1. Prioritize leadership: ensure that robust CEO and board leader succession plans are developed, discussed, and supported by the full board.
With S&P 500 CEOs averaging 8.1 years in the role before retiring and S&P 500 directors averaging 11.6 years of service before leaving the board, most directors should expect to oversee at least one CEO change during their board tenure. And plenty of CEOs are likely approaching retirement: 34% of S&P 500 CEOs have served in the role for at least 8 years and 25% have served for at least a decade.
To add to succession complexities, most of these longer-tenured CEOs — 61% of the 8-plus-years CEOs and 68% of the 10-plus-years CEOs — also chair the board. Looking at independent chairs, 43% have led the board for five or more years. These numbers suggest that boards should not only get ahead of CEO succession planning but also should be proactively evaluating the board’s leadership structure and developing succession strategies.
We’ve seen the good, the bad and the ugly when it comes to both successions.
What are best practices for CEO succession planning?
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Make sure succession planning is “always-on.” Boards should be thinking about succession early on in a CEO’s tenure, working with the CEO and involving the CHRO to integrate it with broader executive leadership development programming. This is the key to developing a robust pipeline of emergency, near- and long-term successor options so the board has options who are ready to meet the moment when the time comes. Boards should review CEO succession plans at least annually, and twice a year if a transition is likely within the next three years.
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Review succession against the company’s strategic context and performance. Boards require a deep understanding of the implications for succession of the company’s current performance, strategic direction, organizational structure and operating model, as well as the composition of the top team and how those roles and executives may change.
- Develop dual internal and external tracks. While most CEO successors are internally promoted, the best boards develop dual tracks of internal and external options. There is always the possibility that the readiness of internal options may not align with the changing needs of the business — especially given the volatility of the current environment. An external talent review gives the board relevant comparative benchmarks to internal successor options. Also, boards must ensure that potential internal successors are being actively developed through career pathing, development programs, coaching and mentoring.
- Look beyond the CEO role. Boards need to be mindful that succession planning isn’t just about the top job. Whoever becomes CEO will need to work hand in hand with the top team and board; their capabilities will need to complement each other. Robust succession planning considers the CEO, top team and board as a system, because these three bodies evolve with each other.
- CEO succession doesn’t end when the new CEO is appointed. Once the new CEO is named, the focus must shift seamlessly to preparing for the transition and providing performance support for the new CEO.
What are best practices for board leadership succession planning?
- Process matters. Ensure the nominating and governance committee formalizes a process — tailored to the company — for board leadership succession planning, encompassing both leadership structure and leader. The committee should make clear that the current independent board leader does not have unilateral authority to decide the board’s future leadership structure or to anoint the CEO or another independent director as successor.
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Understand market and peer trends. Only 8% of S&P 500 CEOs appointed in the past year were also named chair. Our research finds that 42% of S&P boards have an independent chair, but this is misleading. Changes to board leadership structure generally occur as part of a CEO succession: 43% of combined chair/CEOs of S&P 500 companies have served as CEO for 10 years or longer.
- Develop a position specification for the board leader role.
- Give each director, along with the sitting CEO and incoming CEO (if applicable), an opportunity to provide input.
- Evaluate each proposed candidate against the position specification, talk with each candidate and make a recommendation (with input from the CEO) to the board for approval.
2. Proactively evaluate current board composition and future boardroom needs in developing boardroom succession strategies.
For the past two years, our annual survey of S&P 500 and S&P MidCap 400 nominating and governance committee chairs found that the top focus area for the committee — by an overwhelming margin — is board composition and succession planning. The heightened attention makes sense given the complex business environment and increasing expectations of directors.
And the focus is warranted. We’re likely to see more board retirements in the near future: 35% of S&P 500 independent directors are 72 or older or have served on the board for at least one decade. Of those, one-third (34%) are former or current CEOs and another 9% are current or former CFOs — both in-demand profiles for director recruitment. Just under 40% are diverse. The data are clear: boards will be facing intense competition for director talent.
While one size doesn’t fit all when it comes to board refreshment strategies, stagnation is not the right strategy for any board. Nominating and governance committees must balance the value of boardroom continuity with the benefits of new perspectives. We’ve seen too many cases where boards have been reluctant to ask directors to retire or to add directors with new perspectives, sometimes leading to activist attention and abrupt and significant changes to the boardroom.
What are best practices for boardroom succession planning?
- Foster a boardroom culture that supports change, with directors understanding that their board service is linked only to boardroom needs and director performance.
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Encourage directors to be introspective about the relevance of their experiences to the board going forward.
- Annually, with CEO input, determine forward-looking boardroom needs.
- Ensure board skills matrices are reflective of forward-looking boardroom needs, are meaningful — with categories defined and directors asked to highlight and soft rank their top four or five skills and experiences — and used to determine gaps and overcapacity in the boardroom.
- Perform robust board, committee and director evaluations, ideally using an independent third party every two or three years.
- Consider shareholder-specific input on board composition and expectations of shareholders in general.
- Avoid relying on tenure limits and/or retirement ages as the sole motivator for boardroom change.
- Maintain an evergreen list of potential director candidates to enable quick or opportunist decisions.
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Leadership matters. With the challenges facing companies accelerating and the demographics of CEOs and boardrooms changing, nominating and governance committees should be laser focused on the talent agenda. The best nominating and governance committees are proactively planning for potential changes to company and board leadership and leading the hard work to ensure the board is fit for purpose and composed of the right directors for the forward-looking challenges and opportunities facing the company.