According to Aviva Investors, in order to draft an adequate succession plan, company boards must consider what kind of leader is needed to implement the strategic priorities of the business, whether the business requires continuity or fresh thinking, and how markets will react to a new hire.
Senior portfolio manager Trevor Green and senior ESG analyst Louise Piffaut said: “Without a strategy for the transition, companies are often left scrambling for answers under the glare of media and shareholder scrutiny.
“Perhaps it is not surprising, then, that poor hiring decisions are common. This is bad news for investors, as a failed CEO appointment can have a material impact on performance.”
The pair cited a recent Harvard Business Review study that found botched succession planning wipes out close to $1 trillion in market value every year among companies on the S&P 1500.
“These costs stem from a variety of factors. Some companies underperform after hiring unsuitable external candidates; others after promoting insiders who prove unequal to the top job,” Mr Green and Ms Piffaut said.
“The loss of intellectual capital among firms whose CEOs leave to take other opportunities was also found to have a negative effect on value across the index.”
In order to do better, the pair said company boards must take succession more seriously.
“While there is evidence companies have become more focused on the issue — partly due to increased leadership churn during the convulsions of the pandemic — further progress is required. Over half of the board members in a recent survey of over 500 US companies admitted they needed to improve CEO succession planning,” they said.
Companies also need to cultivate internal leadership talent by identifying rising stars early and providing coaching opportunities and rotations that broaden their skills and experience well, before a vacancy arises.
“Companies might also consider bringing succession candidates onto the board, so their work can be assessed firsthand by other directors,” Mr Green and Ms Piffaut said.
Finally, to minimise disruption, the pair said companies should consult a range of stakeholders at an early stage in the succession process, including shareholders.
“This is not to argue investors should be given the final say, only that is sensible to get a sense of what they are looking for in the next CEO. As well as input from investors, a diverse range of internal views can help build a rounded picture of the strengths and weaknesses of candidates,” Mr Green and Ms Piffaut said.
