Magazine article People & Strategy

When the CEO Exits: A HiPo Strategy for Leadership Succession

Magazine article People & Strategy

When the CEO Exits: A HiPo Strategy for Leadership Succession

Article excerpt

The spotlight on corporate governance continues to shine as calls increase for evaluating the effectiveness of boards of directors. (1) At issue is the fiduciary responsibility of boards and their relationships with top management teams. "Poor corporate governance has ruined companies, resulting in directors being sent to jail, destroyed a global accounting firm, and threatened economies and governments." (2)

At a time when boards of directors are increasingly in the hot seat, recent research has shown that boards are at a disadvantage when it comes to carrying out their most important responsibility --selecting the CEO. A key barrier is the lack of access directors have to critical information about high potential successors, both internal and external to the firm.

Interestingly, the average length of tenure for a CEO is only about five years, which means boards are dealing with CEO succession on a fairly regular basis. Given this short turnover cycle, directors, TMT members, and HR executives should be involved in CEO succession processes in an ongoing manner as they prepare and develop high-potential employees to take the helm.

"As business models transform, and as careers and the very design of work evolves, we need to also understand where and how the application of potential assessment and development is also changing." (3) Assessment, early identification, and development of those who will replace the CEO is a key priority for boards.

Yet, the facts show that directors, who are not immersed in the day-today affairs of the firm, are reliant upon the CEO and top management team for information. Often there are barriers that make it difficult for directors to carry out their important responsibilities related to CEO succession. Given this, boards and management are looking for better ways to identify and prepare high-potential leaders to step up when the CEO steps down.

In this installment of "Linking Theory to Practice," we review a new research study that addresses the challenge of CEO succession. Donald J. Schepker (University of South Carolina), Anthony J. Nyberg (University of South Carolina), Michael D. Ulrich (Utah State University), and Patrick M. Wright (University of South Carolina) have conducted an important study highlighting how directors, top managers and HR executives can help boards overcome the limitations inherent in CEO succession planning. Their research article is entitled, "Planning for future leadership: Procedural rationality, formalized succession processes, and CEO influence in chief executive officer succession planning." The research findings are published in the Academy of Management Journal (in press).

This study of top-level succession planning was based upon in-depth qualitative interviews, surveys, and archival data collected over three years from over 200 large organizations. It included discussions with board members, CEOs, "and 40 Chief Human Resource Officers (CHROs) to understand the critical succession planning challenges firms face (Schepker et al.)." The researchers note that, "The need to understand succession planning is underscored by our interview of a former CEO of two large, publicly traded companies who also served on seven different corporate boards when he said, 'Succession planning is really where the board can make an impact on the company.'" (Schepker et al.).

The Challenge of CEO Succession Planning

"Succession planning was once the private purview of the CEO, (4) but recent legal changes in corporate governance guide boards to take responsibility, and to continually manage succession planning, rather than waiting until a departure is imminent (Schepker et al.)."

While boards have important new legal responsibilities, Schepker, et al. point out that there are many challenges boards face in fulfilling this charge. These barriers to making well-informed succession decisions often include:

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