Edgar Paltzer is a Switzerland-based attorney-at-law who advises clients on the legal aspects of wealth structuring. This article will provide an overview of some of the main benefits of succession planning, outlining its importance in terms of safeguarding the future of any enterprise.
The first step in successful succession planning is to identify the most appropriate person to take over the leadership role of a business. In many instances, businesses look to their existing workforce, recruiting internally, although this may not necessarily be the case.
Succession planning enhances leadership continuity, with the departing CEO typically involved in the transition process and able to help select a permanent replacement rather than a temporary CEO, ensuring a smooth transition of responsibilities.
News of a CEO stepping down can have a negative impact on shareholder value as the market reacts to the uncertainty. Nevertheless, research suggests that immediately following the announcement, and for the first year of the new CEO’s tenure, companies with a succession plan in place typically see less stock return volatility than companies that don’t have one.
Companies with solid succession planning in place also link management turnover decisions with performance more effectively. Succession planning increases performance-turnover sensitivity, i.e. the link between the CEO’s performance and termination decisions. A company with a formal succession plan in place is likely to be less hesitant to dismiss a CEO who is performing poorly. At the same time, succession planning also reduces the risk of a CEO being let go for reasons that are beyond their control, for example an industrywide or economywide downturn that is beyond the CEO’s influence.
Succession planning requires business leaders to start with the end in mind, taking the time to clearly understand what they are looking for in terms of roles to be filled, requirements for those roles and what drives success at their company. They need to identify the key skills and competencies required to fill these specific roles, ensuring they are as inclusive as possible throughout the interview process to engage with the strongest incumbents.
Succession planning has numerous advantages, chief among them reducing post-turnover costs and aligning the new CEO’s and shareholders’ interests. Succession planning can also help businesses to make decisions related to newly-hired CEOs that are in line with the best interests of shareholders. For example, research shows that a company with comprehensive succession planning in place is less likely to pay a new CEO too much, instead achieving success by linking their performance to results.
