In today’s complex business landscape, CEO succession planning should be top priority for every company. As organizations face extraordinary challenges and opportunities, ensuring smooth leadership transitions is essential for maintaining stability and cultivating growth. Effective succession planning prepares companies for the unexpected and aligns CEO development with long-term strategic goals. In this article, we explore how to approach CEO succession planning, including best practices, and the importance of being proactive in identifying and developing future leaders.

Many CEOs are baby boomers, driving attrition rates higher as they reach retirement age. As of June 2024, 1,101 CEOs have announced their departures this year, the highest year-to-date total on record, according to research from Challenger, Gray & Christmas. That number is up 21% from 907 exits in the same period last year, which was the previous year-to-date record.

This generational shift makes it critical for companies to have solid succession plans to avoid disruptions. Creating a formal plan involves identifying and developing potential leaders within the organization, establishing clear criteria for leadership roles, and ensuring that these future leaders are prepared to step into their new positions seamlessly. A well-structured succession plan safeguards against unexpected vacancies, mitigates risk, and aligns leadership development with the company’s long-term strategic goals.

Proactive Planning Pays

Recent CEO turnover underscores the importance of having a robust succession plan to address leadership gaps and ensure business continuity. Without a documented succession strategy, a company faces potential operational disruptions, financial instability, and challenges in maintaining strategic direction.

“You could argue that CEO succession is the most important job a board has,” said Justin Menkes, Partner in DHR’s Leadership Consulting Practice. “When it’s done well, the benefits are significant and enduring. When it’s not done or done poorly, however, the costs are dramatic and obvious.

Without CEO succession planning, companies may face legal battles, financial losses, and a significant impact on their reputation,” Menkes continued. “Establishing a thorough forward-looking succession plan helps to avoid such turmoil.”

Inadequate planning also leaves companies vulnerable to uncertainty in emergencies, such as when a CEO suddenly resigns or has unexpected health problems. Boards should create a road map for these situations by identifying interim candidates who can step in immediately and remain until long-term successors are ready to lead their companies.

“It’s a relatively simple thing for a board to do, but many companies don’t plan for sudden departures,” said Jonathan Hoyt, Partner in DHR’s Leadership Consulting Practice. “This oversight is surprising, given the potential consequences of leadership instability.”

Build a Road Map for Leadership Success

In contrast, having clear plans helps organizations remain resilient and focused, even during periods of change. When companies are prepared, they can position themselves for sustained success, attracting top talent, potential investors, and partners. Succession plans are an investment in a company’s future. After all, finding the next leader is always in an organization’s best interests.

“A planned approach ensures organizational continuity and mitigates risks associated with leadership changes,” Hoyt said. “Perhaps even more importantly, it improves retention of top employees by offering them clear opportunities for growth and advancement.”

One example of a successful transition is when the late Steve Jobs, Apple’s founder and CEO, left the company to then chief operations officer, Tim Cook. Apple had a strong succession plan that included and prepared Cook as the primary succession candidate. Before Jobs died in 2011, he helped in Cook’s development, including allowing Cook to serve as CEO while Jobs addressed his health issues. When Jobs died, Cook became CEO, helping the company solidify its future as a tech powerhouse.

“A well-executed succession plan is the backbone of a company’s stability and continuity,” Hoyt said. “It not only safeguards the organization’s future, but also boosts morale and retention by showing a commitment to internal talent development.”

Commit to a Dynamic Process

At a minimum, a succession plan should include a comprehensive, data-driven evaluation of potential internal and external candidates, defined criteria for leadership roles, and a structured development program to prepare successors. Moreover, it’s a starting point for action – not a static document that sits on a shelf. Boards should update their plans to reflect changing business needs and emerging leadership talent.

In short, as company needs and talent evolve, so should a succession plan. Boards should treat succession planning as an ongoing priority, reviewing plans at least annually.

“Regular reviews ensure that succession plans remain relevant, effective, and actionable,” Menkes said. “This practice helps boards to stay ahead of potential leadership challenges and reinforces their commitment to effective CEO transitions and successful onboarding.”

Similarly, establishing a culture of succession planning helps ensure continuous leadership readiness and a pipeline of capable leaders. Waiting too long to create a succession plan means an organization may not have sufficient time to develop potential candidates.

“Identifying and developing potential CEO successors can take two to three years,” Menkes said. “It’s very likely that they’ll need to grow in some areas to take the role, even if they’re very promising prospects for the job.”

Cultivate Future Leaders Early

Many organizations opt for internal candidates when selecting new CEOs. Identifying potential successors early gives current CEOs and boards ample opportunity to interact with them, make sure they have adequate experience, and evaluate their performance. They can assess candidates for succession-readiness, including their strategic thinking, ability to inspire teams, and capacity to embrace organizational change.

“Long-tenured CEOs know who to elevate,” Hoyt said. “They know how to cultivate capability and performance within their organizations. They can make sure candidates get the proper experience and exposure for the position. There’s nothing like the institutional knowledge that CEOs get over time that’s not easily replaced with an outsider.”

Adds Menkes, “If it’s clear where the business is going and what demands the next CEO will have, it’s a pretty straightforward exercise to derive the qualities, capabilities, and track record the top successor must have.”

How early is too early for identifying and preparing internal candidates? Some organizations start as soon as their new CEOs are in place. The ideal timeline may depend on the industry and its pace of innovation.

“It depends on how slow or quickly they evolve,” Hoyt said. “With a large-cap company that has a portfolio of businesses, it’s unlikely that a particular change in one business is going to change the requirements that the CEO needs,” Hoyt said. “For a software company, however, the rate of change is much faster.”

Make the Right Choice: Internal Versus External

While the guiding rule of thumb is that internal successors are the best choice for CEO succession, it’s not always the most suitable option. Sometimes, an organization’s needs, strategic direction, or specific challenges may necessitate bringing in external talent. External candidates can offer fresh perspectives, diverse experiences, and innovative ideas that align with evolving market demands.

“If a company is doing well and it’s on a trajectory of positive results, then staying internal is the safest and best way to go statistically,” Hoyt said. “But if the company is struggling and needs new direction, outsiders tend to outperform outsiders.”

Menkes echoed Hoyt’s sentiments.

“Internal talent has the knowledge and the trust. They understand the culture,” he said. “There isn’t that sort of transition risk associated with bringing in an outsider whose style and culture might not be a fit.”

“Finding and securing a top CEO is a major challenge, under any circumstances,” he added. “Going from a superstar CEO to another superstar CEO rarely happens.”

In the best situations, potential successors have basic leadership skills gaps they can easily overcome. A formal internal candidate development program can provide targeted training, mentorship, and hands-on experience to address any weaknesses. By investing in the continuous development of internal talent, organizations can build a robust roster of capable leaders who are ready to step in when needed.

Strategic Succession for Stability

Effective succession planning is crucial for handling planned and unexpected leadership changes, supporting long-term growth and stability. By having robust plans in place, companies can minimize risks associated with leadership transitions and maintain their strategic focus. Continuous evaluation and refinement of these plans is essential to keep pace with changing business landscapes. Prioritizing succession planning demonstrates a commitment to organizational resilience, ensuring a steady path toward future achievements.