Imagine that, out of the blue, your top executive resigns and your company is left with the urgent task of finding a capable replacement in no time. Or, your board decides to fire the CEO and your company cannot afford to wait to appoint a new chief.
This type of challenging and stressful situation can occur in any organisation. Therefore, the best way to handle it is to be ready by proactively preparing a succession plan for key positions in order to avoid damage. Here are the the most common mistakes that usually happen at organisations where succession planning is concerned:
1. No succession planning: Although the necessity of succession planning is obvious, not all companies are doing it. In a study of 711 Australian organisations in 2004, researchers Tracy Taylor and Peter McGraw wrote that 44% of the respondents did not have succession management programmes. In the United States, the National Association of Corporate Directors (NACD) found that, in 2014-15, almost 30% of board directors said their firms did not have a formal emergency CEO succession plan in place.
The lack of succession planning could be caused by a number factors that can vary from firm to firm. However, if there is no plan in place, it is unlikely that the board can solve the issue of an unexpected departure quickly. The stakes are too high to ignore.
2. Succession planning not a board priority: Many boards tend to prioritise "hard" issues such as business performance, tax planning, compliance with ESG regulations, and so on. According to the 2024 NACD Private Company Board Practices report, 36% of the 214 respondents said their firms were unprepared for a CEO succession. The long priority list of performance- and finance-related matters usually dominates the mindset of directors, leaving less time for human resources issues including succession planning. Even if there is a plan in place, there may be low involvement from the board.
3. Difficulty finding a capable leader: Lou Gerstner, a former IBM chief executive, is widely hailed for turning around "Big Blue", creating a highly competitive company and laying down a solid foundation that persists today. This kind of impressive success story does not happen every day. In reality, capable senior executives are not always easy to find.
According to the Harvard Business Review, 2 of 5 of new CEOs fail in the first 18 months, and 30% of Fortune 500 CEOs have lasted less than 3 years. The study also noted that 82% of failures stemmed from personality fit issues, not industry experience or expertise, which resulted in difficulty building relationships with subordinates and peers.
4. General perception that succession is the responsibility of HR: Many directors and senior executives believe the Human Resources department can handle succession issues since its staff have expertise in understanding and communicating with people. In reality, though, the head of HR is rarely perceived as being as important as the chief operating officer or chief financial officer. Think about this: how many firms have their HR head officially reporting directly to the CEO? The answer will surprise you.
If the firm has no current succession plan and the head of HR does not directly report to the CEO, the former may hesitate to raise this matter with the latter, let alone the board. Dave Ulrich wrote in Human Resource Champions (Harvard Business School Press, 1997) that HR is at heart an "infrastructure" department. Its role is to ensure the efficiency of the succession planning process, but the guiding principles and key have to come from CEO and the board.
5. Relying on "gut feel" too much: Jack Welch, the late CEO of GE, once said that everyone thinks they are a people person. However, not everyone can read or understand others to the same degree. Also, not everyone has a chance to see others with the same perspective. In this regard, when it comes to identifying a successor, gut feeling can be more harmful than helpful. A numbers of factors can get in the way such as bias, prejudice, gender inequality, and so on.
In the end, identifying and placing the wrong person in charge can be costly financially. Research by the Society for Human Resource Management (SHRM) suggests that direct replacement costs can reach as high as 50-60% of an employee's annual salary, with total costs associated with turnover ranging from 90% to 200% of annual salary. The average cost for replacing managerial and executive positions is 18 months of base pay.
Therefore, the right succession planning process can help save a large amount of money. In addition to annual performance reviews, behaviour observation, 360-degree feedback and face-to-face interviews, personality and cognitive ability assessments should be included in the process. This can ensure that the organisation will choose the right successor, and talent, and always be ready for the unexpected.
Sorayuth Vathanavisuth, PhD, is Principal at the Center for Southeast Asia Leadership. His areas of interest are executive coaching, leadership development and succession planning. He can be reached at sorayuth@sealeadership.com
