This article has been written by Himanshu Agarwal pursuing a Diploma in International Contract Negotiation, Drafting and Enforcement from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

CEO succession means finding the next leader after the current CEO retires or resigns. Although it is a most ignored step in companies, it is vital to scout or groom the leader at an early stage. Over a while, this buzzword has taken on an important position during board meetings. Many companies have realised that bad leadership or bad selection can become an impediment to a company’s growth. 

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CEOs are considered the face of the company and can be beacons of the reputation of the company. The selection of the CEO directly or indirectly affects, inter-alia, company investor relationships, employee motivation, the vision and mission of the company and the performance of the company in the long run. 

CEO succession is most discussed in Indian companies, as most of the companies are promoter-driven or family-driven. These companies are facing acute crises of leadership in forthcoming generations or the next generation is not keen to take up the responsibilities. Hence, companies have to ponder their future identity and leadership – especially how the CEO would function and assist the overall business. 

This article aims to find out the importance of CEO succession planning, key ingredients of scouting, various strategies, local vs. global company scenarios and many more by observing a few case studies. 

Reasons for CEO succession 

Although it is difficult to comprehend the exact reason for CEO succession planning, some of the top reasons identified by the industry for the current CEO are:

  • Retirement
  • Death 
  • Resignation 
  • Separated for any reason
  • Company transition into a new company

Reasons for companies overlooking succession planning and responsibility

In common parlance, succession planning is an indispensable job for the board of a company. It is not overnight work, it requires time and patience. Often, the board believes it is the responsibility of the management. However, it is a joint responsibility of the management, leadership executives and board. Also, it is necessary for the current CEO to groom or nurture the right fit in his or her absence. 

They all must identify, interview and evaluate the successors from within the available company resources or scout outside the company. Things would be easy if the chief human resources officer took the lead and laid down a realistic foundation for talent identification. All the departments or stakeholders must make holistic efforts to ensure the new CEO is aligned with company policy and stakeholders.  

Importance of succession planning 

In the aforementioned paragraph, responsibilities and key stakeholders for the identification of a new CEO were outlined. The habit of succession planning can foster the growth of the company in the following ways: 

Preparing the list of qualified leaders

Preparing the list would include SWOT analysis and be handy in case of an urgent replacement. The analysis would assist the company in identifying the candidates that are aligned with or could be aligned with the company’s vision and mission. 

Investment in planning pays in the long run

The time investment in the process negates the possibility of uncertainty. The company can focus on other vital aspects. Moreover, planning fosters confidence in the shareholders. The character of the company evolves during the uncertainty, as does their handling ability. 

Reduction in top executives’ attrition

Employees stay with the company where the opportunity to become a leader is provided. Succession planning signals to the top executives that they are being considered for higher roles and responsibilities. A strategy could be outlined to retain, mentor and train identified talent for the future role. 

Solace to the company

During COVID-19, companies, where CEOs met sudden deaths, were perplexed about the future. They were not able to cope with the sudden demise of the CEO.

Notable case studies – successful and failed

McDonald

Crisis

The company operates in more than 100 countries and is known as one of the world’s largest food service retailers. It is widely appreciated for its success and studied in various B schools as case studies. However, in 2002, the company faced an acute price war from unorganized and small retailers that forced the company to close underperforming chains, moreover, they faced a million-dollar settlement for the job cuts. Mr James R. Cantalupo, a retired CEO of the company, joined the company and led the way, launching the program called “Plan to Win”. However, he died due to a heart attack and six months later Mr Charles H.Bell, his successor, also resigned after becoming terminally ill.  This was a crisis for the company to lose two CEO’s in the same year. 

Arrival of a new CEO

Mr James Skinner, was appointed to lead the company and fill the vacuum. Mr Skinner’s tenure was remarkable and the share price of the company tripled in a short duration. Mr Skinner was nominated as the “CEO of the Year” by various forums of the repute. This odyssey from the loss of the two CEOs in a year to becoming a successful case study, is unbelievable.  

Background saga of success

The Company was proactively investing in the succession plan, 6 years before Mr Skinner became CEO of the company. Mr Cantalupo, President & COO, was considered the next in command and he was working in the shadow of Mr Charles Bell. Mr Cantalupo started his career in the company at the age of 15 and received ample opportunities before taking up the leadership role. His experience and mentorship from Me Charles became a stepping stone for him.   

Meanwhile, Mr Skinner who commenced his career in the company had a very humble beginning as a Management Trainee, he was not a graduate and had 10 years of experience working with the Navy. 

