In Focus: Succession Planning

Succession planning - is it important?

The concept of succession planning is one that every business – irrespective of size - needs to consider. The price for failing to invest in leadership development and earmarking top talent for the top jobs can severely hamper the preservation of brand longevity.

In the past few weeks there have been a number of companies including Tesco and Sports Direct who have faced criticism for not being quick enough to find permanent replacements with the right level of experience for board members who have stepped down.

Indeed, according to today’s national papers (8 June 2015) the two chief executives at Deutsche Bank have resigned following allegations of the company’s involvement in the Libor-rigging scandal. One, Anshu Jain will be leaving on 30 June (2015), the other, Jurgen Fitschen, in May 2016.

Following board changes in the first quarter of 2015 the Financial Reporting Council’s (FRC) report later this month will assess whether the UK corporate governance code guidelines that cover succession are tough enough.

Of course, the issue of succession planning is not the preserve of companies listed on the London Stock Exchange, but a global business issue. According to a recent report by Stanford University entitled Senior Succession Planning and Talent Development, the recruitment of a successor is often a long process disconnected from coaching and talent development programmes, and one whereby companies do not have an actionable process in place from which to select senior executives.

The report says: “Companies recognise the importance of a thorough and rigorous succession process for both the CEO and senior executive positions; however, most fail to create one. The problem tends to be cultural: the majority of companies do not have honest and open discussions about executive performance.

“Succession is fundamentally a preparation exercise for the future. However, respondents are more likely to view this in terms of its potential to reduce future downside risk rather than producing shareholder value benefits from the identification of strong and appropriate leadership.”

A key decision for company boards is often whether to find a successor internally or recruit fresh blood from outside the organisation. An example of the latter was the appointment of Philip Clarke at Tesco following the resignation of long-term CEO, Sir Terry Leahy. At the time, Leahy said of the appointment: “I have worked with Phil at Tesco for many years and I am confident he has all the necessary talent, energy and experience to take the group forward. He will be supported by an outstanding team of senior executives who together represent one of the strongest leadership teams in the world of retailing.”

Clarke had worked for Tesco’s for 40 years. However, on his watch as CEO the once successful brand witnessed dramatic profit losses and has been accused of fraudulent accounting. Following Clarke’s resignation July 2014, the board made the decision to hire external candidate Dave Lewis who was at the time the former head of Unilever’s personal care business.

The cost to Tesco was significant. As well as having to pay Clarke’s £11.5m pension pot, the retailer also had to part with £10m worth of cash and shares to Clarke, not to mention the expenses usually incurred when recruiting a new CEO.

A strong succession plan can also have a dramatically positive impact on investor sentiment and share prices.

In Tesco’s case, despite poor financial performance, the brand’s share value – although far from being strong – is performing comparatively well, suggesting that investors have faith in Dave Lewis’ fresh approach

Under current UK FRC guidelines, the responsibility for putting in place a succession plan comes under the responsibility of the nominations committee, although the decision-making process itself can vary from company to company.

For most, the main decision will stem from weighing up the short-term and long-term benefits potential staff members will bring to the company and which of these should take priority – there’s also the decision to be made about recruiting internally or externally.

For most nomination committees the main decision will stem from weighing up the short-term and long-term benefits potential staff members will bring to the company and which of these should take priority. Companies also have to make the decision as to whether they require a candidate from within, or some-one with external experience.

Even for smaller businesses without nomination committees, it is important for those involved in the recruitment of senior staff to have a candidate with a strong vision and awareness of the brand to make sure that – in the event of any change over – the transition is as smooth as possible without damaging business finances