Successful CEO succession planning is crucial for the long-term sustainability and growth of an organization. Succession planning is a process that ensures your next generation of leaders are capable and the transition of power is seamless. A new report from Egon Zehnder explain when and how to develop your CEO succession plan.
July 17, 2024 – Boards are often reluctant to engage CEOs on their inevitable departure—even when the event may be imminent. Orchestrating succession timing feels like a complicated, delicate maneuver, even though discussing it should be part of business as usual, according to a new report from Egon Zehnder’s Kati Najipoor-Smith and Frank Heckner. “Highly effective boards ensure that succession planning never stops being a priority,” the study said. “It isn’t personal, it’s simply best practice. It takes many years to groom candidates. Developing leaders fit for the demands of today, requires long-term investment. Boards rely on a mature and well-balanced relationship between the chair and the CEO. If power dynamics throw succession planning off course, the most effective boards summon the courage for the difficult yet vital task of putting the needs of the business first.”
A chair recently shared with Egon Zehnder: “When I begin working with a new CEO, I make it clear that I will regularly engage with the non-executive board members without the CEO present. At least once a year, I will discuss the succession plan with the CEO and the board. This conversation should never be a surprise. And that means I make it clear from day one.”
Egon Zehnder meets very few stakeholders who would disagree with the wisdom of this approach. Yet, the report points out that CEO succession planning tends to involve more lip service than depth. As a result, boards are too often forced to contend with emergency timeframes.
Real planning requires a level of rigor that can seem wildly ideal, according to the Egon Zehnder report. “Mounting burdens squeeze the board’s agenda—keeping their attention distracted from critical matters under the pressure to tick regulatory boxes,” it said. “The discipline involved in maintaining a close eye on the leadership pipeline slides into the important-not-(yet)-urgent category. Boards put off the in-depth conversations and groundwork that underpins robust succession planning until later. But what is required calls for continuous effort—the training before you run your next marathon.”
Egon Zehnder explains that the only way to equip a board for the single most consequential decision it will ever make is to accept it as an ongoing priority. “Instead, many board members are lulled into the false belief that succession is no doubt in hand and that when the time comes, they will examine those names listed on a piece of paper,” the firm said. “In our experience, this optimism sets up the board to get caught off guard. Many boards find themselves with too few, if any, viable CEO candidates when the time comes.”
The Unforeseen Succession Crisis
Nearly one in three CEOs will likely exit with little notice, leaving ill-prepared boards without a contingency plan, according to Egon Zehnder’s findings. In an analysis of 236 global companies with $30 billion or more in revenue and market capitalization, almost one in three lost their CEO in the last decade due to a major disruptive event. CEO ethical misconduct, poor business performance, and CEO illness explain over half of these shake-ups.
Natural Cycles of Leadership
Suppose you accept that even the most impressive CEO remains the best leader of the organization for a limited time—no more than two major cycles of strategic push and transformation, roughly eight years, the Egon Zehnder report explains. “Suppose you also accept that preparing the next generation of leaders demands a long game,” the firm said. “You can never overprepare candidates or yourselves to orchestrate an inevitable transition. Then, the time to start planning is always yesterday.”
Related: Creating an Impactful Succession Plan
How many long-tenured CEOs will go out on a high? Egon Zehnder says that there are natural cycles of leadership. There are only so many times you can rejuvenate yourself in the context of such an intense position. One chair said: “After eight successful years, it is too much to wish, never mind expect, that the same person can sustain this momentum.”
Sadly, in cases where organizations and boards enjoy a CEO who has delivered long-term performance, the search firm says that the risk that there is no contingency plan becomes even greater.
Cultivation Before Harvest—Invest Now to Produce Your Next CEO
While the CEO role has always required exceptional leadership, today’s geopolitical tensions, stark societal divides, disruptive technology, and environmental disasters—the so-called polycrisis, call for transformational levels of leadership. In Egon Zender’s survey of 1,000 CEOs, a near-unanimous 97 percent said that the demands of the role mean they must learn to transform themselves to transform their business.
“The usual must-have background experience boards seek in potential candidates falls dramatically short of the leadership capacities today’s CEO must demonstrate,” the Egon Zehnder report said. “Yes, developing leaders entails assignments and postings designed to expose candidates to the breadth of the CEO’s remit. But boards must plunge deeper to align on the core leadership qualities the next CEO must possess.”
The search firm notes that it takes at least two, and preferably three years, to bring a robust slate of candidates to fruition. “To do so entails much more than filling a gap,” the report said. “To unlock a leader’s potential, to cultivate CEO material, the developmental focus shifts from experience and skills to guiding already highly accomplished executives toward genuine self-leadership. Do they understand their blind spots and tendencies, know how to flex their style under stress, when to ground themselves, how and why to tap into a higher sense of purpose, what it takes to hone their relational capacities to create authentic followership?”
