CEO Succession Planning: A Comprehensive Guide for Leaders
The best companies often seem inseparable from the drive, vision, and personality of their CEOs. No wonder even giants like Starbucks and Disney have struggled to fill some very BIG shoes in recent years.
CEOs who don’t want to get dragged out of retirement to rescue their life’s work — or worse, watch helplessly from the sidelines as the company fails — need a succession plan that ensures a smooth transfer of leadership and a path to long-term sustainability. In this comprehensive guide, we’ll discuss keys to effective CEO succession planning, lessons from some high-profile stumbles, and why the way you step away could determine if your company keeps Making BIG Happen for years to come.
1. Why Getting CEO Succession Right is Crucial
CEO succession planning is kind of like estate planning: we tend to avoid it as long as possible because we don’t want to think about life, or business, without us in it. But the longer you delay putting these plans in place, the higher the risk of external events forcing change upon you, your family, and your organization.
Even if you have years in the BIG chair ahead of you, start planning for an exit that’s going to maintain continuity in three important areas:
- Culture and Morale A smooth transition of CEO leadership can maintain and even enhance the organization’s culture. If you hand off the baton and business goes on as usual, your employees, customers, board members, and shareholders are going to appreciate just how strong the company’s core values, vision, and mission really are, and how effective you were at weaving them into the very fabric of the business. Botch the transition and that culture could crumble, sending top talent out the door after you and customers across the street to your competition.
- Growth Momentum You don’t want to leave behind a company whose stock price or private valuation plummets as soon as you clear out your office. Key stakeholders — and Wall Street/private equity — like stability and continuity. Your CEO succession plan should demonstrate both, as well as a path to continued profitability.
- Strategic Direction Your leadership transition should say something about the direction of the company. How are you and your successor planning to build off past successes toward a bold vision for the future? If your company is faltering, you may need a successor who will make tough decisions, recast the vision, and create a new path to growth. Further down the ladder, how — if at all — will your departure affect other C-suite positions, strategic partnerships, and institutional relationships (banks, governments, etc.)?
The judgment period for your success as a founder or C-suite executive does not end when you give up the big chair. Your legacy includes how you set up the company to perform after you leave.
Jack Welch, the former CEO of GE, was revered during his time as CEO due to the company’s consistency of rising earnings, rising stock price, and the “celebrity” nature of Welch as a management guru. But in the two-plus decades since his 2000 retirement, the company has floundered and “went into a tailspin from which it would never recover.”
The impact you make during your time as the leader can reverberate long after you leave. Keeping that in mind underscores the importance of leadership and the trajectory you set for the company.
2. The CEO’s Role in CEO Succession Planning
Even if you’re a hired gun rather than a retiring founder, it’s your responsibility to position the business to succeed without you. In many cases, that starts with identifying a successor or a potential candidate pool. Once a decision has been made, everyone has to align around that transition plan — including CEOs who don’t have final say and might not agree with a board’s decision.
A CEO succession plan with a longer runway can give the departing CEO months or even years to mentor their successor. Share your intimate knowledge of the organization’s operations, culture, and strategic plans. Include the new CEO in any major decisions, as well as your annual planning session. Open up your professional network to the new CEO and organize a few friendly dinners to build new relationships. Help the new CEO get the lay of the land in the board room.
And once you do begin to step aside, stay out of the spotlight. A successful CEO looms large over a company, even after they’ve left. Give the new CEO the space they need to establish their authority and make their mark. If anyone sticks a microphone in front of you, offer your unconditional support and encouragement.
3. The Board’s Vital Contribution to CEO Succession Planning
Regardless of who ultimately chooses the next CEO, departing CEOs will have to work closely with their board members on this transition. Your input and knowledge will be valuable, but the board will largely be responsible for oversight, due diligence, and balancing the needs of the company with shareholder expectations.
Whether you’re grooming an obvious successor or conducting an open search, this process needs to be fair, transparent, and timely. The CEO and the board should be clear on who is responsible for what, particularly regular updates to stakeholders on how the CEO succession plan is progressing. The interview process should be as standardized as possible, including who is present at each round, so that all candidates feel they’ve been given an equal opportunity. The board might also consider retaining an external recruiter or an executive coach who can provide an additional level of oversight and a fresh perspective as your search narrows.
4. Internal Versus External Succession Planning
There’s no right or wrong way to decide who’s next in line. Promoting a leader from your C-suite, passing the reigns to your eldest daughter, hiring from outside the company — all of these options can work.
And all of these options will rub someone who’s passed over the wrong way.
What’s important is that the CEO and board identify what the company needs going forward, and who the best person is to lead the company towards that vision. Let’s briefly consider some of the pros and cons of internal and external CEO succession planning.
Internal Succession
Pros
- Continuity Elevating a familiar face sends a message to key stakeholders: everything that’s good about this company is going to stay good.
- Familiarity with Organizational Culture A qualified internal candidate already understands the company’s culture, operations, and strategic objectives. That lowers the learning curve, shortens the onboarding process, and smooths acceleration toward the company’s next target.
- Boost Employee Trust and Morale Promoting from within can ease workplace tensions around job security, operations, and goals. Seeing a CEO work their way up through the ranks can also be aspirational and help to retain ambitious talent.
Cons
- Not Enough Change The same continuity that keeps your company plugging along might also perpetuate lingering inefficiencies, blind spots, or cultural deficiencies.
- Limited Perspective and Experience If an internal hire has cut their teeth with your company, your company might be all that they know.
External Succession
Pros
- New Ideas and Strategies An external hire won’t just have a better chance of spotting a company’s problems, they might also have a more inspiring vision for where the company could and should be headed.
