Without an Effective Succession Plan, Companies Can Risk It All.

Only hours before a special board meeting on December 5, 2010, to discuss Jeff Kindler’s future as the CEO of Pfizer, the world’s largest drug maker, he suddenly announced he was retiring because he needed to “recharge my batteries” after a “period extremely demanding on me personally.” Making matters worse for Pfizer’s board, Kindler had failed to name an operations chief despite internal discussions about successors for this position. The operations chief has 85 percent of Pfizer’s revenue under management.

Succession planning, which is the practice of identifying, assessing, and selecting talent to succeed incumbents in critical roles, is increasingly a top priority for boards of directors, CEOs, analysts, and shareholders. Despite this renewed focus, the situation that played out at Pfizer is still far too common. Effective succession planning is much more than simply having a slate of candidates to address the hit-by-the-bus scenario. Effectively navigating through what is an inherently subjective, emotional, and highly political process requires delicately managing the mechanics and dynamics of the succession process. Done right, succession planning can ensure your organization has a deep bench of talent in its most critical roles and improve its ability to resist the inevitable shocks of leadership departures.

This article shares insights gained from the authors’ experiences consulting with numerous companies on succession planning issues around 10 key decision points that most frequently emerge.

 

Decision No. 1: Does my organization really need a formal succession plan?

It is difficult to argue against the merits of a well-developed and thoughtful succession plan no matter the size, industry, or performance of a company. The CEO succession plan of publicly traded companies, however, is viewed with a higher level of scrutiny. Activist shareholders, institutional investors, and the Securities and Exchange Commission (SEC) are now showing a renewed interest in understanding the economic risk associated with leadership departures by evaluating information on the succession plan in corporate proxy statements. Organizations that view succession planning as a primary driver of ongoing talent stewardship rather than pure replacement planning can realize a significant competitive advantage. For example, companies like Dow Chemical, Procter & Gamble, PepsiCo, and Walmart who share this philosophy have been able to achieve sustained performance by grooming their leadership from within; these companies boast internal hire rates upwards of 75 percent.

 

Decision No. 2: When is the right time and frequency for my organization to conduct succession planning?

Succession planning should be considered an ongoing business process; it is not a singular event or static plan that is retrieved when key talent departs. To identify succession candidates, assess fit and readiness, and select the best person for the role takes time; rushing this process can be the kiss of death to the credibility of the process and trust throughout the leadership ranks. Most organizations sync their succession planning process to an annual business cycle. Organizations like Procter & Gamble and PepsiCo, well known for their development approach of deploying leaders to challenging assignments and markets around the globe, conduct more frequent succession reviews to ensure leadership movement does not expose the organization to risk due to frequent transitions.

 

Decision No. 3: Who should be responsible for succession planning?

Whether the succession planning takes place at the C-suite level or one or two layers down in the organizational hierarchy, a constant factor in the success of any talent management effort is ownership and engagement of leadership on key decisions. “Over the past couple of years, we have significantly increased the line leaders’ adoption and ownership of the succession planning process at Grainger — and they believe it is a critical factor in maintaining a high-performing business and essential to meet the company’s strategic growth objectives,” says Suzanne Burns, vice president of leadership, employee and organization development at Grainger.

Deborah Peirce, director of global talent management at Baxter, echoes the importance of leadership ownership. “At Baxter, leaders assess individuals’ overall performance and potential as part of an organization inventory process used to identify people-related needs that are critical to enhance Baxter’s overall performance, productivity, and profitability. Succession and development plans are then reviewed against these needs.”

Governance and decision authority for CEO succession planning, however, is almost exclusively owned by the board of directors for publicly traded companies. So where does human resources fit into that scenario? The most progressive HR organizations share the view that a critical success factor in succession planning is leadership engagement and ownership of talent decisions. They also recognize the value that HR can bring to this process, positioning themselves to support the process in five key areas:

1. Facilitating the process to ensure objectivity and process rigor
2. Translating performance and potential data into key insights on candidate readiness and fit
3. Serving as a confidential sounding board for candidates
4. Creating opportunities for development
5. Monitoring and measuring progress against development areas

In addition to driving continuous improvement on the succession process, Grainger’s HR team provides the tools to make sure the company has robust discussions on the key issues and monitors the progress on development commitments made during the succession planning sessions. “It’s a great partnership,” Burns says.

 

Decision No. 4: What roles should I include in the succession plan?

“Succession planning was originally designed for senior leadership, but many parts of Baxter now use the process for levels deeper in the company to differentiate our talent and provide the right programs to prepare (top talent) for critical roles,” Peirce says.
Often through the shock of losing critical intellectual capital due to retirement or poaching by competitors, a growing number of organizations are coming to realize that succession planning should also be applied to the most critical (or strategic) roles, regardless of where those roles may fall in the company’s hierarchy. These are often roles that are critical to driving competitive advantage, generate significant revenue, or are critical for market expansion and new product introduction through specialized skills and knowledge. However, talent for these roles can be scarce due to a lack of supply and/or significant demand.

 

Decision No. 5: Who should be included in the succession plan?

Most organizations look for a combination of demonstrated results and potential when selecting succession candidates for various roles. At the senior leadership level, boards often want to look at all the executives one or two levels below the CEO to see who’s in the pipeline and how deep and wide the pipe is to the C-suite. This deeper dive greatly helps in succession planning, as executives are exposed to the board much earlier and more frequently. Baxter, for example, tracks succession metrics and reports them to the board annually, Peirce says. In addition to demonstrating the technical competence to be successful in a future role, organizations are increasingly looking for leadership behaviors like learning agility, emotional intelligence, intercultural awareness, managing change, and systems thinking as jobs and organizational structures become more complex and global. Grainger, for example, “focuses on a person’s level of engagement, willingness to learn and be stretched in new ways, their ability to work well with others, in addition to their track record,” Burns says.

