Korn Ferry: Boards Should Identify and Embrace CEO Succession Risk

Commencing the process of CEO succession, without first agreeing on the strategy and market factors that impact the role, is the highest risk to successful CEO succession, according to a survey of prominent business leaders in Australia and New Zealand. Korn Ferry, the preeminent authority on leadership and talent, interviewed and surveyed key players in CEO succession to identify the greatest risks when replacing a CEO.

The survey also indicated that starting the process too late was the second highest risk and involving the current CEO in choosing their successor was the third highest risk.

Korn Ferry’s Executive Chairman, Australasia, Katie Lahey said: “Securing a smooth CEO succession is more than good governance; it makes sound business sense, for news of a departing CEO often impacts a company’s value.”

The report revealed that many chairmen keep two lists of names; one with potential CEO successors and the second of people who could be an interim CEO or a ‘safe pair of hands’. Being identified as the ‘safe pair of hands’ is not necessarily a passport to the top job, as that person may be someone who can maintain the status quo but no more. When boards want a change agent, they are just as likely to look outside the company for their next CEO.

“This was an interesting development which those who are in the CEO succession pipeline need to consider. Are they contenders for the top job, or seat warmers for the next CEO?” said Ms Lahey.

The relationship between the chairman and the CEO was identified as both the strongest or weakest link in CEO succession planning. “It is a highly nuanced undertaking where the personalities of two key individuals – the chairman and the incumbent CEO – may determine whether this risky business has a smooth path to transition.

Korn Ferry advises companies to start a search for a CEO by first assessing the risk that surrounds the process. “An experienced board will identify risks in CEO succession early, and use their risk assessment to guide and anchor the process. Risk can derail a succession. However, CEO succession viewed and managed through a risk framework will be stronger,” said Ms Lahey.

The key success factor of a smooth CEO succession is alignment between all parties involved in the process. In particular, the board must be aligned on the future strategy of the company. With every slippage in alignment, risk increases.

An unplanned or poorly executed CEO exit coupled with a clumsy replacement process may result in further loss of executive talent, diminished shareholder value, a drop in market confidence and lasting brand damage.

Korn Ferry’s report was recently profiled in The Australian, Australia’s leading newspaper. Click here to read the article.