HR's role in strategic succession planning
With greater scrutiny on how organisations are governed and led, now is the time for HR to take charge on succession planning
US news website Observer described 2019 as the ‘year of disappearing CEOs’ in an article that went on to list a raft of top executives who resigned abruptly or were ousted in disgrace.
The CEO position seems to be more insecure than ever. Research firm Challenger, Gray and Christmas found that nearly 1,500 CEOs of US-based companies/subsidiaries exited their posts between January and November in 2019, marking a jump of 12% on the same period the preceding year (a record increase since the firm started tracking this stat back in 2002).
“A CEO can go from being invincible to shockingly dispensable very quickly,” says Keith Robson, an interim people officer who has held senior HR roles at M&G Investments, NATS, Rolls-Royce and Aviva. “Some would argue that’s why they get the big bucks – because, on average, the tenure is 3.5 years then they’re out.”
This volatility is set to continue, according to experts like Paul Aldrich, co-author of Building An Outstanding Workforce. He says: “Stakeholder pressure through social movements, 24/7 public judgement through social media, and regulation will all combine to intensify the pressure on CEOs. CEO development and ongoing support require more thought than ever.”
‘Shamed’ CEOs of 2019 include Expedia Group’s Mark Okerstrom who was sacked by the board for under-performance, Away co-founder Stephanie Korey who was accused of creating a toxic workplace culture, and Warner Bros. chairman and CEO Kevin Tsujihara who resigned amid a flurry of accusations about an inappropriate relationship with an actress.
When a CEO exits a company, particularly with a cloud over their head, it can have a phenomenally damaging effect on share price.
When McDonald’s fired its chief executive Steve Easterbrook for breaking its personal conduct policy by having a relationship with a colleague its stock price plummeted by $4 billion.
Similarly, unicorn tech start-ups like WeWork and Juul suffered seismic falls in their IPO valuations that were linked to poor CEO performance last year. But even if a CEO is deemed to be failing there’s often the hefty expense of a ‘golden parachute’ exit payout. Yet another blow to the bottom line.
Given how much the younger generation looks to company figureheads to demonstrate corporate values, organisations cannot keep ignoring this fundamental strategic issue.
Yet, despite knowing how business-critical these individuals are, even companies with robust talent processes in place often don’t have a clear succession system for the top jobs.
“It’s not done well anywhere,” says Robson, drawing on his vast experience working in industries from retail to finance in many different countries.
“It saddens me that my profession [HR] can’t get its arms around this and drive it forward in a commercially-astute way that is going to help businesses. And it annoys me that the businesses don’t want to engage in the dialogue. There’s a lot of admiring the problem without doing much about it.”
However, this might all be about to change. The updated Corporate Governance Code published in July 2019 could be the much-needed catalyst for overhaul and lend HR a hand in ‘getting its arms around’ succession planning. As well as stipulations on culture and stakeholder engagement, the Code places much more emphasis on executive succession planning than it has done historically.
It states, for instance, that annual reports must now ‘describe the nomination committee’s work in the annual report, including appointments, succession planning, and pipeline diversity, linking this to company strategy and reporting the gender balance of those in senior management’.
Given that this new Code will likely see the NomCo rise to greater prominence over the next year, the big questions for HR are what role should and can it play in this reinvention?
HR steps up
Helen Pitcher is chair of board effectiveness consultancy Advanced Boardroom Excellence, as well as holding various chair and board executive roles. She believes that the new regulations present HR with a “superb opportunity” to raise the profession’s profile and underline the huge value it can bring to the business through effective succession planning.
“The average board doesn’t have a huge insight into succession planning,” she says. “But boards are looking to appoint people with a broader range of skills. An HRD can now say to a chairperson ‘would you like me to design and run a skills audit?’ If the chair rates the HRD then the HR team has a superb opportunity to lead here.”
The operative words here are “if the chair rates the HRD”. One of the biggest barriers to HR playing a leading role is its lack of credibility in the board’s eyes.
In research by the Center for Executive Succession virtually all board members consulted made the distinction, when talking about what constitutes effective succession planning, between HRDs who they saw as having credibility and those who they didn’t. Some even said they had never seen a credible HRD.
Bharat Shah is the chair of analytics and behavioural science firm iPsych Tech. He was formerly CEO of Kodak, as well as chairing multiple NomCos and RemCos and being the deputy chair of the Audit Commission. His impression of the HR profession from his many board experiences hasn’t been good so far.
“They are more used to being in their comfort zone, doing the transactional work as opposed to the strategic work and helping leaders. They need to up their game,” he says.