 

Decision No. 6: How do you reliably assess individuals to ensure the best candidate for the role?

Organizations that have a strong track record of selecting the best candidate for each critical role take the time to articulate to candidates what success looks like on the job. Organizations do this by clarifying the required and desired competencies, experience sets, credentials, and demonstrated results. These organizations also appreciate the multidimensionality of performance (and potential) and leverage various forms and channels of data. “Baxter uses the Nine-Block Performance Times Potential Grid as a tool to assess overall performance,” Peirce says. The Baxter tool integrates with performance management ratings from the past few years, as well as a number of other performance indicators, and includes an assessment of potential, which is one’s ability and likelihood to advance in a position and assume greater responsibility over time. When the stakes are higher, the business case for using tools like external assessors, psychometric testing, and in-depth competency-based 360 interviews that probe for demonstrated skills and behaviors essential for the role may also be warranted. It is important, however, to be aware of not going overboard on assessments because the incremental predictive validity of some assessments is marginal.

 

Decision No. 7: How do you ensure visibility into and maintain a strong bench/pipeline of talent?

Talent reviews every six or 12 months on critical roles can provide visibility on the depth and breadth of talent, as well as insights on the composition of current and potential future gaps. Baxter’s organization inventory process provides high-level visibility into the health of its talent pipeline,” Peirce says. “This process also raises the visibility by requiring Baxter leaders to assess the quality of their top talent pool and, most importantly, explain the state of succession for critical positions, particularly highlighting any succession vulnerabilities.” Progressive HR organizations, which strategically manage the talent-review process, focus their review efforts on the critical few (or strategic) roles in the organization linking data, decisions, and actions to the succession plan. In addition to improved understanding of the current talent portfolio for critical roles, talent reviews introduce a common forum to think about talent, help calibrate individual ratings on performance and potential, and promote real action around development.

 

Decision No. 8: What can human resources do to develop leaders to move into critical roles?

Leadership-development assignments that have the greatest impact on candidates are those that are most closely related to the job (e.g., stretch assignments, special projects, and developmental jobs). At a number of organizations, movement at the senior leadership level can be limited, however, which can make effective job-related developmental assignments for potential leaders difficult to find. (See Identifying Potential Successors.)

 

Decision No. 9: How do I manage the politics and emotions of succession planning to avoid a horse race?

The pros and cons of whether to inform a candidate (C-suite or below) that he/she is part of a succession plan is a topic of frequent debate and is often a cultural decision. When the message is managed appropriately, informing top employees they are part of a succession plan signals that the organization is invested in the candidates’ development and career progression. Along with emphasizing the developmental focus, maintaining transparency and openness in the process are key factors in preventing the horse race effect from occurring. These factors are even more important at the executive level, where the nature of interpersonal relationships and the proclivity of board members to view leadership behaviors through a personal lens can create strong sociopolitical and interpersonal dynamics around succession decisions.

 

Decision No. 10: What do I need to do to ensure a smooth transition of successors?

Regardless of the role, once a candidate has been selected for succession, it is critical that a thorough transition plan be developed so that the newcomer has the benefit of a strong start. One of the most often overlooked succession decisions is what to do after the successor is named. Sink or swim is simply too risky to endure, and it is a myth that there is such a thing as a ready-now candidate. All successors have learning to do. A valuable portion of the planning part of succession allows for time between the succession decision and the acceptance of the job so that the leader can be exposed to the entire system he/she will impact. Organizations that manage transitions ensure that the candidate is exposed to opportunities for intensive knowledge sharing, including in-depth discussions about the viewpoints, priorities, and expectations of key stakeholders. Successor preparation continues with a greater focus on deepening important inside and outside relationships, developing a refined vision, building teams, and initiating the required actions to drive meaningful change.

 

Identifying Potential Successors

Seventy percent of Grainger’s leadership development usually occurs on the job through special assignments or action-learning programs. Grainger’s program for more senior leaders is called the Global Leadership Development Program (GLDP); each year, a small number of high-potential leaders is selected to participate in this six-month action-learning program. This group of leaders commits 50 percent to 60 percent of their time to the effort and works toward a recommendation to the board of directors on a strategic challenge facing the business. Twenty percent of the leaders’ development is a function of networking, coaching, and mentoring relationships. Several formal mentoring programs are available to leaders and emerging leaders through Business Resource Groups. The final 10 percent is provided in a more formal, traditional learning environment and includes more than 500 courses within Grainger’s Learning Center, university degrees, and other instructor-led venues. To date, Grainger has found the most effective way to develop leaders is to put them in stretch assignments and provide great feedback and support along the way. When paired with objective behavioral data or a 360-degree survey-based instrument, leadership development programs and coaching can also be an effective method to close development gaps and improve performance. “Baxter takes an integrated talent management approach to developing its leaders,” says Deborah Peirce, director of global talent management at Baxter. “This includes performance reviews and feedback, 360-degree assessment, executive assessment, development plans, mentoring, coaching, and offering a variety of in-house and online leadership development programs.”

 

Conclusion

It is no secret that transitions can be risky or rewarding. When the incumbent is performing well, there is concern about a loss of momentum, positive direction, and intellectual capital with change. Conversely, in a situation where the incumbent is underperforming, there is an expectation that the successor will quickly turn things around. The reality is that the leader alone will never be the silver bullet for a more productive or profitable organization, and that creating sustained levels of performance requires effective stewardship of talent. This is especially true in the industries where talent, as opposed to systems and products, are what create real competitive advantage.

By Aaron Sorensen, Ph.D.
Originally posted in WorldatWork | Workspan