“Challenges in Chief Executive Succession”

Connor Teskey, at 36 years old, is not just the president of Brookfield Asset Management, he is also the designated successor at the worldwide investment organisation, earning him the moniker of “the next Bruce”, Bruce Flatt being the current CEO. By 2022, Teskey had climbed the corporate ladder to a high-ranking position, alongside two others, as speculation brewed over who would seize control.

Two years later, the decision appears to have been made, with Flatt prepping for a shift to the role of executive chair. The transition, thus far, has been a smooth one.

Many in recruitment emphasise the value of a meticulously planned CEO succession process that stretches over a significant period. This is perhaps in response to the number of issues – from broader economic obstacles and geopolitical crises to internal corporate mistakes and controversies regarding personal behaviour – that can unexpectedly unseat a CEO. But can a company take specific steps to increase their chances of a successful succession? And does a long-term succession strategy inevitably prevent failure? The simple answers to these questions are both yes and no.

In the investment sector, there are certain elements that may encourage extensive succession planning. Investments require commitment over uncertain timelines, necessitating a clear view of future leadership. For instance, Jonathan Gray has spent years at Blackstone, gradually preparing to step in for Stephen Schwarzman.

However, it’s not just investment firms that are thinking further ahead when it comes to succession. Increased expectations from shareholders have resulted in more companies planning for the future earlier than they traditionally would. Instead of planning succession one or two years in advance of an expected exit, the board is under increasing pressure to provide insight five years ahead, according to recruitment specialists.

These days, just as companies carry out stress tests on corporate strategies and plan for various scenarios, they are now considering different possibilities for succession. The may need to prepare multiple potential successors, each ready to uphold the current situation, drive for growth or completely overhaul the strategy, depending on sudden changes in context.

Patricia Lenkov, a specialist in corporate governance and succession, clarifies, “Today’s environment demands risk management and business continuity. Companies need a plan B and a plan C.”

No company wishes to experience problematic successions like Microsoft did in 2013 – when Steve Ballmer suddenly announced his departure – or Howard Schultz’s recurring Starbucks returns.

Worryingly, according to a commonly referenced study, 40 per cent of CEO transitions fall flat within just 18 months. Additionally, the duration of a CEO’s term appears to be shrinking.

Initiating the talent hunting process at an early stage is merely the first step. This approach assists businesses in establishing a reservoir of potential leadership to prevent the possible upheaval and expense linked to hiring from outside sources. However, the way in which CEOs are nurtured and the management of the transition process hold equal importance.

For prominent firms, prospective leaders need to acquire a diverse range of experience, including geographical exposure and understanding of various business sectors. These potential successors also require sufficient time to manage projects to completion, allowing the board to aptly evaluate their performance.

The handling of internal and external messaging regarding potential successors is of significant consequence. Premature publicity often results in employees picking sides, causing splits among staff and escalating rivalries amongst high-ranking officials vying for the top spot. When a final decision is made, an established timeline should be in place to maintain the chosen successor’s drive and minimise disappointments.

The protege of the incumbent CEO is often an internal candidate, who might find it challenging to make strategic decisions without feeling overshadowed by their predecessor. This was the case with Gordon Brown who faced an agonising wait before succeeding Tony Blair as the Prime Minister of the UK. In the business environment, a prolonged wait could tempt candidates to pursue alternate opportunities.

Boards then face the task of dealing justly with the unsuccessful candidates, by either offering incentives to deter them from resigning or ensuring a resentment-free departure. An example of this is Morgan Stanley who, last year, awarded identical bonuses to three potentials even when only one was chosen for the top position. The bank also assigned senior roles to the unsuccessful candidates, resulting in a more balanced leadership structure.

Interestingly, the real challenge oftentimes begins once a candidate has secured the top position. Though the planning may be meticulous, outcome uncertainty still exists, according to Navid Nazemian, an executive coach. Past success does not guarantee future performance. Spencer Stuart, a consultant at an executive recruitment firm, adds that the longer an incumbent remains in position, the more complex the transition process tends to be.

Challenges often arise when new leaders do not possess backing from important figures like board members or the CEO whose strategic direction they aspire to alter. The well-known dispute between Bob Iger and his successor, Bob Chapek at Disney serves as a paramount illustration of this. New incumbents may need to devote effort towards building connections within departments they previously had scarce interaction with, all while earning the trust and allegiance from individuals who were their equals in status, and also the broader workforce.

Accomplishing a successful handover in leadership is, to a certain extent, always a complex task. However, board members can adopt measures to avoid guaranteed failure. – Copyright The Financial Times Limited 2024.

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