Succession planning, and its elevated purpose in boards’ eyes now, is the perfect platform on which HR can step up. He adds: “The change in the Governance Code requires measuring and improving succession planning. HR can add value here, really take control and be seen as a shining light leading on this critical driver of the business. The Code is a great stroke of luck for every HRD, which they can use as leverage.”
Raising HR’s credibility is, according to Pitcher, a balance between having “actual capability” and being seen to have that capability. When she says this to female HRDs in particular she often gets a negative reaction to self-promotion, networking or – as they often put it – ‘schmoozing’.
“When I ask how much time they spend networking they’ll say things like ‘it’s so smarmy, I really don’t like it’,” says Pitcher. “But networking is about increasing your external radar and sharing your views with other people and the board. I reframe it and ask them why they would deprive their organisation of their skills and capability. After all, if you don’t tell people about what you do you are not going to be visible to the board.”
Incidentally, this common female reaction of shying away from networking is a contributing factor to the lack of gender balance generally at CEO level and within the CEO talent pool.
Another common scenario that Pitcher has come across is that an HRD’s name may come up in conversation among the senior executives, but many of them aren’t sure if they have met them. This is why taking every opportunity to share expertise is so crucial. This could be something as simple as a “corridor conversation”, explains Pitcher.
“While you’re exchanging pleasantries with a board member you can ask them what is on their agenda at the moment. Remember, you’re in the business much more than the non-executive directors and they’ll probably be really pleased you shared your insights with them. It’s about getting that air time with them. If you only rock up once a year to go through a succession planning exercise you don’t have licence to play at that higher level.”
To be taken seriously HRDs also have to talk to the board in their language. Not in ‘HR speak’.
The most effective way to raise credibility as an HRD is to impress them with commercial insight. If you lack confidence in, for instance, reading a P&L account then Pitcher advises sitting down with the CFO and addressing this insecurity head on.
Ideally you want to be able to look at a balance sheet and P&L and quickly identify key insights into the health of the business. What you’re aiming to do is confound any negative expectations about the HR profession.
Another characteristic that came up repeatedly in The Center for Executive Succession’s research as a way to raise HR credibility in the board’s eyes is courage.
A number of board members interviewed for the research acknowledged how difficult it can be, but how valuable, for an HR specialist to air a view on succession that differs from the CEO. Board members recognised, and welcomed, the courage necessary to express this independent opinion.
As one said: “The CHRO can give feedback to the successor and the board from a different courageous point of view, independent of the CEO.”
This avoids the not-uncommon scenario where the CEO has a fixed idea of who should replace him/her, which may be based on an unconscious bias.
The HRD can also demonstrate courage in succession planning by calling companies and boards out on their hypocrisy when it comes to people issues.
While many a CEO loves a soundbite for the press on how ‘people are at the heart of our business’ or ‘our most important resource is human’, this commitment often isn’t followed through.
As Shah says, there is a “disconnect” between what organisations generally say about their people being important and the minimal time they spend at board meetings considering people-related issues. The new Code could be HR’s chance to pull the board up on this.
“People are always an afterthought. Only when there is a problem with people does the board look at it,” says Shah. “Take a look at the board agenda. Do people, career development and succession planning feature at all? Often they either don’t feature, or it is a once-a-year small item on the agenda.”
By instilling confidence and cementing their capability in these ways – strategic focus, commercial acumen, visibility, proactivity, courage – HRDs can win the ear of the CEO and gain their trust when it comes to succession planning, more than any other function.
It should be remembered that for most CEOs considering their own succession or would-be CEOs wanting to step up, this is a time of some emotional upheaval. This can be an opportunity for HRDs to build trust with key executives even further, as they can take on a coaching role essential to the smooth running and commercial health of the business during transition.
For the HRDs already in this position, where they are valued highly by the CEO and board, the new regulations are a no-brainer.
“The way I see it is that if I’m doing my job and operating well then I’m automatically going to be following the principles of the Code,” says Jill Tennant, group HR director at Diploma. Tennant has been in her role for eight months and describes succession planning as the “number one thing that occupies my mind”.
In all of the companies she has worked in she has seen the challenges of CEO succession planning and the disruptive and expensive consequences when things go wrong. They hit home the vital importance of the HRD in the process. Having never had an HRD before, her company is 100% behind her drive to put good succession planning at the heart of the business.
“It’s hard for a board to really get under the skin of a business and understand what skills are required. HR plays a critical role in bridging that gap and having that level of understanding and knowledge to share,” she says.
More than any other role HR understands what kind of leader the company needs in the months and years to come. One of the biggest mistakes boards and CEOs can make when succession planning is to focus on the skills necessary in the present, rather than thinking about future-proofing the organisation via its human resource.
