Despite increased emphasis in recent years on the importance of succession planning, many financial executives haven’t planned for leadership transition. A recent survey by our company found that a majority (83 percent) of chief financial officers (CFOs) polled said they have not identified a successor for their position.
Why the inaction? The primary reason, according to 74 percent of respondents, was that they don’t have plans to leave their current post in the near future. The second most common reason given was respondents’ belief that there was a lack of qualified candidates within their organizations.
Even if those in leadership positions have every intention of staying in their current role, one of the key tenets of succession planning is that the process should be a continual one that takes place even when it doesn’t appear to be needed. Change, whether foreseen or not, is a fact of life, and companies that are prepared for it are more likely to sustain performance.
Although most business leaders know that succession planning is a worthwhile undertaking, it often takes a back seat to more immediate issues, such as compiling quarterly financial statements or getting through another tax season. But company leaders owe it to their firms and various stakeholders to pass on a legacy of success by supporting effective succession planning practices. In some companies, managers are held accountable for identifying highly qualified successors. Moreover, part of their compensation may be tied to their commitment to and success at succession planning.
Besides ensuring a seamless business transition when key talent leaves, there are other compelling reasons why organizations should make succession planning a priority. Here are three important ones:
1. Demographics are not on your side. As baby boomers near retirement age, succession planning takes on added urgency for many organizations, particularly those that have older boomers in key positions. Although most of the CFOs we polled weren’t planning to step down anytime soon, even professionals who plan their careers carefully may encounter unexpected personal issues or developments in their company or industry that force a change of plans.
Talent gaps can develop at any job level, but businesses may be most vulnerable to the loss of key talent in mid-level positions. A recent Ernst & Young report found that one-in-four Fortune 1,000 companies said their middle-management ranks would be most affected by boomer retirements. Not only are these positions crucial to business operations, but there’s usually a smaller pool of qualified candidates from which to fill these vacancies. In addition, experienced leaders possess a depth of business and cultural knowledge which is not easily or quickly replaced.
Despite this need, the Ernst & Young report also found that three-quarters of firms that engaged in formal succession planning focus exclusively on replacing top senior executives.
The most effective succession planning is even broader in scope than an emphasis on mid-management. It involves identifying key positions and personnel throughout an organization and attempting to define a pipeline of talent for every critical role. An accounting firm, for instance, might plan just as thoughtfully for how it would replace a tax specialist with sought-after knowledge as it would someone in a management position.
2) Succession planning can identify recruitment needs. Especially in a difficult recruiting environment, such as the one that has existed in the accounting field in recent years, companies can benefit by knowing with certainty whether they have a pipeline of capable in-house successors for key roles. If not, a company may want to jumpstart its recruiting efforts to focus on filling certain levels on the organizational chart or skill gaps.
After identifying qualified successors throughout an organization, companies typically work with these employees to create a development plan to help them acquire new competencies and expand existing ones. For example, high-potential employees may be asked to accept a rotational transfer or international assignment, become a participant in strategy sessions or improve their interpersonal skills.
3) Planning for leadership transition improves retention. Besides helping companies prepare for their future leadership needs, succession planning has a positive effect on employee motivation and retention. The process helps to identify promising employees who may need additional attention or incentives to stay in their jobs, especially when there isn’t immediate room for advancement.
When companies help talented employees envision their professional future and commit to providing them with the development experiences needed to assume positions of greater importance, employees become less inclined to pursue other opportunities. This is likely to be an increasingly important benefit of succession planning, especially if highly skilled candidates remain in short supply or retention becomes more difficult.