How to Develop Effective Leadership Succession Planning
Poor succession planning processes stemming from a lack of leadership development and assessment can be extremely costly. Harvard Business Review, in fact, has found that this problem costs an estimated $1 trillion across the S&P 1500 annually. When employees feel engaged, valued, and supported through development opportunities, they are more likely to stay with a company for the long term and drive value creation, according to a study from GeniusMesh’s Neerja Bharti. As a result, “organizations will be able to collect data on employee strengths and development opportunities during the leadership development process so they can build comprehensive and objective succession plans,” she said.
Increased self-awareness paves the way to becoming an evolved version of oneself—a stage of leadership mastery Egon Zehnder calls vertical development. It requires deep work: intense self-reflection, sustained learning (with peers, coaches, or others), and deliberate investment.
“Vertical development does not happen over a weekend or even a year,” the firm said. “Leaders must stretch themselves in real-time, on the job, with opportunities to step back and take stock. In our experience, the real payoff, when a leader has put insight into fresh practice and enters a new realm of maturity, takes no less than two to three years.”
Getting to Know the Real Candidates
In addition to the necessary developmental runway to groom the best people, anything less than two years denies board members the level of exposure to candidates they need before they can speak knowledgeably about concerns and hopes for the different personalities and capabilities each person brings, according to the Egon Zehnder study.
Related: Top Five Mistakes Companies Make with Succession Planning
“Succession planning must always strike a balance between a tight yet inclusive process,” the report said. “Every board member should know their role—when and how they can expect to engage on the question of the next CEO. To be well-equipped for the final phase, boards must be able to have an open, informed dialogue not just about CEO candidates but the long-term health of the entire C-suite. To achieve this, the best boards invest in a process where some (or, sometimes, all) members have a clear view of the development and exposure plan for every name on that list.”
Transformational Leaders
Egon Zehnder explains that transformational leaders are adaptive, humble, curious, and open. They listen to a diverse set of perspectives and demonstrate exceptional relationship skills. They cut through the noise, providing a deep sense of purpose and clarity of direction that inspires followership.
The Writing on the Wall
Eight years may be the ideal, but Egon Zehnder says it’s time to replace the incumbent whenever there is…
- Ongoing unhappiness with business performance
- Declining organizational health, including frequent mentions of a toxic or fearful company culture
- Consistent noise about the CEO’s ethics or a personal style that destroys trust-based teamwork or vital relationships with key stakeholders (or symptoms of this, such as the departure of pivotal people)
- Waning CEO energy or motivation level.
Power Dynamics in Succession Planning
The relationship between the chair and the CEO lies at the heart of good governance and, as the opening quote implies, comes to the fore in succession planning.
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Who holds the most power? “If the CEO is struggling, it is typically the chair,” Egon Zehnder said. “If the business is struggling and the CEO has just been appointed, it tends to be the CEO. But in a well-performing company, it is unsurprising that the most influential person is the CEO. Hence, the most common dynamic we observe involves CEOs who control their departure.”
The firm notes that board members frequently tell us the number one issue they face with transition planning is not just the incumbent’s reluctance to go but to get started. “CEOs who keep their boards at arm’s length prevent members from getting to know internal candidates,” the report said. “CEOs who hijack the process by muscling for their favored candidate—often a leader who resembles themselves. Not only does the exercise become far from inclusive and balanced, but the wrong hands hold the reigns.”
In these ways, the best performing CEOs, when they obstruct succession, become a threat to the business, according to the Egon Zehnder study. “Success distorts vision,” it said. “Power impairs objectivity. CEOs who have delivered excellent performance year-on-year can become blind to when their time must end. Boards (and shareholders) get dazzled by track records, only to shock themselves with the cold reality that they have been left without a viable candidate and a culture and organization shaped to fit the incumbent.”
The Seasonal Shift
In continuous succession planning, the board shifts from cultivating to harvesting, from ongoing stewardship to a timetabled transition. Egon Zehnder explains that deciding to trigger a transition often strikes boards as too bold a move, littered with risks that are best avoided. The timing seems a complicated, delicate maneuver. Board members fixate on the reputational fallout this process can set off: rumors in the market, dips in the share price, and uncertainty spreading throughout the C-suite.
“These concerns are symptomatic of a deeper malaise,” the Egon Zehnder said. “The temperature of the board’s attention has flipped from cold to hot—when the only safe path involves keeping it warm. When we observe strong boards in action, in the most effectively governed organizations, healthy successions are never triggered—in that, there is no sudden “hot phase.” The planning and preparation never stopped. Boards simply change gears. They shift from the discipline of driving the process of cultivating leaders to a phase of selecting the best candidate to take on the job. They do not depend on the incumbent to navigate the power transition—they guide and support incumbents to do so.
Related: Enhancing CEO Succession Planning
Contributed by Scott A. Scanlon, Editor-in-Chief and Dale M. Zupsansky, Executive Editor – Hunt Scanlon Media