HR can be critical here in creating forward-thinking job specifications, and translating what skills are needed for the next stage of the company’s strategy into a clear description for others of the type of person they need to recruit and why.
The first change, or re-education, that Tennant is making in colleagues’ minds is away from the idea of succession planning to one of management.
“It’s much better to think about succession management. Planning is a concept that is a bit theoretical, whereas management is more active and in depth. You’re taking control of the situation rather than just scenario planning. You’re not waiting until something happens,” she says.
You’re also not just filling roles when they become vacant. You’re managing individuals so, even if they stay in a role, they are constantly developing and creating value for the business. To Tennant if an individual is still doing their job in exactly the same way after three years then that is also not effective succession management. So too is losing a valued employee because they have not been supported after they have gone for a promotion but not got it.
“There is often some fallout in these situations,” she says. “But so often processes are not managed well and there’s unnecessary fallout and more could have been done to manage this part well. HR can add a huge amount of value here.”
With the cost of recruiting top executives so high, losing unsuccessful candidates is often a hidden cost of poorly-managed CEO succession planning.
To reduce fallout as much as possible Tennant prioritises time with internal potential future CEOs, and other senior roles, talking about their development and where they are on their path to the top.
While doing this she’s open about whether the company is looking externally too, and through these discussions looks to make it clear why – should an external candidate be chosen – this was the case and what the internal candidate can learn from this person if they stay. This again requires courage because these conversations can be tricky.
Another HRD who has the ear of his CEO and is recognised for the value he provides in succession planning is Eugenio Pirri, chief people and culture officer at the Dorchester Collection and an HR magazine Most Influential practitioner. He, like Tennant, believes that succession planning should already be central to any HRD’s strategy, new regulations or not.
“If you’re in HR and you’re not thinking about succession planning then bad on you,” he says. “We have a responsibility to future-safe the business.”
Talent pool diversity
Pirri feels strongly that HR has a responsibility to foster diversity via succession planning. This can be challenging because of the lack of diversity in the CEO talent pool, but research suggests that companies are not doing enough to seek out diverse candidates.
In the Center for Executive Succession’s research almost 20% of respondents reported that their firms are ‘doing nothing’ to boost the diversity of the CEO talent pool.
Pirri, by contrast, is active when it comes to presenting a diverse pool of candidates to choose senior executive talent from. He’s a big believer that you can find the right diverse talent “if you really want to”.
Pirri recently led the recruitment of a CFO that resulted in the appointment of a female – a highly unusual feat in the hotel industry. He admits he had to work hard to find good diverse candidates and initially presented a shortlist of 20 men and four women, which was then narrowed down to two women and four men.
To widen the pool for talent at exec level he also invests time following potential candidates as they journey through their careers, both internally and externally.
However, he cautions against relying too much on online data when it comes to people. Much more valuable are the “stories you hear” from people who have worked with them: “Being the ultimate leader is about the decisions they make, their vision, how they bring things forward and how they remain consistent in an ever-changing world. You don’t learn that from a LinkedIn profile.”
Making decisions based on evidence is crucial to good business practice today, which is why data analysis is fast becoming core to every discipline, not least HR.
Analysing data in sophisticated ways can help in succession planning by, for example, mapping the core competences necessary for success against your future strategy and identifying which candidates have these from tools like psychometric tests.
However, Sharron Pamplin, partner for HR at Deloitte, states that when it comes to recruiting a leader you can’t rely on a spreadsheet.
“You must balance the need for the process to be disciplined and data driven but also people centred,” she says. “You have to ensure the individuals are at the heart of the experience. We can forget sometimes that this is about people and be too led by the data. An organisation can end up being dispassionate if too data driven.”
In her opinion one of the most powerful contributions HR can make is creating opportunities for the executives and the board to get to know key people in the business in a “more human way”. Establishing a ‘two-way dialogue’ means understanding them as a person, their ambitions, their motivations and their interests.
This clearly helps when appointing a CEO but Pamplin believes that the most successful businesses in the future will be those that lessen the importance of the CEO and move towards a model of having ‘talent pools’ at the top.
As we’ve seen with the ‘disappearing’ CEOs of 2019, the top job is a precarious place to be and Pamplin argues that some of the risk, damage and expense can be mitigated this way.
“We’re experiencing unprecedented change,” she says. “Different skills and capabilities are required. We’re moving away from this being delivered by one or two people at the top. We are moving to develop a cadre of talent who can fulfil any number of key value-creating roles. It’s definitely not just about the CEO anymore.”
This piece appeared in the February 2020 print issue. Subscribe today to have all our latest articles delivered right to your desk