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What are the risks when the CEO stays too long without a succession plan

The experience from HR assessments is that succession planning is not an issue companies address in a systematic way. The challenges often occur when profits are small, face organizational challenges, sudden changes and more. Companies that rely on management to carry out the goals and missions, provide services but they must also address the issues that changing realities on succession planning. It must move high up on the corporate agenda.

Example: The legendary Jack Welch, former chief executive with 20 years at GE's helm, stepped down in 2001 and was succeeded by Jeff Immelt, who rearranged and globalised GE, even though the wheels of GE were coming off when JW left.

The dangers of any director or executive who overstays his/her tenure are clear and well documented. The power base of a long term director often becomes outdated because he is surrounded by a gang of flattering insiders and steadily becomes more isolated from the company's strategy, customers and suppliers. As a rule of thumb, you can say that almost 80 per cent of top jobs are internal. Therefore if a CEO hangs on to the job for two decades at least one generation of talent would have left the building.

However with a structured succession planning and establishing the role and responsibilities of all involved including getting the Board involved or at least defining the Board role in succession planning, many additional rewards are achieved and risks avoided.

Another reason for a structured succession planning is that the board and management had plenty on their plate, and the best excuse for the board for not having thought about it five years ago is the 2008 financial crisis.

Emergency Succession Planning
The structured succession planning approach of Copenhagen ComplianceŽ also reveals if a trigger happy CEO shuffles the leaders too rapidly or adopts the private equity definition of long term that is three to five years of deluge and head for the exit.

The structure assesses the internal leaders and potential successors so that they can develop as Internal Leaders for possible successors. We create a succession plan for all key positions and customize how to identify potential successors.

Our structured Top-Down Approach to Succession Planning has further focus on culture, gender, nationality and diversity issues to address the following HR issues:
  1. Growing economic contribution of emerging markets
  2. To take advantage of the increased buying power in the collective diversity component
  3. Ensure continuous creativity and innovation edge to respond to the dynamic global competitive environment
  4. Address the global talent shortage issues
  5. Addressing the generation (age) issues
  6. Address the war on global talent pool
  7. Provide added dimension to the corporate people- strategy, mission and values
  8. Competitive advantage to attract better talent from the global marketplace
  9. Opportunity to strengthen the humanity and cultural relevance in the organisation
  10. Retaining the knowledge pool in the retired staff

Returns against tenure
The average tenure of chief executives at the world's 2,500 largest companies is about six and a half years. The median, dragged down by the fact that quite a few suffer buyer's remorse and fire new chief executives rapidly, is 4.8 years . The report tracked shareholder returns against tenure and found that those who hung around for more than a decade.

Managers who get to the top tend to be both skilled and pretty fortunate upon arrival. Later a certain level of self-confidence enters and smooth sailing makes them less open to new ways of thinking. Later improving the company in the long term is replaced by short-term crowd-pleasing. In such a scenario the executive becomes isolated from the market and loses touch when the people promoted are friends. Now it is time for a departure.

The general conclusion is that bosses peak at eight to ten years. However that probably does not apply for a talented leader.

The Copenhagen Compliance top-down approach to succession planning is part of an elaborate HR assessment. The HR audit with an IT assessment tool is developed by a couple of experienced Human Resources ph.d students from CBS. Send us an email if you wish to receive additional information or want us to conduct a workshop.