3. They have a documented plan with a timeline and process for updating it
To keep CEO succession planning a priority, directors need to lay out the goals of the process, the cadence for discussion, the short and long term aspects of the plan, and the details of the candidate development program. They should also determine how often CEO succession planning is on the board agenda. And although the current CEO can provide valuable input, the board should regularly discuss CEO succession in executive sessions.
The result of these discussions should be a documented CEO succession plan that describes the responsibilities and expectations of the new CEO. It could also include the skills and experience they will need to drive the company’s long term strategy and a list of possible candidates.
The plan could also establish a timeline for each step the board will take, from assessing internal candidates and interviewing external candidates, to appointing the new CEO and announcing the board’s choice publicly.
The full board should review the succession plan at least once a year. This allows directors to update the capability requirements for the next CEO as the company’s needs change.
4. They have a well-defined emergency succession plan
Too many boards have only a vague notion of how they would respond to a sudden CEO departure. Given the abrupt rise in CEOs leaving unexpectedly, companies without an emergency plan jeopardize their financial futures and relationships with stakeholders.
Developing an emergency succession plan requires identifying strong interim candidates who can step in quickly, such as the CFO, COO, or other candidates already being groomed for the position. Having emergency CEO candidates spend time with the board and the current CEO to better understand the business will help smooth the transition. And the board’s discussion should include whether a director could temporarily step into the CEO role while the board searches for a long term replacement.
PwC Perspectives—CEO Succession
The perfect opportunity to consider other types of change
Reduce overboarding: During a CEO transition, boards should review their company’s policy on the number of outside directorships the CEO can hold while serving as the top executive. Institutional investors, activists, and proxy advisors often consider overboarding , particularly of CEO directors, when making voting recommendations and decisions. During a CEO succession, boards can revisit whether they need different limitations.
Rethink board leadership structure: Calls to separate the board chair and CEO roles have become more common. Some shareholders argue that a unified role diminishes the independence of the board. Transitions involving an outgoing CEO who is also the board chair are a good time for directors to assess whether that board leadership structure is still appropriate.
Increase diversity: The number of female CEOs in the S&P 500 rose to 34 in 2020 the highest ever. But there have only been 86 female CEOs since 2000 in the S&P 500. When searching for CEO candidates, boards should make a concerted effort to consider CEO candidates that differ in gender, age, race, and ethnicity.
5. They engage their CEOs in succession planning from day one
Once boards have gone through the hard work of appointing and transitioning a new CEO, few have the appetite to restart the planning process. Many put it off for two to three years after the new CEO is appointed. Nearly one third of the directors in PwC’s Annual Corporate Directors Survey say the biggest hurdle to getting started earlier is that the current CEO is meeting expectations.
One way to reduce the awkwardness of talking to a CEO about who might replace them is to make it a routine conversation. Discussing successors regularly, no matter who holds the position and how they are performing, will help make the conversation feel less personal.
Boards that make it clear to their CEOs from day one that planning for their succession is a critical part of their job can circumvent much of the anxiety about whether the CEO will feel threatened by the process. Their responsibility, much like the board’s, is to avoid the disruption of a messy CEO transition.
The CEO’s primary role in succession planning is to identify potential successors and make sure those people are getting the proper experience and exposure to assume the position. Accordingly, directors should ask for regular updates from the CEO and chief human resources officer on their progress in identifying and developing internal candidates.