- Potential for Transformative Change Does the company need a fresh start without totally starting from scratch? An external hire can reset the scope of the company’s values and vision, whether that means prioritizing AI integrations or new diversity and inclusivity initiatives.
Cons
- Longer Integration and Onboarding The exiting CEO and board members might need to recalibrate business goals as they devote more time to helping the new CEO find their footing.
- Risk of Cultural Clash or Misalignment A bad leadership hire can kill a company’s momentum and damage culture. A bad CEO hire can be catastrophic and lead to a mass exodus of talent.
5. The Ideal Timeline for CEO Succession Planning
Again, the best time for CEOs to make a succession plan is before they need one. A 3-to-5-year window should allow for adequate identification and development of potential candidates and build towards a seamless transition. In the absence of a clear internal candidate, CEOs and boards might work with an executive recruiter to help craft a succession plan.
Given a longer time frame of months or years, the CEO succession plan shouldn’t be static. The CEO and the board should revisit the plan and the list of potential candidates as part of their regular meeting rhythm. The vision of an ideal candidate might need to adjust as the company reaches new milestones or faces new strategic challenges.
And, of course, that plan might need to accelerate if external events like a health issue or M&A opportunity move up the timeline. As in most things in business and life, if you have a plan in place for things you can anticipate, you’ll be in a much better position to pivot and adjust when things you can’t anticipate happen.
6. Handling Internal Candidates Who Don’t Get the Top Spot
Losing valuable team members who are passed over is an inherent risk of CEO succession planning. The potential for disappointment and resentment is high. This transition might also cause candidates, the new CEO, and board members to reexamine how everyone fits — or doesn’t fit — into the company’s next-gen org chart.
Once the CEO and the board have named a new CEO, it’s important to meet with internal candidates who weren’t chosen and explain your decision. Have an open discussion about what their expectations are going forward, as well as the expectations of the board and the new CEO. Talk about how these executives plan to align themselves and their direct reports with the new CEO’s vision. Consider moving high performers into other leadership roles within the organization. Provide training or continuing education opportunities that could help their professional growth. Greenlight an executive’s pet project, or put them in charge of a key initiative.
On the other hand, you might be sitting down with talented executives who either can’t get behind the new CEO, or who have plateaued within your organization. These can be painful discussions to have. But they’re also necessary now that the company’s new leader is in place. As important as a good CFO or COO is, the CEO will ultimately determine the company’s direction. Help anyone who can’t or won’t follow make a graceful transition to a new company…or to retirement.
Case Studies: Starbucks and Disney
In April 2023, Howard Schultz stepped down as CEO of Starbucks.
For the third time.
In a sense, Schultz never really left. After his first retirement in 2000, Schultz transitioned into the chairman role. He returned as CEO in 2008 as brick-and-mortar overexpansion and a dip in cafe quality and consistency had dragged down the company’s earnings. Schultz took over the CEO role again in 2022 when his original vision of Starbucks as a “third place” between home and work collided with COVID, the new grab-and-go economy, and workers who wanted better pay and more time at their first place.
In both instances, there’s a strong case to be made that Starbucks needed a leadership change. But as a board member, brand ambassador, and potential presidential candidate, Schultz maintained such a high profile that, to many observers, he still was Starbucks. Rather than work with its leadership on a well-defined CEO succession plan, the board seemingly kept Schultz on speed dial in the event of a crisis. Wall Street is still wondering: Can a company that’s so entrenched in its past find a leader who can ensure its future?
Bob Iger went a step further as he prepared to leave Disney: he put himself on speed dial.
Despite his own smooth transition into the CEO role in 2005, Iger wasn’t prepared to cede control in 2020. According to some observers, Iger groomed and then moved on from several potential successors in the 2010s before finally settling on Bob Chapek. But by creating a new “executive chairman” position for himself and making the new CEO his direct report, Iger was sending mixed signals to the company and its shareholders about who was still in charge and how much confidence he really had in his successor.
To make matters worse, Chapek wasn’t given a chance to set his own strategic vision for Disney. He largely inherited a plan from Iger and the board that was already in motion: more streaming, more movie and TV franchise sequels, and more spending. You could blame Chapek for raising the price of admissions to theme parks, which reeked of desperation and offended some of Disney’s best customers. But it was harder to blame him for how inflation and higher interest rates torpedoed the previous regime’s strategic plan.
Ultimately, Iger’s reservations about Chapek might have been justified. That’s still on his decision-making as CEO and his reluctance to plan a better succession. And once the decision had been made, Iger and the Disney board certainly didn’t do their new CEO any favors.
Plan Ahead and Get Succession Right
No one’s disputing that Bob Iger and Howard Schultz are business legends. But their struggles with CEO succession planning should be a warning to mere CEO mortals. Leaving a stable, successful business in the hands of a capable leader is a simple-sounding goal full of complex challenges. Prioritize your planning now so that when you’re ready to move on, your successor and your company will be ready to Make BIG Happen.
About CEO Coaching International
CEO Coaching International works with CEOs and their leadership teams to achieve extraordinary results quarter after quarter, year after year. Known globally for its success in coaching growth-focused entrepreneurs to meaningful exits, CEO Coaching International has coached more than 1,000 CEOs and entrepreneurs in more than 60 countries and 45 industries. The coaches at CEO Coaching International are former CEOs, presidents, or executives who have made BIG happen. The firm’s coaches have led double-digit sales and profit growth in businesses ranging in size from startups to over $10 billion, and many are founders that have led their companies through successful eight, nine, and ten-figure exits. Companies working with CEO Coaching International for two years or more have experienced an average revenue CAGR of 31% (2.6X the U.S. average) and an average EBITDA CAGR of 52.3% (more than 5X the U.S. average).
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