Mr Charles Bell’s “Plan to Win” program, had Mr Cantalupo and Mr Skinner in the team. Creating a pool of talent and core team that was groomed to rise on the occasion, saved the company. Soon after this Mr Skinner, inculcated the culture of nurturing young talents and preparing them for adverse situations. 

Today, McDonald’s is admired as one of the most successful food chains around the globe. 

Key takeaways

  • Long-term planning: Planning for not one but two CEOs enabled the company to rise in the crisis. Inculcating the culture of grooming young and top executives is a vital approach. 
  • Backup planning: A bench or pool of talent is a vital aspect of a company. Just like in sports, teams maintain the talent pool for any adverse situation. 
  • Teamwork: There is an old saying “If you want to reach fast, walk alone. If you want to reach far, walk with someone”. The same goes for a company, work should not be done in isolation.

Coca-Cola

Crisis

Mr. Doug Ivester retired in December 1999, aged 52. He had spent only two years as CEO. During this tenure, the company’s performance dropped significantly in all departments, inter-alia, shareholder equity from 56% to 35%, overall earnings and lost market share in many countries. 

Arrival of a new CEO

Mr. Dough Ivester was appointed after the retiring CEO Goizueta’s. He was trained and mentored for 10 years by Mr. Goizueta. It was believed that he had imbibed the leadership skills and other vital skills of the erstwhile CEO to run the company. However, his certain decisions and ignorance over critical subjects made the board ponder their ability to run the company in the long run. Some of the decisions that raised concerns were:

  • During the economic meltdown and slow global economy, he did nothing to improve the company’s position. 
  • He ignored socio-political contexts and stakeholder concerns on several occasions. 
  • There was a contamination report in Belgium after students fell sick after consuming Coca-Cola. But he paid no heed to all this and business went similarly.  
  • Many of the prominent top executives left the company after Mr. Ivester’s attitude towards working. 

When the aforesaid issues were arising, Mr. Goizueta was not available to assist the new CEO. He passed away due to cardiac arrest, thus leaving Mr. Ivester alone in the system. Mr. Ivester is considered a good manager but is never remembered as a good leader. 

Background saga of success

After two decades, Coca-Cola’s succession plan and strategy have improved significantly. Mr. James Quincy, current CEO and groomed CEO, is the quintessential of successful succession planning. He was given smaller assignments to lead the business, gradually making him a leader. Now, the company puts in a lot of effort and has plans for future leaders. 

Key takeaways

Lessons that we learned from the poor succession in the aforementioned case study are:

  • Holistic development: Mr. Dough Ivester was a great manager and groomed under a great mentor. However, he never tested the water, i.e., small assignments or individual responsibilities were not assigned to him. Hence, he failed to meet the expectations of the board and stakeholders. 
  • Succession plan: A person should not be groomed in isolation. In the aforesaid case, the board simply believed his predecessor was a visionary and hence he would be a perfect fit. 
  • Backup plan: A company must have a backup plan or pool of talent to replace the leader. Everyone cannot excel in all the departments. It is vital to comprehend the skill set and assign the work in accordance with it. 

Microsoft

Crisis: Mr Bill Gates, founder and innovator of the company, decided to step away from the daily task. The task was not very simple, as the company was looking for someone who comprehends the values, brand, and ethics and maintains innovation within the system. In the realm of Microsoft, staying abreast of industry development is also a vital aspect. The task of choosing a new CEO with all the skill sets was to make it an easy or overnight job. 

Arrival of a new CEO

Mr. Steve Ballmer served the company from 2000 to 2014. During this tenure, he did remarkable work of transformation. He was abreast of the dynamic industry norms. Some of the notable works are:

  • Adopting new technologies and hiring the right talent at the top level.
  • The industry was moving away from the personal computer, or PC, first. He invested heavily in the newer technologies, making sure shareholders and the board were in alignment. 
  • Adoption of talent retention strategies at various levels. 

Key takeaways

  • Focused approach: The company had a focused approach to grooming and nurturing talent. Human Resource Management System (HRMS) played a pivotal role in the identification of potential successors.
  • Identification of skill sets: HRMS and the Board were in alignment with the skill set that should be present in the potential successor. It was never about filling the position but bringing a successor who looked for innovation, growth and creativity.  
  • Company culture: The board and HRMS wanted to elevate someone who comprehends the company’s culture, values and strategic goals. Hence, Mr. Steve Ballmer was identified, who has been associated with the company for 2 decades. 

