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Best Practices for Creating
a CEO Succession Plan
Aaron Sorensen, Ph.D.

This material was previously webcast by ExecSense...
Aaron Sorensen, Ph.D., Principal, Axiom Consulting Partners

 Successfully led numerous succession planning processes in
...
Overview

 Poor CEO succession planning can erode greater value in a much
shorter period than other competitive threats
...
What to Know
 Succession planning is a business process designed to manage risk
 Effective governance is critical for su...
WHAT TO KNOW:

Succession planning is business process designed to manage risk
 Human capital risk should be managed as r...
WHAT TO KNOW:

Effective governance is critical for successful CEO succession planning
 Clarifying accountabilities and o...
WHAT TO KNOW:

Just as businesses adapt to stay relevant and compete in their markets, so should
the succession plan for t...
WHAT TO KNOW:

Leadership talent reviews form the backbone of the succession planning process
 Most performance managemen...
WHAT TO KNOW:

Leadership is a complex and dynamic phenomenon, is difficult to measure and
should be examined through mult...
WHAT TO KNOW:

Linking succession planning with leadership development is a critical success factor
and can create incredi...
Tips and Strategies
 Make succession planning a priority
 Establish governance process for CEO and other
leadership succ...
WHAT TO DO:

Make succession planning a priority
 Focus your time on talent—“talent masters” spend 30-40% of
their time o...
Example: Succession Bench Strength Chart

John Doe Capability Profile:
Development Areas:

Leadership Strengths:

• Compet...
WHAT TO DO:

Establish governance process for CEO and other leadership succession decisions
 Understand how your Board wa...
Example: RACI for CEO Succession Planning

Board of
Directors

Board
Committee

CEO

External
Advisor

1. Succession proce...
WHAT TO DO:

Identify the leadership capabilities needed to support the long-term strategic plan
 Engage key stakeholders...
Step 1 – “Unbundling” the strategy

Organizational Capabilities
Factors that are critical to execute
the strategy and deli...
Step 2 – Linking capabilities to leadership competencies

Organizational
Capabilities

Sample Leadership Competencies
Asso...
WHAT TO DO:

Bring greater objectivity into the process through the science of leadership assessment
 Most selection tech...
Effectiveness of various assessment methods

Leadership Capability Spectrum
Leadership Competencies

Assessment
Method

Te...
Complimentary methods are needed in CEO succession planning
Validity of Various Assessment Tools in Predicting Job Perform...
WHAT TO DO:

Link succession, talent review and leadership development processes
Expectations
What it means to be an effec...
Do’s and Don’ts

Do

Don’t

1. Clarify decision rights

1. Create a horse race

2. Link succession to business
strategy

2...
Ten-point checklist of best practices for creating a CEO succession plan (SP)
1. SP is an essential business process to en...
FAQs: Common misconceptions about CEO succession planning
1. CEO succession is event driven
2. The emergency succession pl...
Conclusions

 CEO succession planning is critical to ensure business continuity, yet
many organizations still get a faili...
Contact Information

Aaron Sorensen
Email: asorensen@axiomcp.com
Phone: 312.343.4644
Website: www.axiomcp.com

Best Practi...
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Best Practices for Creating a CEO Succession Plan

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Proven approaches and practical advice for CEOs, board members and HR executives who need to create a CEO succession plan. Aaron Sorensen, Ph.D, has helped Fortune 500 companies and not for profit agencies avoid the panic and pitfalls that too often come with ill-planned CEO succession.

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Best Practices for Creating a CEO Succession Plan

