CEO succession planning

Rising global attrition rate of CEOs has put a pressure on the firms to think about this issue on a priority basis. According to a recent study conducted by Booz & Company, the CEO turnover currently stands at 14.2% globally which is 2.6% higher than that existed in 2010. The research also provides that Australia leads the world in case of CEO turnover with a rate as high as 23.5%. The research also concluded that the average shelf life of Australian CEOs has reduced from 5.2 years in 2006-08 to 4.4 years in 2009-11. Another study conducted by EMA Partners established that average shelf life of Indian CEOs has gone down from 6-7 years in 2002-07 to 4.2 years in 2009-11. These statistics clearly reveal the changes in global top management corporate scenario over recent years.

CEO Succession Planning

Having known the trend of CEO attrition, it is obvious for the firms to stay prepared for any  such situation. Though the best idea always remains to retain the talents at top positions, the turnovers do happen. The immediate effect of CEO turnover is leadership gap in the organization. The obvious solution therefore lies in doing succession planning. Most often the term succession planning is used to mean that the firm has decided the successor of CEO within the firm in advance, so as soon as the CEO departs, there is another person holding the position. But, this is only a partial view on succession planning. Succession planning is rather a broader concept.

Types of CEO succession

Though succession planning relates to planning the successor, the succession planning process may differ among organizations as per the need. Commonly, there are 3 kinds of processes used for deciding CEO succession:

  • Relay succession: Under relay succession, the predecessor is succeeded by a heir apparent within the organization. Since the heir is already identified, relay succession gives enough time for grooming the heir according to the new role. However, there is no infusion of new ideas and initiatives in most cases. The succession at Tata Group where Cyrus Mistry succeeded Ratan Tata is an example of relay succession. Mistry was announced as the heir before Ratan Tata left his office and was personally groomed by Mr. Tata before he took over the new role.
  • Non-relay inside succession: Non-relay inside succession refers to a succession where the successor is chosen from within the organization but there is no identified heir. There are persons competing within the organization for the position of CEO and the best among them wins. Since the  heir is not identified, there is no scope for grooming and this kind of succession many times result into workplace conflicts. The case of Reliance Industries fits best here. Though succession was to be done internally and the heir had to be one between Anil and Mukesh Ambani, none was identified and declared by Dhirubhai Ambani as the legitimate heir. The conflicts that followed Dhirubhai’s death need no introduction.
  • Outside succession: As the name suggests, outside succession process is about choosing the successor from outside the business. Though it helps the firm to get new ideas and perspectives and may also prove beneficial when the firm needs a complete organizational change; but a person from outside usually have little idea of firm’s core competencies and resource constraints. Such kind of succession is mostly adopted when the firm is not doing well and therefore in many cases the incoming CEO focuses on short-term revenues to prove his capabilities. However, this may prove detrimental in the long-run. No on-the-job training is offered to him and the employees put little faith in him initially. Moreover, the outside CEOs are usually hired at much higher salaries and perks than the ones selected from inside. Apart from paying them higher, the firm may also suffer substantial costs in the long-term because outside CEOs generally have a shorter shelf life and in many cases, the exit of CEO is followed by mass resignation in the organization. Yahoo’s new CEO Marissa Mayer is the perfect example of outside succession. She earlier served Google and was hired by Yahoo directly as CEO.

References

  • ANI (November 30, 2012). “Australia has ‘highest CEO turnover rate’ in world: Study.” Retrieved from: http://in.news.yahoo.com/australia-highest-ceo-turnover-rate-world-study-115443257.html
  • “CEO turnover rate rises to pre-recession levels.” (May 24, 2012). Retrieved from: http://www.consultant-news.com/article_display.aspx?p=adp&id=8657
  • ET Bureau (April 9, 2011). “Indian CEOs’ shelf life getting shorter post slowdown.” The Economic Times. Retrieved from: http://economictimes.indiatimes.com/indian-ceos-shelf-life-getting-shorter-post-slowdown/articleshow/7924309.cms
  • Rajagopalan, N. & Zhang, Y. (2004). “When the Known “Devil is Better than an Unknown God: An Empirical Study of the Antecedents and Consequences of Relay CEO Successions. Academy of Management Journal. Vol. 47. No. 4. p.p. 483-500.
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Ankita Agarwal

Ankita is working with the editorial board of Project Guru as a Research Analyst and Writer. With Masters in Commerce and Business Studies, Ankita learned much of what she knows about management through experience. She has previously worked in various financial institutions like Birla Global, HDFC Ltd. and Citi Financial. She is self-motivated and writes for the Knowledge Tank section of Project Guru. She has authored more than 80 articles so far in Human Resources Management, Strategic Management, Finance and Marketing. She likes to pen her thoughts about the latest issues gripping these areas across the world.

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