The recent news out of Starbucks that Kevin Johnson will be stepping down as CEO on April 4 and founder Howard Schultz will again be leading the company puts the critical process of CEO succession planning back into the spotlight.
Selecting the right leader for an organization is arguably the most important job of a board of directors. Mellody Hobson, the independent chair of Starbucks‘ board, said directors knew of Johnson’s desire to step down a year ago and that a new CEO would be in place by the fall.
Even the most innovative strategies or the best financials are not enough without the right leader at the helm. Now, changes in the wake of the Covid-19 pandemic coupled with rising stakeholder activism are reshaping succession planning. The ability to manage rapid digital transformation, flexible and remote schedules, and the overall changing nature of work means boards are having to rethink the skills they’re looking for in a top leader.
Directors are also needing to replace CEOs more often during their own board tenures. In 2020, 56 S&P 500 CEOs resigned, an increase of 30% over the prior decade, according to data from executive search firm Spencer Stuart. Of those who quit in 2020, 20% did so under pressure, up from 13% a year earlier.
Yet too often, boards are caught unprepared when a CEO retires, steps down, or is forced to leave. “If you believe that the primary responsibility of the board is getting the right leader in place, and it is, then a company should never be caught by surprise when a CEO has to be replaced,” says Maria Moats, leader of PwC’s Governance Insights Center. “There should always be an emergency plan in place.”
One of the reasons why succession planning often turns out to be such a painful process, she says, is just simple human nature: it can be an uncomfortable conversation.
Talking to a newly installed CEO about the process of replacing him or her is not what most board members relish about the job. A PwC survey shows that the single biggest reason why directors struggle with more timely and effective succession planning is because the current CEO is performing as expected and therefore there’s little urgency to focus on the process.
The other barrier standing in the way of better succession planning is often board priorities. When a company is early in a CEO’s tenure, there are a number of competing business initiatives that are critical for the board, says Stephen Schwanhausser, global managing partner at Heidrick & Struggles.
“If a board isn’t prescriptive about about succession planning early in the process then it becomes harder to have these conversations the closer they get to the point of change,” he says. “Boards have to plan it out far enough in advance that they can do it thoughtfully and clearly while also managing all the other priorities in the business.”
Moats says the easiest way to prioritize succession planning is for the full board to review its plan at least once a year. The goals of the process, details of the candidate development process, and the timelines for each step the board will take should all be part of the planning process.
Involve the CHRO
This is also where the chief human resources officer comes in. “If the board owns the CEO succession planning process, then the CHRO owns the talent management role in the company,” Moats says. Involving the CHRO gives the board an opportunity to look at candidates one level below the CEO. If an internal candidate is selected as the new CEO — as is often the case, Moats says — the CHRO will understand the impact on other senior executives and what it will take to retain top talent. In a highly competitive jobs market this is an especially important point, Moats adds.
A recent PwC survey shows that hiring and retaining talent throughout the organization (and not just the C-suite) is the top priority of 88% of directors surveyed, outranking digital transformation initiatives and new product development.
Cynthia Stoldt, CEO of Aherne Executive Search, says she is witnessing that priority shift in her company’s CEO searches. “Because employee retention is so critical now, everyone is paying very close attention to the way transitions are carried out,” she says.
She cites as an example a recent CEO search she did for a consumer company. The organization was experiencing double-digit growth and was able to avoid layoffs throughout the pandemic and beyond. “Employees there felt very secure and motivated,” Stoldt says.
For personal reasons the CEO needed to resign and Stoldt’s firm was charged with finding his replacement. “This leader was very confident and energizing and we needed to replace him with someone who would instill that confidence in a way where the company would not lose any of their other top-tier talent,” she says. Stoldt says looking for that kind of “stylistic fit” was probably something she would not have prioritized in years past.
“The searches now are all being done with an eye for retaining top talent,” she says.
As CEO tenures shrink and stakeholders demand that companies represent the values they hold dear, it’s up to boards to find the types of CEOs who can best reflect these changes.
“The next generation of employees are demanding very different things from their leaders,” says Schwanhausser. “That puts a different kind of pressure on the CEO role and requires boards to rethink the kinds of leaders they’re going to be choosing.”
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