  1. 1. Best Practices for Creating a CEO Succession Plan Aaron Sorensen, Ph.D. This material was previously webcast by ExecSense in Jan. 2014. The webcast is available at http://bit.ly/1a3yXtx ST R AT EGY  O R G A N I Z AT IO N  TA L E N T
  2. 2. Aaron Sorensen, Ph.D., Principal, Axiom Consulting Partners  Successfully led numerous succession planning processes in partnership with boards of directors at some of the world’s most prominent brands/companies  Approaches CEO succession planning from a future needs perspective – “what got you here won’t get you there”  Utilizes leading-edge practices from psychology and business to build a robust and objective process and unassailable fact-base on succession candidates  Approaches CEO succession planning from an integrated perspective that ties together strategy, organization and workforce  Veteran of the social and political battles that often accompany CEO succession decisions Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 1
  3. 3. Overview  Poor CEO succession planning can erode greater value in a much shorter period than other competitive threats  Developing a deep pipeline of leadership talent can provide a distinct competitive advantage  Activist shareholders, institutional investors, and the SEC are now showing a renewed interest in understanding the economic risk associated with leadership departures Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 2
  4. 4. What to Know  Succession planning is a business process designed to manage risk  Effective governance is critical for successful CEO succession planning  Just as businesses adapt to stay relevant and compete in their markets, so should the succession plan for the types of leaders needed to achieve future success  Leadership talent reviews form the backbone of the succession planning process  Leadership is a complex and dynamic phenomenon, is difficult to measure and should be examined through multiple “lenses”  Linking succession planning with leadership development is a critical success factor and can create incredible long-term value for the business Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 3
  5. 5. WHAT TO KNOW: Succession planning is business process designed to manage risk  Human capital risk should be managed as rigorously as financial, reputational, supply chain, and IT risks  CEO succession planning ensures business continuity, but can also be a competitive advantage  CEO succession planning is a dynamic and continuous process  It creates improved understanding and transparency of the leadership talent portfolio and the strong pipeline of future leaders  Effective succession planning is much more than simply having a slate of candidates to address the “hit by the bus” scenario Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 4
  6. 6. WHAT TO KNOW: Effective governance is critical for successful CEO succession planning  Clarifying accountabilities and ownership for CEO succession planning is paramount  Boards of directors of public companies are accountable for CEO succession  CEO engagement in the process is critical, but this practice varies significantly by company  Transparency is critical…up to a point  Private companies, not-for-profit institutions and family businesses may not have an external mandate, but must navigate through challenging social and political forces Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 5
  7. 7. WHAT TO KNOW: Just as businesses adapt to stay relevant and compete in their markets, so should the succession plan for the types of leaders needed to achieve future success  Aligning the board and management around the criteria for success is imperative—that criteria must evolve with the strategy  Many businesses are evaluating leaders solely on the competencies that are needed now versus needed in the future  The leader who “got you here won’t necessarily get you there”  Greater versatility and breadth of capabilities in leadership talent pools are frequent pain points for Boards when considering CEO successors Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 6
  8. 8. WHAT TO KNOW: Leadership talent reviews form the backbone of the succession planning process  Most performance management systems do not yield the type of data needed to make decisions about leadership readiness  Boards often rely on false assumptions, old data, loosely defined selection criteria and inadequate assessment techniques when it comes to CEO succession  Talent reviews provide a forum to discuss leadership talent through a common nomenclature that provides a sense of fairness, objectivity, and transparency  Talent reviews establish common talent standards  Board involvement may be limited, but members are keenly interested in the outputs Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 7
  9. 9. WHAT TO KNOW: Leadership is a complex and dynamic phenomenon, is difficult to measure and should be examined through multiple “lenses”  Leadership is a behavior that requires agility and coordination of various competencies  Complimentary methods are needed for reliable and valid assessment of dynamic and complex phenomena  A leader’s motives, values, and psychological needs are paramount to assess role and organizational fit  There is a gap between the science and practice of leadership assessment Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 8
  10. 10. WHAT TO KNOW: Linking succession planning with leadership development is a critical success factor and can create incredible long-term value for the business  Emphasizing the developmental focus helps to mitigate the “horse race” effect  Development assignments that have the greatest impact are those most closely related to the job (e.g., stretch assignments, special projects and developmental jobs)  When leadership development is integrated with strategy execution, not only do leaders emerge with greater competence to lead the business, they become more facile with strategy Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 9
