Chief departures often come suddenly, leaving companies unprepared. To mitigate risk, boards must take steps to prepare for uncertainty.
If it seems like CEOs are departing in droves lately — they are. The year 2018 saw the highest U.S. CEO turnover rate since the last recession, and thus far 2019 has continued to be a year of uncertainty for the top job within companies.
These departures often come suddenly in high-profile, contentious situations, and we don’t have to look far back in the headlines — see WeWork, Juul, eBay, and Renault — for recent examples. In fact, one study found that just more than half of CEOs who leave are being fired rather than choosing to pursue other opportunities or retire.
Far too often, companies are unprepared for these shake-ups. They find themselves scrambling to select new chief executives with the skills, knowledge, and experience to take the helm in troubled times. The fact is, preparing for the possible sudden departure of a top executive often isn’t prioritized in companies or simply isn’t on the radar.
But this lack of preparation comes at a price for businesses. Chief departures can signal fear and uncertainty within the ranks, and often managers and employees feel a lack of direction for moving forward. Individuals and teams may not know which projects to pursue and which to put on hold. Morale can also take a hit if there are concerns that new leadership might radically restructure or institute layoffs during the company’s transition.
One study estimated that it costs organizations an average of $136 million to suddenly lose a CEO rather than having a planned retirement with an organized succession plan. This study, published in the International Journal of Financial Research, specifically focused on companies in which the CEO suddenly became ill or died. When a CEO is fired amid controversy, the cost to an organization’s reputation and market may be even higher.
As Robert Hooijberg and Nancy Lane of IMD in Lausanne, Switzerland, have observed through their research, more than half (58%) of boards do not have emergency succession plans in place. Fifty-two percent also say they would hire an outsider if they had to bring in a new CEO, with only about one-third (35%) of board members saying an internal candidate would most likely be chosen.
No matter how happy boards of directors are with a company’s current top executive, all boards need to be prepared with a succession plan in order to mitigate the risk. One obvious step here for boards is creating a set of procedures to follow in seeking out and hiring a new CEO, but action should not stop there.
Boards should be meeting with potential candidates year-round. This is best done through what my company calls strategic introductions agreements. (Some other executive search partners use different terms for it or make it a component of a master services agreement.) Under these deals, every time an executive search firm comes across a candidate who may be a good fit for the company, the board is offered an opportunity to meet that individual. There’s no cost at the time. The company only pays if, in the future, they choose to hire that person.
With these agreements in place, I’ve had client companies take immediate action when suddenly losing a CEO. They’ve hired new candidates within days who were already vetted and considered for the role, avoiding the potentially months-long process that other companies undergo.
The idea of effectively interviewing candidates for positions that aren’t available may ring alarm bells for some. For starters, boards don’t want to do anything to start rumors that they may be looking to replace the CEO. Some board members are also concerned about the possibility of bruising a CEO’s ego. They might fear that these proactive measures of speaking with potential replacements could signal to the CEO that the board is dissatisfied with current performance.
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To avoid this, boards can keep the process confidential by using nondisclosure agreements with candidates. Standardizing these practices will also go a long way in assuaging these worries. If it’s standard practice, then meeting candidates is not a sign of distrust in a current CEO. One step boards can take is adding a provision into their bylaws that makes the process of interviewing potential alternate leadership throughout the year a core duty.
Finding the right CEO is a significant undertaking and one that requires precision and commitment. In one survey, directors of Fortune 250 companies said they believe fewer than four people could step into the role and run it at least as well as the current CEO. It’s imperative to be prepared.
Businesses should act on the expectation that emergencies could happen at any time — and that when they do, competitor companies will rush to take advantage of a loss in leadership. Having terrific new leaders “on deck” is a bulwark, strengthening the organization’s position for the future.