IndusInd Bank

 Crisis: Mr Ramesh Sobhti, is remembered for turning around the Indusind bank. He was in the leadership position from 2008 to 2020. During his tenure, he was instrumental in fostering customer loyalty, brand recognition and, most importantly, consistent earning growth. When he turned 70, his retirement was inevitable and the company was looking for a continuation of its growth. 

Arrival of the new CEO: Mr. Ramesh, HR and the Board realised the gravity of the situation and focused on succession planning. In his last two-year tenure, he focused on finding the talent and setting expectations with the potential successor. 

  • He identified a handful of people who would be a perfect fit. 
  • He made sure there was no lobbying or bias within the team regarding potential successors. 
  • Potential successors were allowed to make decisions and reach out to Mr. Ramesh for concurrence. 
  • He ensured potential successors developed rapport within the team. 

Once the board was confident in the choice, his name was officially revealed to everyone. Mr. Ramesh worked parallelly with the successor for the last four months to ensure a smooth transition.

 Key takeaways

  • Identification of the crisis: The company was aware that they must have a competent replacement for Mr. Ramesh for the growth of the company. Mr. Ramesh initiated the process of succession 2 years before his retirement date. 
  • Involvement: The team was aware of the replacement and they had started working with him, before an official announcement. Synergy and working comfort within the team were tested to ensure a smooth transition. 

Infosys

Crisis

Infosys, a prominent IT giant in India, faced serious succession issues when its founders decided to step down from leadership positions. They decided to bring an outsider to lead the company. This step was initially criticised by the experts, but finally the abrupt exit of the new CEO, Mr. Sikka, cleared all the doubts.

Arrival of new CEO

Mr Sikka, was a veteran in the IT field. He was associated with a lot of companies, like HP and SAP, before joining Infosys. The initial problem of the succession was that when Mr. Murthy resigned in 2002, Infosys was under the leadership of other co-founders. Since its inception, the company’s focus has been only on building the business empire, values, ethics, corporate governance, etc. However, they failed to comprehend the importance of succession or never felt the need for it. Mr. Sikka was associated with SAP and immediately joined the company. There were rumours of differences in opinion between Mr. Sikka and the founders of the company. Many times, rumours were dispelled, but they became evident after his abrupt exit within 3 years.

 Key takeaways

  • Resistance: Indian companies often overlook succession ideas, that have proved fatal in the long run. Something similar happened with the company. 
  • Cultural difference: The outsider is not aware of the company’s growth philosophy, team culture and various other aspects. There is always a doubt of trust that persists between the founder, the team and the outsider. 
  • Involvement: Outsiders may not like the involvement of the founder in day-to-day affairs. He may look for freedom while working and adopting any new idea. 

CEO succession : global vs. local scenario 

Indian Companies pay little attention to CEO Succession planning compared to Global companies. This concept is more prevalent and considered vital in institutions or MNC companies, as Indian companies are mostly family-run businesses. Some of the reasons for the difference have been outlined hereunder: 

Family-owned businesses

In common parlance, India has witnessed many family-owned businesses grow from scratch into mammoth empires. They believe in passing on the legacy to the next generation. It is hard to accept that someone outside is going to run the show or business on their behalf. Many families believe that the outsider may not comprehend the culture, bond and working style of the company. However, nowadays, Indian companies are pondering about bringing CEOs from outside as the next generation is not keen to pursue the family business. They have diverse interests or are not competent enough to manage the growing empire and handle the pressure.  

Regulations 

SEBI (Securities and Exchange Board of India) have stringent norms when it comes to succession that also prevent companies from going out of their comfort zone. Moreover, company rating depends significantly on the face of the company or CEO in this case. 

An inclination toward family successor by the board

Some of the directors who have served in MNCs as well as in Indian companies have the opinion that Indian company boards are more aligned towards internal succession programs. The board of directors consider outsiders as a competitor. The promoter and other senior management hardly consider age and mortality for the continuation of the business. There is no backup plan in case of an adverse situation. 

Some of the prominent and big families in the country have realised the gravity of this concept and have actively set up a talent hunt and succession programme. Still, a road toward transformation is significantly far away. 

Critical elements of succession planning 

After comprehending the aforesaid case studies, critical elements of succession planning have been outlined hereunder: 

Early initiation of the succession planning

“Prevention is better than cure” an old saying holds in this sense. There is no point in initiating scouting after the CEO is stepping down or vacating the office for any reason. In such events, either the board looks for a ready-to-move CEO from outside the company or elevates a senior person who may or may not possess the requisite expertise.

