Formal succession plans ensure more careful and efficient CEO turnover decisions, and reduce the economic and organizational disruptions that can undermine a company in the wake of a CEO’s departure.
The departure of a CEO inevitably leads to disruption and uncertainty — from a nervous workforce unsure of what the future will look like to the markets monitoring carefully the performance of a new leader in a new situation. Often, other top managers may decide that a leadership change is a good time to leave the company.
A new study based on 17 years of CEO turnover data reveals the extent to which having a rigorous, formal succession plan in place can reduce these and other negative effects — including making an inefficient decision to terminate a CEO in the first place.
Specifically, the data showed that a formal succession plan:
Succession planning is much more than just creating a strong leadership pipeline for your company. As this in-depth study of more than 3300 public companies experiencing CEO turnovers between 1993 and 2010 reveals, succession planning can ensure that management turnover decisions are appropriate and timely, that any negative impact from turnovers are short-lived, and that new CEOs are welcomed with a compensation structure that links their interests to shareholder interests.
The results of this study are unequivocal: the return on time and investment in succession planning is invaluable in terms of the nature and efficiency of turnover decisions — and in terms of the company’s prospects after the new CEO is in place.
Changing of the Guards: Does Succession Planning Matter? Dragana Cvijanovic, Nickolay Gantchev, Sunwoo Hwang. SSRN (November 1, 2016).
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