  11. 11. Tips and Strategies  Make succession planning a priority  Establish governance process for CEO and other leadership succession decisions  Identify the leadership capabilities needed to support the long-term strategic plan  Bring greater objectivity into the process through the science of leadership assessment  Link succession, talent review and leadership development processes Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 10
  12. 12. WHAT TO DO: Make succession planning a priority  Focus your time on talent—“talent masters” spend 30-40% of their time on people decisions  Scan your business to identify where the leadership pipeline is strongest and weakest  Align incentive systems to focus on grooming leadership talent  Treat high potential leaders as you would any other corporate asset  Remove organizational barriers that inhibit growth and exposure to other high potential leaders Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 11
  13. 13. Example: Succession Bench Strength Chart John Doe Capability Profile: Development Areas: Leadership Strengths: • Competencies: Coaching and Developing Others, Fostering Collaboration and Teamwork, Supply Chain Management Competencies: Investor and Public Relations, Strategic Business Planning and Implementation, Business and Financial Acumen Other Data: Other Data: • Tends to “fall down” on questions from analysts if he is not prepared for the • In ambiguous and complex business situations, Joe can easily link together question, specifically in the area of finance complex concepts and ideas • Joe adopts a holistic perspective and systems view when approaching complex • Hasn’t had the opportunities to interact with certain financial bodies and participate in a significant role during investor calls problems • Prepared Board presentations have been perceived as being too scripted, void of • Reacts proactively and aggressively when challenged by competitors creativity, and lacking insights Development Activities Progress Potential Upward or Lateral Moves: Serve as primary interface with the investor community by demonstrating business and financial acumen Complete Chief Executive Officer 5+ yrs Chief Operating Officer Now Divisional SVP (Asia Pac) 1-2 Yrs Adopt a more flexible decision-making style that considers the balance of various ideas Lagging Identify opportunities to lead the presentation of results with key investment and financial community Not Started Readiness EVP Strategic Planning Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. Now 12
  14. 14. WHAT TO DO: Establish governance process for CEO and other leadership succession decisions  Understand how your Board wants to engage in the CEO succession planning process and the expectations of management  Clarify what board committee will be responsible for recommending the slate of candidates  Establish a cadence and succession planning process that links to strategic planning, operational planning, and talent reviews— management processes should link to the board-level process  Understand your requirements  Develop a set of decision rights for the succession planning process Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 13
  15. 15. Example: RACI for CEO Succession Planning Board of Directors Board Committee CEO External Advisor 1. Succession process design A R C C 2. Development of the success profile and leadership competencies A R C C 3. Nomination of internal candidates to participate in succession process A R R I 4. Agreement on the prioritization and readiness of internal succession candidates based on assessment data A R C C 6. Creation and management of candidate development plans to close gaps A R C C 4. Determination (and management) of external search if warranted A R C C 7. Initiate transition and communications plan when a succession event is determined A R C I Succession Planning Decisions R = Recommend A = Approve C = Consult I = Inform Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 14
  16. 16. WHAT TO DO: Identify the leadership capabilities needed to support the long-term strategic plan  Engage key stakeholders in a process to clarify the leadership capabilities required for success now and in the next five years  Update your succession plan as your strategy changes to ensure alignment  Confirm the business/technical, leadership, and interpersonal competencies that leaders are expected to demonstrate, and the work experiences needed for success Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 15
  17. 17. Step 1 – “Unbundling” the strategy Organizational Capabilities Factors that are critical to execute the strategy and deliver results Pricing Excellence Market Insight Community/External Relations Marketing & Branding Customer Intimacy Channel Management eCommerce Operational Excellence Leverage Technology Margin Management Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 16
  18. 18. Step 2 – Linking capabilities to leadership competencies Organizational Capabilities Sample Leadership Competencies Associated With Organizational Capabilities* Pricing Excellence Business Acumen Decision Making Market Insight Intellectual Horsepower Executive Image/Presence Community/External Relations Acts with Integrity Public Affairs Marketing and Branding Vision Customer Intimacy Customer Focus Channel Management eCommerce Operational Excellence Leverage Technology Margin Management Brand Building Forging Synergies Leading Change Technology Savvy Operational Discipline Systems Thinking Innovation Value Management Results Orientation *Other competencies associated with interpersonal and intrapersonal effectiveness are also typically included in leadership assessments. Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 17
  19. 19. WHAT TO DO: Bring greater objectivity into the process through the science of leadership assessment  Most selection techniques rely heavily on interviews—make sure interviewees are trained in behavioral interview techniques and calibrate their ratings  Use complimentary methods to maximize the validity of the process  Leverage personality assessments early in the process, but not as a primary decision factor for selection  Know the science that underpins the assessments you are using— not all assessments are created equal  The leader “beneath the surface” is the most difficult to assess, but are important predictors of cultural fit Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 18
