Opinion

Succession planning needs to be a boardroom oversight from the get-go

3 min read

30 October 2014

According to a paper written by professor Timothy Quigley, “the magnitude of market reaction to CEO deaths has increased significantly since 1950".

And coupled with the 2006 report ‘Do CEOs Matter‘, which suggests that companies suffer a decline in profitability after an emergency succession, it is clear that succession planning should be one of the board’s most important oversight responsibilities.

Perhaps one of the worst-case examples is Yahoo! 

Since Carol Bartz’s departure, the company has seen quite a few CEOs. Jane Stevenson, vice chairman for board and CEO services at Korn/Ferry International suggests that the internet giant was “trying out CEOs to stem the bleeding. But it is clear from Bartz’s tenure that there isn’t much support behind whoever takes the job, leaving the CEO out to dry.”

“Most boards lack a clear process for how to engage on the topic by themselves, let alone discuss it,” she said. “This creates a process logjam that makes it difficult for them to get started. Boards are often uncomfortable broaching the topic, particularly with new CEOs and do not want to do anything that could suggest they do not have confidence in a CEO.”

There is one particular company that seems to follow her recommendations of “thinking about leadership two to three generations out, and has both internal and external CEO options identified,” rather well.

McDonald’s has had to content with multiple CEO deaths. After Jim Cantalupo, who died in 2004, and Charlie Bell, who died the year after, Jim Skinner apparently asks managers for potential replacement names on a regular basis.

But there’s another shark in the water. Janmejaya Sinha, chairman of the Boston Consulting Group states that “investors hate uncertainty, and if a company leader dies, of course they will worry and it will lead to volatility. This is true not just for Tata Motors, but look at what happened when Apple’s Steve Jobs died. Investor sentiment was anxious for some time.

“Succession planning for emergency situations cannot be simplistic, it has to be contextual,” he said. “Having succession planning in place also is no guarantee of success for the company. But it is always the quality of the top management team which makes succession less of a risk for a company.”

Of course, after a CEO passes away or moves on, shareholders are left with an intriguing question: Did the CEO possess exceptional, average, or poor ability? And, what is the likelihood that a replacement will be significantly different, either positive or negative?

Professor Quigley explains that “if shareholders believed CEOs generally had little or no impact on firm outcomes, the loss of a CEO would be a non-event as each would be equally constrained and the overall effect of the transition would be trivial.”

This, once again comes to show that shareholders place a greater emphasis on the individual heading publicly traded corporations today versus in earlier years.

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