With more than half of companies failing to plan for CEO succession, the topic needs to become more prevalent at meetings.

In a relay race, dropping the baton is catastrophic. All the advantages and momentum gained up to that point in the race are lost. Even the most talented teams have a slim chance of recovering from a dropped baton.

The same can be said when it comes to CEOs passing the baton. Getting succession wrong has profound implications. It impacts shareholder returns, disrupts business continuity, creates unnecessary business risk, creates organizational anxiety and ultimately threatens corporate reputation.

Boards that take their role as guardians of the organization seriously know that CEO succession planning is their most important strategic responsibility. Many boards, however, fail to act on that knowledge. According to a survey conducted by SHRM in 2021, 56% of companies do not have a succession plan in place. Of those that have a plan, 24% say it is “informal.”

Boards struggle to prioritize succession planning for a number of reasons. In some cases, the presence of a well-performing CEO makes the task seem unnecessary or they fear that broaching the subject may upset the incumbent CEO. In most cases, the board is too busy with matters that seem more urgent or weighty to establish a regular cadence of revisiting, assessing and updating their CEO succession plan. Statistics shared by Harvard Business Review show that 54% of companies do not have an effective planning process for CEO succession and 41% do not regularly discuss CEO succession.

As boards assess the strength of their CEO succession planning, here are factors that should be strongly considered.

CEO Tenure

Failure to appreciate the brief tenure of most CEOs is one of the biggest shortcomings boards bring to this area. Statistics show that the average CEO stays in his or her position for less than seven years. Despite this short time frame, only 54% of Fortune 500 companies report that they are actively developing a successor for their CEO. An alarming 40% say they lack even a single internal candidate for CEO succession.

Boards must embrace the reality that succession planning is a continual process, one that should be a prominent and periodic topic on the board’s agenda. Annual or biannual talent discussions should include a focus on internal candidates for succession. In addition, the board should stay well-informed of potential external candidates who could fill the role.

Integrating succession planning into the board meeting agenda on a regular basis will eliminate the awkwardness that can surround the topic. When it is treated as a one-off conversation, succession planning is more likely to create friction between the board and the current CEO. Ideally, the goal is to destigmatize the subject matter and include the CEO in the conversations. At the very least, the CEO should be held accountable for developing the organization’s internal succession bench in partnership with his or her chief human resources officer.

The Evolution of CEO Responsibilities

Boards cannot focus on selecting a successor who will be effective in managing today’s challenges. Rather, they must develop a vision for a CEO who can lead them into the future. Succession planning should involve an extensive CEO profile scoping exercise with the next three to five years in mind. Boards must acknowledge that the challenges and obstacles that got the company to where it is today will likely not be the same things they’ll face going forward. They must determine what gaps might need to be filled to be successful in the future.

The people factor is a critical factor that boards must consider when developing a CEO profile. Understanding balance sheets, profit and loss statements, and other business mechanics is no longer the most important CEO skill. Now, CEOs need to be able to motivate people and help them to connect with a purpose. They need to be experts in talent, leadership and cultivating resilience. They also need to guide their organizations in engaging with the social issues that are driving the culture, such as climate change, income inequality and the implications of AI on employees.

To address the increasing complexity of the CEO role, some boards are looking at nontraditional successors. Should boards choose a nontraditional successor, they may need time to help that person develop key skills that have not been a part of their background, a factor that further highlights the need for ongoing and future-looking succession planning.

Bringing Heart to the Equation

As boards carry out CEO succession plans, they must prioritize the identification of candidates who lead with their hearts as well as their heads. 
 
In today’s society, the need for businesses to look beyond the numbers has become more apparent. Getting your ESG proposition right links to higher business value creation and generates wealth. Research suggests that exemplary ESG behaviors can improve financial results including the top line, capital costs and a firm’s valuation. Sustainable practices improve shareholder satisfaction as well. Businesses who play the long game and satisfy customers, stakeholders and partners, as well as employees, remain attractive as potential employers (especially to Millennials and Gen Z), create jobs, increase tax revenue and raise the standard of living, thereby improving the communities in which they operate.
 
Today’s workforce is also dealing with an exceedingly high level of stress — the pandemic, inflation, mass layoffs and civil unrest. Employees are carrying a lot into the office with them. A CEO who does not lead with empathy, compassion and a deep appreciation for people both inside and outside of his or her organization will struggle to be effective in the business world.

In a business world that is experiencing exponential change, organizations that simply ride the wave of change will not remain relevant. Rather, they must anticipate and prepare to meet the challenges that the future will bring. For boards, CEO succession planning is a key component of that preparation.

Naveen Bhateja is EVP and chief people officer at Medidata Solutions.