CEO succession refers to the process by which boards of directors ensure that their organization has the ability to sustain excellence in CEO leadership over time, with transitions from one leader to the next.^[1]

Commercial importance

CEO succession is one of key functions of a board of directors. Changing the head of an enterprise impacts company culture, board/CEO relations, and perceptions from multiple constituencies inside and outside the business. The disruption that occurs can impact performance in a positive, neutral or negative manner. Successful companies manage this process well in advance with a concerted set of processes and milestones. Effective CEO succession requires a well-defined program that ensures a supply of highly capable candidates ready to assume the CEO position whether through an unexpected event or a planned transition. Success or failure of a CEO transition is influenced by a host of obvious and non-obvious factors, many of them of a social/psychological nature. How these factors are managed can have an enormous impact on the performance and status of the organization.

Regulatory opinion

In an October 2009 release,^[2] the United States Securities and Exchange Commission effectively removed the ordinary business exclusion defense used by companies reluctant to disclose their CEO succession process to shareholders. The policy change allows for a new wave of corporate governance scrutiny, as regulators and shareholders increasingly focus on CEO succession practices. Staff Bulletin (SLB 14E) announced that, in principle, the commission no longer allows companies to exclude shareholder proposals based on an argument that CEO succession planning is an ordinary business operations matter. In reversing its position, the SEC acknowledged that poor CEO succession planning constitutes a significant business risk and raises a policy issue on the governance of the corporation that transcends the day-to-day business of managing the workforce. The change indicates that regulators have reframed CEO succession as a risk management issue and placed its responsibility firmly in the boardroom. Succession planning responsibilities are redefined as “a key board function” and “a significant policy (and governance) issue … so that a company is not adversely affected by a vacancy in leadership.”^[3]

Succession Options

CEOs can be put in place from multiple options available to any organization, some of which are:

• Earmarking and training experienced and high value internal candidates for taking over the role of an outgoing CEO.
• Promoters may prefer to elevate family members (co-promoters) as CEO, subject to Board of Directors approval and investor approval (in case of listed firms).
• Hiring external CEOs from similar industries, culture and business expertise. This is done by outsourcing the work to executive search firms.