HR's role in executive succession planning
Katie Jacobs, November 19, 2012
Naked photographs notwithstanding, 2012 has been a good year for the British royal family. A Diamond Jubilee that even torrential rain couldn’t render a washout, followed by an Olympic Games where most of the younger royals showed off their sporting spirit by attending as many events as possible (and in the case of Zara Phillips, even winning a silver medal on her own merit).
As three generations of Windsors acknowledged cheering crowds at the Olympics opening ceremony, you couldn't have asked for a finer example of succession planning in action.
If only businesses had it so easy. But with the day-to-day grind of issues such as sales figures and share prices to think about, solid and strategic succession planning, even for the very top roles, can often slide right down the agenda. In fact, research conducted by talent analytics company SHL in 2012 found that although 43% of UK companies admit to having experienced an unexpected change in leadership in the past 12 months, only 32% of the companies surveyed actually have a full CEO succession plan in place.
Add to that the egos present in the average boardroom - many executives appear assured of their 'divine right' to lead - and is it any wonder that succession-planning activity is often a nightmare for organisations? Whether it is being caught out after a senior leader leaves unexpectedly (perhaps even via the funeral home), or appointing the wrong person through lack of careful consideration, succession planning can be a minefield. Even the biggest multinationals are not exempt: corporations including Citigroup, Coca-Cola and Procter and Gamble have all made headlines for their lack of a decent succession plan.
Yet despite all that, it is not uncommon for academics and business theorists to suggest that succession planning is largely unnecessary for companies, even a waste of time. "Some people suggest succession planning is a crazy thing to do," says Wendy Hirsh, an independent researcher and consultant. "Trying to plan ahead and prepare people for jobs might seem like a ludicrous endeavour, because jobs and people are changing all the time."
However, when Hirsh researched succession planning as part of a report for the Corporate Research Forum (CRF), she found it is a topic that many organisations, especially the larger ones, are thinking about more and more. According to the CRF report, Planning for Succession in Changing Times, published last month, 76% of companies say they use some formal succession planning (this plunges to 28% in small and medium-sized companies). But although there is apparently lots of activity taking place, it is not clear that it is doing much good: only 56% of those surveyed said they are satisfied with their organisation's ability to fill senior positions, and 42% are actively dissatisfied with it.
Having a formal, well thought-out succession plan in place for the top roles is more than just a bright idea - it is business-critical. There is no shortage of examples in the business press that explain why: the share price of insurance giant Legal and General plummeted last year after chief executive Tim Breedon announced he was leaving, but appeared to have no idea who would be succeeding him. At US retailer Home Depot, the ill-judged appointment of ex-GE star Bob Nardelli - someone with no previous retail experience - led to a series of poor decisions, a serious fall in market share and Nardelli's eventual replacement by an internal candidate who could show a deep understanding of the market and company culture.
"Succession matters hugely," says Stephen Dando, former EVP and chief human resources officer at business data provider Thomson Reuters, and soon to be operating partner at asset management firm Bain Capital. "Whether you like it or not, senior roles matter disproportionately, and senior external appointments are notoriously risky: the absence of a succession plan means you raise the risk for your organisation significantly. Unplanned discontinuity can have serious consequences for the organisations - particularly with CEOs. Companies can immediately leave themselves open to hostile takeover if the CEO dies or leaves unexpectedly."
Hirsh agrees: "When it comes to the top team, there are very high risks to organisations that are caught on the hop if someone senior leaves unexpectedly," she says. "Not having candidates for the very senior roles makes companies look fragile and ill governed. What sort of a company do you think you are if you haven't got people who can do those top roles?"
In the UK, the average CEO tenure has shortened by 18 months in the past decade, so knowing where the next leader is coming from and giving the organisation the time to prepare for it is more pertinent than ever. And while it might be wishful thinking to believe all senior roles can be filled with internal candidates, it is worth aiming high. Succession planning is most crucial for the very top jobs, but it is also important to consider those key roles that take technical expertise (59% of UK businesses anticipate difficulty filling roles that require expertise in science, technology, engineering and mathematics over the next three years), or a thorough understanding of different markets - "the people you can't run a business without," as Hirsh puts it.
