Succession Planning

“Succession Planning” - define in the context of corporate governance and explain why a failure to plan a successor can cause a company problems.

Succession Planning

Succession Planning is where a board of directors, usually through its nomination committee, tries to predict when senior members such as the Chairman or CEO are likely to leave so that replacements (i.e. successors) can be identified and put in place for an effective handover. 

Often a Chairman or CEO will give up to a year’s warning of their intention to leave, and will be prepared to be flexible on the actual date so that they can be available to handover to the new person. However, sometimes the person leaving will be going to a similar role at another company, so flexibility may be impossible.

As such it is essential that suitable candidates are identified as early as possible and “sounded out” about joining the company. Sometimes this will be done before the existing person decides to leave, meaning that negotiations with the replacement may have to be very confidential. It is typical of the Press to speculate about who a successor will be, especially at the largest companies with the highest profile, so it is essential that a company has a plan in place to avoid doubt and uncertainty about the way forward.

Problems

If succession planning is not done, or is done badly, a company may find itself having to appoint an “interim” person to fill the gap. This will mean that the person has to change again very soon after, which is hardly good for board continuity and suggests a lack of planning to outsiders such as the company’s shareholders. Worse still, a company might find it has to appoint an unsuitable candidate because it has no other options available, or may have to breach corporate governance.