Executive succession planning should be an ongoing board function. Best practice organizations are moving executive succession planning and leadership development from the human resources department into the C-suite and the board room in their pursuit of elevated business continuity planning. This is because the business and financial risks of executive mis-hires and misalignment can be as threatening to the viability of an organization as an operations failure or a major data security breach. Given the challenges faced by companies today on many fronts–and because few executives routinely consider succession planning and take stock of who’s on the leadership bench–senior management should consider institutionalizing a board-level function to oversee leadership development and executive succession planning and implementation.
Quantifying the Costs
Using a formula put forth by Bradford D. Smart, Ph.D., in his book, Topgrading: How Leading Companies Win by Hiring, Coaching and Keeping the Best People, I calculated that the cost of a bad hiring decision ranges from $2.4 million for a $100,000-per-year employee to a staggering $12 million for a $500,000-per-year executive.
Based on my years of executive search experience, I believe these numbers are close to the mark, but for discussion’s sake, let’s agree that the numbers are inflated. We will take the numbers down to a mere 25% of the researched amount, which means you’re still looking at a $3 million cost for a bad hiring decision involving a $500,000-per-year executive! Executive mis-hires and poor executive succession planning will cost you.
Million dollar mistakes are costly to your business, your shareholders and possibly your personal career. The lack of executive succession planning methodologies allows for mis-hired and misaligned executives to incur costs for their company related to sub-standard customer service, inadequate research, missed deadlines and sales targets, failed marketing campaigns, flawed accounting or investment strategies and so much more. Additionally, there are the up-front costs of recruitment and training, the severance you may have to pay to get an employee to leave and the costs of recruitment, training and ramp-up time for the replacement employee. The absence of executive succession planning spotlights that poor hiring decisions and the lack of a strong bench can be a significant drain to a department’s and company’s income. With business continuity and shareholder value in mind, board-level oversight of recruiting, leadership development and executive succession planning will result in better overall human resource allocation and improved competitive positioning.
From Costs to Business Risks
In their article published in the Harvard Business Review, “Growing Talent as If Your Business Depended on It,” Jeffrey M. Cohn, Rakesh Khurana and Laura Reeves argue that corporate boards have traditionally underestimated the role of a robust leadership development and executive succession planning system in risk management. They suggest the steady attrition in talent that occurs in the absence of an effective executive succession planning system leaves companies vulnerable to making poor decisions in any number of commonplace business scenarios, such as an acquisition or sharpened competition.
In lieu of the stand-alone, ad hoc activities used by human resources departments, these experts recommend board-level direction of smart, integrated, talent development and executive succession planning initiatives that are aligned with strategic priorities. Their ideal organization is one in which:
- HR provides development tools and facilitates their use
- Senior executives are deeply involved in sourcing and growing talent
- Business leaders are evaluated on their contributions to the organization-wide talent development and executive succession planning effort
Whether or not executive succession planning gets promoted to the board room, senior management might benefit from the work of Harvard Business School professor Joseph Bower, who studied 1,800 successions across multiple industries. Bower looked at the results of companies that promote insiders through executive succession planning to senior leadership positions and found they perform significantly better when measured over more than three years than companies that do not look inside first.
By many measures, the stakes are high. Organizations that prioritize leadership development and executive succession planning will be better positioned for risk management success, increased profitability and shareholder value and operational continuity in the years to come.
If you’d like assistance with your organization’s succession planning or in identifying suitable executive candidates, contact us now.