Five signs of bad succession planning

Successful transitions at the top of the house depend on a myriad of factors—true insight into candidates’ strengths and weaknesses, targeted development experiences, an objective process—all contextualized within the unique business and leadership needs of an organization.

While every company’s CEO succession process looks different, there are telltale signs of succession planning blunders. Here are five of them.

1. No Successor To Take Over the Helm

All CEO tenures come to an end. When boards are unprepared for when the CEO decides to step down, it is both a serious and preventable oversight of fiduciary duty. In a survey of board members published in MIT Sloan Management Review, 54% report not having a long-term succession plan and 58% report not having an emergency succession plan.

When Steve Ballmer unexpectedly announced that he would step down as CEO of Microsoft in 2013, the global technology giant with a workforce of 100,000 employees did not have successors lined up. Instead, Microsoft began an extensive external CEO search, identifying over 100 candidates and shortlisting to two notable contenders—one of whom became CEO elsewhere and the other withdrew from the process. The company was leaderless for half a year, until Satya Nadella, a 21-year veteran of Microsoft, was selected as its third CEO.

2. One Successor To Take Over The Helm

A hallmark of robust succession planning is having multiple individuals ready to take over the helm—in planned and unexpected circumstances. In recent years, CEO tenures have gotten shorter. Therefore boards should expect a corresponding increase in number of CEO successions, the majority of which are initiated by the incumbent CEO. As the market for qualified talent continues to shrink, boards must keep their top talent close or expect them to be poached.

After five years in the top job, Kevin Johnson announced in March 2022 that he would be stepping down as CEO of Starbucks. Although Johnson “signaled to the Board” his impending retirement a year prior, the heir apparent, then-COO of Starbucks Roz Brewer, left the company around the same time to become chief executive of Walgreens Boots Alliance. With no successor in place, Starbucks founder Howard Schultz had to return as interim CEO, making this his third stint at the helm.

3. Boomerang CEOs

Boards are often allured by the promise of boomerang CEOs who come back to save the day. The business case for former CEOs to return seems straightforward—they understand the business and are a known quantity to the organization and market. During Schultz’s second tenure as CEO, Starbucks’ share price more than tripled.

But high-profile success stories such as Starbucks’ Schultz and Apple’s Steve Jobs are exceptions rather than the rule. The average annual stock performance of companies led by boomerang CEOs is 10.1% lower than first-time CEOs and crisis-hires. As business contexts change exponentially, the value of former CEOs’ experience depreciates at a similar rate. After lagging behind competitors such as Hewlett Packard, Michael Dell returned as CEO after having stepped down for three years. Dell’s stock eventually dropped another 40% before going private in 2018.

4. Appointing A Board Member As CEO

The primary responsibility of the board is to ensure organizational perpetuity. To that end, boards should hire CEOs, not become them. Appointing a board member as CEO signals to the market that the organization lacks a (strong) succession plan and sends the wrong message to internal senior executives and high-potentials.

Boeing faced a similar situation three years ago. Against the backdrop of the scrutiny and grounding of 737 Max series planes, the board appointed chairman David L. Calhoun as its next CEO. The front-runner for the top job, CFO Greg Smith, eventually exited the company, despite leading Boeing’s largest bond financing in its history to keep the company afloat amid impacts to the travel industry caused by the pandemic.

5. Inadequate Planning For The Transition

Strong CEO successions not only focus on who the successor will be but also how the transition will take place. Even when the predecessor is involved in and supportive of the decision, inevitable psychological landmines during the handover can stifle the transition of freshly minted CEOs.

After 15 years as CEO of Disney, Bob Iger announced his retirement in December 2019 and handed over the keys to the magic kingdom to internal successor Bob Chapek. “I can’t think of a better person to succeed me in this role,” said Iger. Yet moments after the transition, he began reasserting his control over the company. One of Iger’s associates said Iger “miscalculated” the extent that the gravity would shift over to Chapek after he stepped down.

At Disney’s annual board and top management retreat in June 2021, Iger’s final remarks were seen as a dig to the number-cruncher Chapek – “In a world and business that is awash with data, it is tempting to use data to answer all of our questions, including creative questions. I urge all of you not to do that.” With just under three years at the helm, Disney announced that Chapek will be replaced by his predecessor, Iger, as CEO of the company for a second time.

The Bottom Line

These five signs are symptomatic of bad succession planning. In the absence of a thoughtful succession process, organizations will be caught off guard when the CEO inevitably has to step down. With no or one viable successor, boards are forced to turn to boomerang CEOs and board members, squandering resources from ensuring a seamless transition between leaders.