Succession plan is often ill-executed

Most firms lack proper in-house succession planning; and often don't spend enough time, energy and resources in planning for the same

The hunt is on to find a candidate to occupy the most coveted corner room in the country’s largest private bank; another bank in the peer group has sought the banking regulator’s approval for an internal incumbent as the most likely candidate. It brings to the fore the issue of succession planning, especially in financial services.

The last two years have seen as many as seven new CEO appointments in banks, a dozen-plus in insurance companies, and a few more in the larger financial services’ ecosystem. This has ensured the topic remains hotly debated and fresh, both within corporate circles and the executive search fraternity.

The fact that as many as 60 per cent of the times, the CEO candidates end up being external hires is an indicator of the level of preparedness of organisations and their boards to find replacements internally. When I compare the data on CEO hiring in other industries within India as well as overseas, 55 per cent of the candidates are again external. Global reports indicate that the successor ends up being a mis-hire half the time. And the cost of getting a CEO-hire wrong can often peg firms back by as much as 100 times the compensation of the candidate, and even more for larger companies!

I often wonder if CEO hiring is one of the most important tasks, then why is it that companies get it wrong so often? One reason, of course, is that most companies lack proper in-house succession planning; and very often, don’t spend enough time, energy and resources in planning for the same. Another could be that average CEO tenures are coming down globally — one would be extremely lucky to survive 24-36 months of lacklustre performance. The fact that the business environment is generally getting tougher, coupled with lower tolerance levels of boards, along with wider availability of jobs (all of it being a vicious cycle in my view), means that CEOs are getting replaced faster. And hence, this may not generally be leaving enough time and stability needed for companies and their boards to prepare for succession.

In the case of the banks I started out with, where the incumbents have been in place for a very long period, it is unfortunate that they haven’t been as meticulous in their succession planning. In a few other banks, it was due to circumstances beyond their control – be it regulatory guidance, potential successors losing out to external competition, or simply running out of patience.

One has to be extremely lucky to have a readymade solution available in-house. But then, only a few are born CEOs, and most candidates have to be groomed for the job. I always advise that the planning process should start at least 24-36 months before the due date, with a list of potential successors identified internally, and being put through a rigorous assessment and development process. Also, the successor should be identified and communicated to 12-18 months in advance, which allows sufficient time for the person to settle in, and fine-tune the skills needed. After all, there is nothing better than being paid to learn!

If it is clear the successor clearly doesn’t exist in-house, my advice would be to engage a specialist firm to identify one two years in advance, and on-board the person at least 18 months before D-day. The key is to communicate properly within the organisation to potential aspirants, as well as drawing a clear charter for the person to come and learn. As the CEO role is a major step-up, expectations can be laid out with complete clarity. I often find organisations missing more than a trick by not being clear in their communication, thereby giving wrong signals, which makes the process a mess.

Agamjeet Dang is Managing Partner, Executive Access (India)

Inputs from Arpita Garg, Partner at J Sagar Associates