Marianna Zangrillo and Thomas Keil – co-authors of ‘The Next CEO: Board and CEO Perspectives for Successful CEO Succession’ – offer their expert opinions on an enduring challenge for businesses the world over.

IT was that time of the year again – succession planning. Starting with the board, succession planning was on the agenda, but few people throughout the organisation knew. Succession planning – which is meant to identify the top performers that will be prepared for senior leadership positions including the CEO role, and who should get ready to replace a leaving leader upon retirement, unexpected departure, dismissal or similar occasions – is one of those topics that concerns top performers, yet they often do not know that they are candidates.

 

In the board meeting, Michael, the CEO (name changed for confidentiality), was discussing the potential of the different top management team members to succeed him in the CEO role. Glenda (head of HR) and Christian (the CTO) were quickly discarded – functional leaders, with some exceptions, are not yet considered the natural successor for the CEO role because they tend to lack direct P&L responsibilities and customer-facing experience.

The conversation rapidly crystallised around John and Jamie, the heads of the two largest business units, as the likely successors – given their track records and the year-on-year profitability of their units. With that, the board closed the topic.

As the board had concluded its succession planning exercise, HR was tasked to develop similar succession plans for each executive and the levels below. And similarly to what happened in the board meeting, some names for each position were identified. 

When Michael unexpectedly left the company a year later, the board returned to its succession plan but decided that neither of the two candidates earlier identified would be considered for the CEO role because the board felt uncomfortable with the skills and experience of both candidates. Instead, it engaged an executive recruitment firm to find an experienced CEO from outside. John and Jamie, who were both hoping to get the top job, resigned with frustration – and in the following year and a half, the company was in disarray due to too much uncertainty, and an unexpected and too sudden leadership vacuum.

What happened in this confidential example is more common than one would imagine. Every self-respecting company nowadays carries out formal succession planning exercises, at least for the two levels below the CEO. But when the rubber meets the road, all the hard and typically good work that has been done often gets discarded, and the search for a successor starts from scratch. Given these experiences, it is only sensible to ask: can succession planning ever be more than just a paper exercise?

Forming a meaningful, sustainable succession pipeline

Our research into CEO succession suggests that the succession management, probably one of the most important and challenging processes in any firm, does not have to be just a paper exercise. Rather, firms can complement succession planning with a succession pipeline that helps to renew management all the way up to the CEO, in a way that is meaningful and sustainable and can therefore be utilised when the time comes. This can happen when boards, CEOs, top management teams, HR functions and leaders throughout the organisation are able to look at succession planning starting from the strategic needs of the corporation in the years to come, and can actively create and develop a roster of candidates for each position, so that the candidate who best matches the requirements at the time of succession can be appointed. 

Proper succession planning should start from the strategic goals of the corporation and the capabilities that are needed to achieve those goals. For instance, a company that wants to grow from a midsize company to a large company needs to create succession plans that are based on the capabilities needed to run corporate-scale systems. The succession plan for the CEO needs to define CEO capabilities that are likely to be needed in the future, and develop a career path that allows multiple candidates to develop these capabilities. 

Identifying the necessary capabilities, however, is only one element. Developing the capabilities to become CEO may take candidates years if not decades. Succession management therefore also needs a succession pipeline to be created so that a pool of potential leaders is identified early, and then systematically developed so that the potential leaders develop broader capabilities across departments and businesses while monitoring their performance as they progress. As candidates are developed and only some will get the C-suite positions or the top job, others may be disappointed and decide to leave, or may simply find better opportunities in another firm. When a top performer leaves and joins a different organisation, the company that has invested in developing this candidate should not see this as a failure or a waste, but rather as an additional confirmation that succession planning worked and more than one candidate was successfully developed for the next step, even when that next step is taken in a different organisation. 

For instance, in 2005 when Jorma Ollila, former CEO of Nokia, decided to step down, succession planning had been done carefully and an outstanding roster of contenders was ready to step up. The chosen successor was Olli-Pekka Kallasvuo, who had been the CFO for a long time and then moved to manage the American business and then the Mobile Phone business unit. The other top candidates, Pekka Ala-Pietilä and Matti Alahuuta, left Nokia following the appointment. Alahhuta was able to utilise his competences as CEO to Kone, a leading elevators’ firm whose head office Nokia executives could see from their own offices. Ala-Pietilä, who had been President of Nokia and had been thought by many as the top contender, pursued a second career as a board professional. In this way, succession management can support the broader ecosystem around a company. As more organisations professionalise and take succession planning seriously, and different organisations are able to absorb each other’s talents, the general corporate knowledge and competence level grows as a whole and the talent pool does not dry up.

Every succession management system has its limits

Despite the opportunities and strength of the succession management described here, it is important to recognise the challenges and limits of any succession management system. Creating a strong succession pipeline will always involve a tension for current leaders. Strong rising talents put pressure on and sometimes even create conflict with existing leaders. As a result, weak leaders will always be tempted to hire less capable leaders that do not pose a threat. During our interviews, we were informally told that often CEOs have sidelined top management team members they perceived as a threat. One of the biggest challenges to successful succession management is therefore systematic commitment of management starting from the board, the CEO, the top management team and all layers of management. When leaders are hired or promoted due to personal liking, friendships or closed networks, the risk is that an organisation ends up having a ‘B team’ as their top management team and that ‘B team’ is unlikely to hire an ‘A team’ below. When this happens, succession management is probably the smallest of the issues, since the organisation gets trapped in numerous value-destroying events that keep multiplying until its profitability eventually collapses.

A second limitation arises because even the best succession planning system can only prepare leaders for a limited number of future scenarios. It may not be realistic to expect that succession planning can develop a potential leader specialised in dealing with any strategic contingency inside the corporation. Take, for instance, the case of the recent SAP succession: in October 2019, two existing executives – Christian Klein and Jennifer Morgan – were chosen as co-CEOs; a continuation of the company’s long-standing tradition of hiring from inside and having two co-CEOs. However, when the Covid-19 crisis created a strong need for unified leadership, the board decided to continue with only one CEO and Morgan left the company.

 

It may not be realistic either to expect that a succession pipeline can produce the ideal candidate for the large range of contingencies the company may face. For instance, the succession pipeline may be able to develop CEO candidates that can continue or evolve the existing strategy, but it is not realistic to expect it to also produce turnaround or transformation specialists at the same time. For instance, Swiss industrial company ABB has invested in a highly sophisticated succession planning system. Yet, when faced in 2019 with a major transformation, the board decided to hire Björn Rosengren – an outside CEO experienced in corporate transformations. In other words, even in well thought out and managed succession management systems, the need for targeted external hires to renew the capability base and fill novel capability needs will never cease. 

Succession pipelines also require a minimum critical size to be useful. The smaller the organisation, the more limited the opportunities are to identify a broad pool of candidates, rotate them regularly across different assignments, or to develop multiple candidates for any position.

Creating a strong bench of future leaders

To return to the opening question, succession planning does not need to remain a paper exercise and it is in fact a key element for sustainable growth, knowledge development, and customer retention, among other things. However, to bring it to life requires a true appreciation of merits rather than personal relationships and views, as well as years of systematic work supported by the board, the CEO, the top management team and right down to the grassroots of the organisation. Firms that have succeeded in doing so have created a strong bench of leaders – not only for themselves, but often for many other companies too.

About the authors

Marianna Zangrillo and Thomas Keil are co-authors of ‘The Next CEO: Board and CEO Perspectives for Successful CEO Succession’ – published by Routledge (£29.99), and available from Amazon and leading international booksellers. 

www.thenextceo.ch