If the UK is to climb out of recession, visible succession plans may also be necessary for an organisation to hang on to its best talent once the job market picks up. "In the past 18 months, we have seen more companies become aware of succession planning," says Clinton Wingrove, EVP and principal consultant at Pilat HR Solutions. "You've survived the recession, but can you survive recovery? Companies have cut themselves to the bone but held on to their best people. When the job market picks up, their best people are the ones who are going to leave." Dando agrees. "Having a good succession planning process in your organisation is in itself a statement of commitment to your own best talent," he says.
With all this talk of talent, it is only natural to assume that HR should play a leading role in any succession planning activity, right? Wrong, apparently. Evidence, both anecdotal and statistical, suggests that HR can be shut out of the process altogether when it comes to succession planning for the very top roles, with senior leaders preferring to do it themselves.
"When it comes to the high-volume, lower end of an organisation, HR owns the talent strategy, because it is just not very sexy," says Colin McKinnon, consultant at management consultancy Chemistry Group. "But when it becomes sexier - those higher-end, strategic jobs - the CEO suddenly takes note and wants to own it. That's an elitist view of the business and it risks feeling completely disconnected. HR slips back to being merely a support function."
The findings from a recent Chartered Global Management Accountant (CGMA) report on talent pipeline, carried out by the Economist Intelligent Unit and surveying CEOs, CFOs and HRDs around the world, make sobering reading for any HR director.
According to the research, 83% of HR directors feel they are responsible for talent management performance, but that view is supported by less than 30% of CEOs and CFOs. In fact, 65% of CEOs see CFOs as the natural lead when it comes to talent in an organisation. And there are further disconnects when it comes to talent strategy and succession planning. HR directors are far more confident about the strength of their organisation's talent pipeline, with three in four believing they have formal succession plans in place, compared with 57% of CEOs and only 12% of CFOs. This lack of conviction in home-grown talent on the part of CEOs and CFOs is even clearer when asked about their confidence that the company will not need to look externally to recruit senior roles: 36% of HRDs are confident it will not be necessary, compared to less than 10% of CEOs and CFOs. If HR is out of kilter with other senior leaders when it comes to talent strategy and succession planning, it can only be bad news for all parties involved, and the wider business.
If HR is not fully involved in the planning at the top level, "it becomes much more personal than about process and criteria", warns Wingrove. "It becomes a fundamentally different process and the danger is that it can smack of the 'old boys' club' if done badly." And as Hirsh says: "The higher up you go [in an organisation], the more people are tempted to be less and less objective."
Nikki Walker, managing director inclusion, diversity and sustainability, Europe, at technology company Cisco Systems, agrees that HR needs to be heavily involved in the process if succession planning is to be done fairly and objectively. "At Cisco, we are trying to break down that 'old boys' club', where it's just about who you know," she says. "We banned things. In a talent review, you are not allowed to say: 'He's a good guy.' That is not an acceptable way to describe someone. You have to be able to articulate what they are doing so well. We need tangible examples and competency-based discussions, rather than just reputation and that old boys' network. It is a challenge because if you sit in the majority, it's hard to recognise the challenges that anyone who isn't in that group faces."
According to the recent KPMG report Rethinking Human Resources in a Changing World, executives see succession planning rising up the HR function's to-do list over the next three years (20% compared with 17% for the past three years), but only 22% of executives think their HR department 'excels' in succession planning. So, what can HR departments do to prove their mettle and play an important role in this most critical of business activities? And what does the perfect succession plan and team behind it look like?
"The CEO and the top team must own the talent strategy, but that includes the HRD," says Dando. "I believe the CEO absolutely owns the talent strategy, but the HRD needs to drive it and be the custodian of the process and the standards embedded in it." According to Dando, there are "five things that make the difference" when it comes to succession planning. These are: strong CEO and line ownership; clear relationship to the business strategy, so that succession planning isn't just existing in a vacuum; clear accountability; focus on building individual and organisational capability; and skilled, strategic HR support. "Good succession planning benefits hugely from top-class HR support," he concludes.
British beverage multinational Diageo is an example of top-notch succession planning in action. While the chief executive, Paul Walsh, has been in his position for 12 years, this year saw the promotion of an internal candidate to the newly created post of chief operating officer (COO). This led to speculation about Walsh's imminent departure. In fact, Walsh has said that he will stay in his role for at least two more years, but that the appointment of a COO should help prepare the "lead internal candidate" to take over - if he proves himself up to the job.