 It is prudent to identify the situation from the following points:

  • Succession is a process that may happen over time, just like in IndusInd Bank or Coca-Cola’s current succession plan. Next CEOs are assigned numerous independent tasks to comprehend their strengths and weaknesses. Their performance determines the way forward. 
  • Succession planning during an adverse situation: A similar situation was observed during the case study of McDonald wherein the company lost two CEOs in a year. Even in this adverse situation, the company’s performance was at its best. This highlights a conspicuous approach to Succession planning of the company. 

Outlining company policies and future outlook

The company must outline the future policy that would be guidance to the new CEO. In the case of Microsoft, the new CEO was sure to keep abreast of the changing technology the company needs to venture into new areas by organic or in organic growth. Hence, he was able to achieve the desired results.

Moreover, outlining company policies and future outlook assists companies in circumventing bleak situations. This starts by factoring in macro and microeconomic outlooks.   

A structured approach to navigate selection challenges

In the case of IndusInd Bank, the succession plan commenced 2 years before the retirement date of the CEO. A suitable candidate was identified and groomed in a way to comprehend the company policies, some of the independent responsibilities and tasks were assigned and performance was noted. He worked in the shoes of the retiring CEO for the penultimate year and received constructive feedback. This commitment from the Board, the retiring CEO and the employees ensured a smooth transition. 

In the case of Coca-Cola, the new CEO was groomed under the retiring CEO; however, there was no one to provide feedback. Moreover, he faced difficulties in handling the pressure that became evident in his decision-making.

Communication 

Internal and external stakeholders are vital pillars of a company. It is necessary to maintain transparent communication with them, which fosters confidence in the company. In the case of Coca-Cola, new CEO decisions were misunderstood and received negative reviews. The share price of the company took a significant hit and Mr. Ivester’s services were terminated all of a sudden.

Engagement with internal and external candidates

There can be only one CEO; however, the board needs a pool of talent to select and keep someone as a contingency plan. All the aspirants must be informed about their future roles and responsibilities. Chances are, potential aspirants may feel dejected and leave the company for better future aspects. Hence, the board must consider such situations tactfully and make sure there is no brain drain.

Furthermore, the process of selection should be transparent and robust to avoid room for discrepancies. They must provide constructive feedback and assign some new roles and responsibilities to boost their morale. 

Succession planning process

Identification of potential successors

  • Conduct a thorough review of the organisation’s current and future needs to determine the skills, experience, and leadership qualities required for the next CEO.
  • Assess the performance of current employees through performance reviews, 360-degree feedback, and interviews to identify potential successors.
  • Seek input from key stakeholders, such as the board of directors, senior management, and customers, to gather diverse perspectives on potential successors.
  • Consider both internal candidates, who have a deep understanding of the organisation’s culture and operations, and external candidates, who may bring fresh ideas and new perspectives.

Development of successors

  • Create a comprehensive development plan for each potential successor, tailored to their individual needs and aspirations.
  • Provide opportunities for potential successors to gain exposure to different aspects of the business through job rotations, cross-functional projects, and shadowing senior executives.
  • Invest in mentoring and coaching programmes to support the growth and development of potential successors.
  • Offer training programmes to enhance their skills, knowledge, and leadership capabilities.

Selection of the successor

  • Establish a clear and transparent selection process that involves multiple stakeholders, including the board of directors, senior management, and key functional leaders.
  • Conduct a thorough evaluation of each candidate’s qualifications, leadership style, and fit with the organisation’s culture and values.
  • Consider factors such as the candidate’s track record of success, ability to inspire and motivate others, and strategic vision for the organisation.
  • Make the final decision based on a comprehensive assessment of all relevant factors, taking into account the long-term interests of the organisation.

In addition to these three main steps, the succession planning process should also include the following elements:

  • Communication: Regularly communicate the succession plan to all stakeholders to ensure transparency and build confidence in the process.
  • Monitoring and evaluation: Continuously monitor the progress of potential successors and make adjustments to the development plan as needed.
  • Contingency planning: Develop contingency plans in case of unexpected events, such as the sudden departure of the CEO or a key successor.

By following a well-structured succession planning process, organisations can ensure a smooth transition of leadership, maintain business continuity, and position themselves for long-term success.

Conclusion 

The article illuminates the importance of succession by observing various case studies. A CEO is a beacon for the company and assists in the navigation of business. The selection of the right candidate cannot be attributed to luck, but to the selection process. A CEO must keep abreast of changing micro and macro economies. 

Succession planning is a testament to the future planning of the company. The character of the company evolves during times of contingency. He must be groomed and mentored in a way to face the adverse situation.

The Board of Directors and HR department play a vital role in the selection process of the CEO. They must look for the longevity of the company and keep the succession plan on their priority list.

References

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