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Executive Summary: Succession Planning
Date: December 19 2006
Succession planning pays off in innumerable ways ranging from recruiting and retaining top talent to improving the bottom line. Confirmation that succession planning helps company performance comes from several recent studies, including one authored by Bruce K. Behn and his colleagues, who examined the performance of 132 global organizations that experienced the death of their CEO. The study concluded that "delay in naming a successor and choice of an outsider successor ... decreases subsequent financial performance and firm equity value." In addition, "companies that adopt more rigorous leadership development programs tend to do better," and succession planning is an important component, reported Chief Learning Officer in a 2005 article based on data from a survey of 373 organizations done by Hewitt Associates.
Succession management has a positive correlation with employee retention, according to research done by consulting firm AberdeenGroup. HR Magazine reported, "Most companies with retention and succession plans also showed a lower cost per new hire and a lower cost of separation per employee."
Conversely, the economic consequences of not conducting succession planning, and the resulting lack of leadership, can be dire. Leader to Leader warned that the "results of poorly planned and managed leadership transitions include stagnation, dysfunctional management teams ... disappointed stakeholders, and falling shareholder value."
Most U.S. organizations do conduct some succession planning. SHRM Research's 2006 Succession Planning Survey Report found that more than half (58%) of responding organizations have some type of succession plan in place, although those plans were formal at only 29%. Another 26% intended to begin succession planning. The respondents to the Human Resource Institute's 2006 Succession Planning Practitioner Consensus Survey are better prepared: 75.3% of them have a formal succession plan in place and 53.9% said their formal succession plan systems had been in place for two or more years.
However, there is room for improvement. Nearly half of the CEOs of the 364 fastest-growing private companies in the U.S. acknowledged that they have neglected succession planning, according to a 2005 PricewaterhouseCoopers survey. And about four in 10 HR professionals think their organizations are unprepared to immediately fill a leadership position should a vacancy suddenly occur, according to the SHRM survey. The proportion of firms that said they were prepared was far higher among firms with formal succession plans (80%) than among those with informal succession plans (39%).
Grooming inside candidates is one way to improve succession planning. Not only did the Behn study conclude that "we find that firms that chose insider successors outperform firms that chose outside successors," Booz Allen Hamilton's annual study of the world's 2,500 largest public firms found that CEOs hired from inside generate better financial performance in the long term.
Another step is for firms to deepen their succession plans. Succession planning should ideally be extended into middle management, according to Management-Issues. Outgoing leaders at all levels hold personal and specialized business knowledge, which it will benefit the organization to retain through orderly transfers of knowledge and responsibility. Currently, a little over half of firms (56%) include midmanagement positions in their succession plans, and only 17% include nonmanagement positions, according to SHRM's survey.
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The Institute for Corporate Productivity (i4cp, inc.) improves corporate productivity through a combination of research, community, tools and technology focused on the management of human capital. With more than 100 leading organizations as members, including many of the best-known companies in the world, i4cp draws upon one of the industry’s largest and most-experienced research teams and Executives-in-Residence to produce more than 10,000 pages annually of rapid, reliable and respected research and analysis surrounding all facets of the management of people in organizations. Additionally, i4cp identifies and analyzes the upcoming major issues and future trends that are expected to influence workforce productivity and provides member clients with tools and technology to execute leading-edge strategies and "next" practices on these issues and trends. i4cp is a for-profit company with offices in St. Petersburg, Florida.