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Why do so many boards struggle with CEO succession planning? Despite being one of the most critical responsibilities, few boards have a solid plan for CEO transition. The statistics tell a sobering story: according to Stanford University, only 23% of CEO replacements are voluntary and well-planned.
Let’s face it: having just a “good” CEO isn’t good enough. The CEO serves as the vital bridge between the board and the company’s team, making succession planning crucial to long-term success. But here’s where it gets tricky: many companies combine the role of CEO and Board Chair, especially when the CEO is a co-founder. This setup is like checking your own homework – it requires exceptional maturity to work effectively.
Effective Performance Management
Before diving into succession planning, boards need to establish clear performance management systems. This means setting formal objectives that align with increasing company value, regularly assessing progress, and providing constructive feedback. But how does this work in practice?
Three essential ingredients make up an effective CEO performance management system:
📌 Plan clear objectives for the year – focus on 3-5 key goals that might include financial KPIs, major project milestones, or organizational development targets
📌 Review performance quarterly through in-camera sessions (board meetings without the CEO present)
📌 Provide direct feedback through the Board Chair or Lead Director, maintaining a balance of honesty and respect
Planning for CEO Succession: When and Why
Here’s a hard truth: most CEOs procrastinate on succession planning. Whether it’s habit, fear of losing power, or looking for an external savior, the reasons are many. However, effective CEO succession planning needs to start early – ideally after the first 100 days of a new CEO or once product-market fit is achieved.
While being ready for eventual CEO succession is important, you have to always keep in mind that making a CEO change carries significant risk. You need to thread carefully and assess the severity of the situation and in which specific area(s) the incumbent underperformed. Here are the key situations that typically trigger this decision:
📌 Consistent underperformance in company valuation or operations
📌 Strategic shifts requiring different leadership skills
📌 Serious one-time events affecting reputation
📌 Changes in shareholder structure
📌 Significant misalignment between company needs and CEO capabilities.
Understanding CEO-Company Fit
A crucial factor in these transitions is what we call ‘CEO-Company-Fit’. As companies evolve, the skills and leadership style that worked in one phase might not be optimal for the next. For example, a technical founder CEO might excel during product development but struggle when the company needs to focus on commercial scaling. The board needs to regularly evaluate if there’s still a strong CEO-Company-Fit and whether the current CEO has become a ‘Reluctant CEO.’ That’s someone who might be better suited focusing on their core strengths rather than general management.
Making CEO Succession Work: The How
When addressing these fit challenges, conventional wisdom might suggest looking externally for a new CEO. However, research and experience point to some surprising insights. Internal promotions often work better than external hires (even if the internal candidate is only 70% ready). And if you must go external, a rookie CEO can be a better choice than a seasoned veteran. This is why developing a strong bench of leaders under the current CEO is crucial. It lets you prepare for tomorrow while making the most of today’s leadership.
Managing the transition is where it can become really tricky. The handover process requires strategic thinking and careful planning. The board needs to manage the current CEO’s exit as thoughtfully as the new CEO’s entry, provide extra support during the first year, and ensure a clean break with the previous CEO. Most importantly, maintain at least two backup candidates at any moment – because succession needs can arise unexpectedly.
Beyond CEO Succession: Evolving the Board
As companies grow and evolve, boards must adapt too. When responsibilities multiply, it makes sense to divide work through committees – typically starting with audit, compensation, and nominating committees. Organizations typically increase the number of directors to accommodate more complex requirements. This often includes independent non-executive directors who bring specific expertise.
The infographic below illustrates how effective boards evolve together with the business.
Key areas for expanding board expertise:
📌 Industry specialists who understand market dynamics
📌 Operational experts with scaling experience
📌 Financial professionals for complex transactions
📌 International leaders for global expansion
📌 Technology experts for digital transformation
Think of it as growing your brain trust along with your business. Just as your management team needs to adapt to stay ahead of increasingly complex challenges, your board must evolve to serve the changing needs of the business effectively.
Smart boards know the secret: start planning for succession before you need it. Through focusing on developing both current and future leaders, and creating clear processes for transitions, you’re ensuring your company can thrive through any leadership change. After all, the goal isn’t just to survive today’s challenges, but to ensure tomorrow’s success through thoughtful succession planning.
Stay tuned for our next chapter on Improving Board Dynamics and Decision-Making. Additionally, you can find our previous articles on Understanding Board Responsibilities and Governance or Board Strategic Planning and Execution Oversight, you can find them here.