Central to succession planning at Diageo is HRD Gareth Williams, who believes it sits firmly in his remit. "Who has ultimate accountability for the rigour and discipline of the process? I do," he says. "I don't have to force my CEO or other executives to do anything in this space. They totally get it and would take full accountability. There's so much at stake: you can't afford to have a difference of view. You get the wrong leader and that could cost you tens of hundreds of millions." At Diageo, an intensive and formal process means succession planning is firmly on the board's agenda and talent incubation for senior roles is very much part of the company culture. An in-depth annual review is supplemented with what Williams calls "constant honest conversation". A president's forum of regional leaders meets with the CEO, the COO and other senior board members eight times a year to discuss the leadership landscape around the company.
"The whole judgement process is very dynamic," says Williams. "We have talent pools: trying to match a group of individuals to a group of similar roles, rather than matching individuals to individual roles. We very rarely lose people from our succession pools, but we discuss it if we do. We are constantly trying to not only show the dynamics, but explain and report on them. It has got to be more than simple numbers. It is constant calibration."
Ah, numbers and metrics… they are crucial, but it seems that not all succession plans take them into account. In fact, one of the major issues with succession planning in those companies doing it is that they are not sure whether it is actually working. Simply, companies are not measuring their best-laid plans properly. This is an area where strategic, forward-thinking HR has a chance to make an impact.
"Succession planning ties up an inordinate amount of planning, energy and resources, so it is important that it delivers robust outcomes," says Dando. "But most organisations don't really know if it does. Organisations do all this work to create plans, but don't analyse implementation." In fact, less than half of the respondents in the CRF research say they track their succession plans and measure whether or not candidates fulfil the roles planned out for them (although Hirsh says the number of companies starting to measure it is increasing). "Succession planning shouldn't be an airy-fairy process," Dando continues. "Succession talent reviews should have the same rigour and edge as business reviews."
This lack of proper measurement and validation makes it "seem as if some companies are doing [succession planning] on the back of a cigarette packet", says Pilat HR's Wingrove. "Good succession planning isn't so much a measure of performance as of potential performance. And we will soon be able to measure potential. It might be marginally politically incorrect to say it, but there are certain criteria you can use: brain power, commercial acumen, political acumen."
Once you have identified the internal candidates who may have the potential to rise up through the ranks, how should you go about preparing them for the future - especially when we don't even have a clear view of what some of the jobs of the future will look like? According to Hirsh, it is important to strike a balance between improving general leadership skills and endowing candidates with specialist ones, such as having experience of doing business in China.
"You can send people on leadership programmes until the cows come home, but you won't have prepared them for the real job roles," Hirsh says. "HR has a role to play in thinking about how jobs are changing. What sort of CEO might the company want next? CEOs can tend to appoint in their own image. HR should be thinking about what needs to be different next time."
Showing how indispensable HR know-how and involvement are is crucial if the function is to play a key role in succession planning and to be heard in executive discussions. It should come as no surprise that this means a focus on external business needs - as well as what is going on in the department and the organisation as a whole. "HR should focus more attention on what the business needs and what else is going on in the marketplace," advises McKinnon. "You need to measure everything and show how HR can create value. Build a watertight business case for involvement."
And at the risk of going over familiar ground, if HR is struggling to get its voice heard when it comes to C-suite succession planning, then perhaps it needs to change what it is saying. As Hirsh puts it: "CEOs want the conversation in business terms, not HR terms. Talk in their language and challenge them in a constructive way." Cisco System's Walker agrees: "The CEO needs to recognise the value HR brings, but there is a big part of HR stepping up, playing the business partner role and being able to relate the people part of the discussion to overall strategy. It doesn't sit alone; it has to be integral. That requires HR people who are able to have a business conversation."
"You can't do anything until you have the right conversation," says Williams. "If you feel there are tensions, you have got to put them on the table. More process doesn't solve that kind of issue. It might paper over the cracks, but it won't solve anything until you have got completely aligned orientation at the top. Tensions are not uncommon, and it can be difficult. HR often resorts to selling process when the more fundamental issue is being skirted around. There needs to be trust in the judgement of HR, otherwise you can resort to unnecessary complexity."
There's an ancient Chinese proverb that says: "A person who does not worry about the future will shortly have worries about the present." That person could be CEO, it could be CFO, or MD, or HRD. The important thing is that conversation around succession planning is open, honest and collaborative, so that organisations and their many stakeholders can stop worrying about the present and face the future with confidence.