  20. 20. Effectiveness of various assessment methods Leadership Capability Spectrum Leadership Competencies Assessment Method Technical & Functional Skills Leading the Enterpise Building Teams & Leading Others Cultural Fit Leading By Example (Intrapersonal Skills) Intelligence Motives, Values, & Psychological Needs Learning Agility & Intellectual Horsepower Competency-based 360 Survey Assessment Interviews Leadership In-Basket Exercise Business Simulations Cognitive Ability Test Abstract Reasoning Test Special Job-Related Assignments Personality Assessment © Axiom Consulting Partners. All rights reserved. Method Effectiveness High Low Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 19
  21. 21. Complimentary methods are needed in CEO succession planning Validity of Various Assessment Tools in Predicting Job Performance Assessment Method Tests of general cognitive ability Work sample tests Structured interviews Job knowledge tests Accomplishment record² Integrity/honesty tests Unstructured interviews Assessment centers Biodata measures Conscientiousness tests Reference checking Years of job experience Training & experience point method Years of education Interests 1 Table Validity of method used alone (r) 0.51 0.54 0.51 0.48 0.45 0.41 0.38 0.37 0.35 0.31 0.26 0.18 0.11 0.10 0.10 Incremental validity (Multiple R) % increase in validity from combining tool with cognitive ability 0.63 0.63 0.58 0.58 0.65 0.55 0.53 0.52 0.60 0.57 0.54 0.52 0.52 0.52 24% 24% 14% 14% 27% 8% 4% 2% 18% 12% 6% 2% 2% 2% adapted from Schmidt & Hunter (1998). Copyright © 1998 by the American Psychological Association. to as the training & experience behavioral consistency method in Schmidt & Hunter (1998). 2 Referred Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 20
  22. 22. WHAT TO DO: Link succession, talent review and leadership development processes Expectations What it means to be an effective leader The behaviors and skills that Leaders are expected to demonstrate And the work experiences needed to develop key capabilities tied to the strategy. Assessment Measurement of Leader capabilities and potential Development A plan for each Leader to reach their full potential Talent Reviews Forums to discuss Leader progress and actions to strengthen the benh Valid assessments to identify leadership strengths, potential and readiness for movement, and areas for development. Individual development plans aimed at measurably improving leadership effectiveness through the 70/20/10 model (e.g. 70% special/stretch assignments or role expansion; 20% coaching or mentoring and 10% execution education). Forums to discuss the strengths and weaknesses of the current leadership talent portfolio and tactics to deepen the bench of current and future leaders. Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 21
  23. 23. Do’s and Don’ts Do Don’t 1. Clarify decision rights 1. Create a horse race 2. Link succession to business strategy 2. Use non-validated assessments 3. Utilize validated psychological assessments 3. Rely solely on data from performance management systems 4. Integrate talent reviews and leadership development with succession decisions 5. Establish a cadence to support the ongoing process 4. Assume that the numbers tell the whole story 5. Send signals to the external stakeholders until you have communicated the decision to candidates Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 22
  24. 24. Ten-point checklist of best practices for creating a CEO succession plan (SP) 1. SP is an essential business process to ensure business continuity and stewardship of human capital 2. SP must be linked to the current and future business drivers and strategic capabilities 3. SP is not “replacement planning” 4. SP for the CEO should be owned by the Board 5. SP is an inherently subjective process. A well-designed process and the independence of an external advisor can bring objectivity and validity 6. SP is a sociopolitical process with high stakes, which elevates the importance of effective stakeholder and change management 7. SP should be an ongoing initiative with periodic, formal check-ins, and report-outs on leadership pipeline strengths and risks 8. Employee performance and employee potential are often confused and should be assessed independently 9. There are multiple dimensions to development, with emphasis on building experiences and competencies necessary to step into broader roles 10. SP must be integrated with executive development and staffing Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 23
  25. 25. FAQs: Common misconceptions about CEO succession planning 1. CEO succession is event driven 2. The emergency succession plan is the same as the CEO succession plan 3. The CEO chooses his or her replacement 4. The Chairman of the Board selects the CEO 5. Boards only step in when succession planning goes awry 6. Insider CEO succession is always the best option 7. You can’t accurately assess cultural fit of outsider candidates 8. Executive search firms will always provide an objective assessment of candidate capabilities 9. The CEO succession planning process should mirror succession at other levels in the organization 10. Candidates should not be told that they have advancement potential Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 24
  26. 26. Conclusions  CEO succession planning is critical to ensure business continuity, yet many organizations still get a failing grade when it comes to managing this risk  There is an opportunity to align leadership talent with strategic needs over a longer-term planning horizon  Utilizing complimentary assessment methods and integrating succession decisions with talent reviews and leadership development is the key to building a deep bench of leadership talent Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 25
  27. 27. Contact Information Aaron Sorensen Email: asorensen@axiomcp.com Phone: 312.343.4644 Website: www.axiomcp.com Best Practices for Creating a CEO Succession Plan | Aaron Sorensen, Ph.D. 26

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