03 Jun 2015
Changing of the guard: why a robust succession plan is essential
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There is probably no corporate event which causes more concern – to shareholders, clients and employees alike – than a change of leadership. Whether planned or unexpected, the uncertainty resulting from the replacement of a company’s top executives can cause jitters in the market and lead to adverse publicity and anxiety among stakeholders. Clear and robust succession plans can go a long way towards quelling such concerns – so why do so few corporates in South Africa take them seriously?
In our experience, although succession planning is much spoken about in the upper echelons of corporates, the number of South Africa’s listed blue-chip companies that have proper strategies in place is not as high as one would like. An exception is the financial services industry – groups such as Sanlam, FirstRand, Standard Bank, Nedbank and Old Mutual all appear to have well-established plans to ensure the smooth transition of leadership. What sets these groups apart is that this planning takes place at board level, involving not only CEO succession but also that of other top executives in these organisations.
The consequences of not having an appropriate succession plan can be dire. Not least of these is the risk of business continuity, especially if a company is struggling or in the process of restructuring. Newly appointed executives need to be well prepared for their roles and able to hit the ground running, to ensure business as usual with minimum disruption. Shareholders should be considered, as well as the perceptions of the market, analysts and the media – a leadership vacuum could have a disastrous impact on investor confidence. Employee morale is just as crucial – a lack of clarity on the succession of key leaders could lead to high-level employees losing faith in the organisation and seeking other opportunities.
Should a succession strategy focus on internal grooming of potential candidates, or should external candidates also be considered? It depends largely on the context of the particular organisation – on the company life-cycle, and its position in the market and within the broader economy. Unless an organisation is in trouble and a turnaround strategy is required, bringing senior executives in from outside can be disruptive, not only to organisational culture but also to employee morale. If a company is performing well, we believe it is preferable to appoint successful internal leaders who know the business and understand the culture, have the required institutional memory and knowledge, and who are known entities able to rally the right teams to support them.
In our view, when considering a succession strategy, corporates should look at the following:
- Ensure that the company board is involved from the start. Both the chairman and the board need to take the initiative of putting an effective succession plan in place for the top three layers of leadership, including the CEO, at least three to five years in advance. Companies should have a strategy of exposing internal talent to the board, to enable directors to form an opinion about potential candidates over a number of years.
- Identify a range of potential candidates for the top three layers. We recommend between three and five individuals per position. Since there is more than one horse in the race, some fallout is to be expected – unsuccessful internal candidates may decide to explore other options outside the organisation. Prospective external candidates should be identified on a regular basis, to facilitate benchmarking and comparison to internal candidates.
- Give all-round exposure to the business to potential candidates. Executives should be knowledgeable about all aspects of the business, as well as different geographies and international markets. They should also gain experience in presenting to boards and committees, and media training and exposure is essential.
- Consider appointing a mentor or coach for senior executives. Working with a professional executive coach can go a long way towards developing the ‘softer’ skills – such as self-awareness – required for successful leadership.
- Communicate the plan to all relevant stakeholders. To manage both internal and external perception, timeous and regular communication with shareholders, the media, analysts and employees is crucial, especially if appointments are to form part of a business recovery plan.
Designing and implementing a sound succession plan can be a daunting and complex task. We recommend that corporates consider involving an external party to assist with managing the process – such as a leading executive search company or an advisory team from a major consulting house. This will ensure that the proper due diligence takes place as the process evolves, and that the requirements of good governance are met within the organisation.