for a key executive position, regardless of the reasons therefore, can lead to a loss of confidence in the CEO and other senior executives among the employees who would normally report to the person in that position as well as  deterioration in employee morale and productivity.  In addition, as with the example above regarding negotiations on financing, the lack of leadership causes ongoing projects to stall due to uncertainties about future leadership support.  A correlation has also been found between loss of a C-level executive and erosion of stock prices.  On the other hand, companies which are able to quickly identify qualified replacements from within are much less likely to run into serious problems if there is a need for a change in the executive team.  In fact, a succession plan for C-level executives that relies on talented managers that are already working for the company can be important recruitment and retention tool.

Succession planning for C-level executives should be driven by the CEO and should involve all of the members of the executive team well before there is an urgent and immediate need for a replacement.  One way to make sure that the company is not caught unprepared is to make sure that everyone on the executive team is kept abreast of important projects in other departments.  The goal is to make sure that all executives know what is going on in the company and can step in to run other departments temporarily and contribute to nominations of qualified candidates from inside the company to take over departments on a permanent basis.  The CEO can get others involved by soliciting their input on strategic and business initiatives that require execution across department boundaries including review of annual operating plans, new products and services, acquisitions and major IT projects.  In addition, all C-level executives should be required to meet regularly with senior managers in their departments and actively serve as mentors to develop the skills of potential successors.  C-level executives should be required to provide input to the human resources department on a regular basis on the performance of key subordinates and the company should launch a professional development program that not only creates a possible successor pool but also generates benefits even before participants are asked to move up in the form of lower turnover rates and great enthusiasm about working for the company.

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