Handing over the baton

Why succession planning is important more than ever now?

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Handing over the baton


Most of the baby boomers will retire by 2020, leaving it to Generation Next to dominate half of the workforce; by 2025 the percentage of the given monopoly will increase further. This by itself says that we are headed towards the biggest leadership succession and we need to plan effectively.

Now, how important is succession planning? A study of the world's 2,500 largest public companies shows that organisations that scramble to find replacements for departing chief executive officer (CEO) forgo an average of $1.8 billion in shareholder value. And a separate study reveals that the longer it takes a company to name the new CEO during a succession crisis, the worse it subsequently performs relative to its peers.

"With increasing business dynamism and uncertainty, the importance of planning for smooth succession in organisations is becoming more and more crucial. Gone are the days of slowly building a 'pipeline' of prospects over the years and human resource (HR) working behind the scenes slowly identifying leaders, as an outcome of completion of fixed time period stint of roles. Businesses today have realised that identifying a successor is only the first step in what may turn out to be a long process of identification which includes development, training and managing change. There's nothing called 'quick-fix' succession planning," says Nishith Upadhyaya, head - advisory services, SHRM India.

In book It's Not the How or the What but the Who, Claudio Fernández-Aráoz of the search firm Egon Zehnder lays out six succession-planning guidelines for busy directors: First, start early, ideally the moment a new CEO takes charge. Second, create strict performance metrics and a process for evaluating the CEO against them. Third, identify and develop potential successors within the firm and then benchmark them against external talent. Fourth, look externally to widen the pool of candidates, through executive search firms that don't use contingency arrangements or charge percentage fees (which Fernández-Aráoz believes create perverse incentives). Fifth, require the board to conduct periodic emergency succession drills. And finally, put in place an extensive transition process to help with onboarding, which is especially important given that 80% of CEO appointees have never served in a chief executive role before.

Sukhdeep Aurora, chief people officer - ANAROCK Property Consultants, says, "All good companies plan for the future, not only in terms of business growth but also on the succession planning front. The old school of thought wherein people were automatically 'boosted upstairs' just because they were next in the line of seniority is rapidly becoming an obsolete concept. Large, ethics-driven firms will recognise potential and performance over mere seniority, and have adequate grooming programs for future leadership. From mid-management to the C Suite, every business leader must keep the welfare and growth of the company in mind while making his or her succession plans. At their very basis, all good businesses are families - but they are families wherein the 'bloodline' must be one based on performance and promise. Continuity is a very important factor for a business. However, while the word 'corporate' correctly implies 'a body', this is not a physical body bound by the laws of decay and death, but an entity which will prevail over several generations. For a company to achieve multi-generational growth, succession planning must indeed be honed into a fine art, governed by the right philosophies and beliefs."

Apple demonstrated a prime example of succession planning when Tim Cook seamlessly took over as CEO after Jobs stepped down. Similarly, IBM's first female CEO Virginia Rometty made the transition effortlessly when Samuel J Palmisano stepped down in 2011, all because she had been with the company for over 30 years and had the complete knowledge of the company's business operations and culture.

Millennials comprise of 38% of the workforce, according to Gallup, and they're poised to take over leadership roles as the baby boomers start to retire. The report points out that if organisations fail to meet millennials' needs, they're more likely to "function as free agents", always looking for fresh opportunities. The report also adds that earlier, employees used to care about salary, satisfaction, having a good boss, annual reviews, their weaknesses and their job but today, employees are focused more on having a purpose, developing their skills and working with mentors.

Do we need to explain the importance of succession planning anymore?


$1.8bn – Average shareholder value forgone by firms that scramble to find replacements for departing CEOs

80% – CEO appointees have never served in a chief executive role before

38% – workforce comprised of millennials, according to Gallup

The writer is assistant general manager, SILA

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