A CEO departure is one of the most critical transitions a company can face — and potentially the most costly. From the operational disruption that leads to lost momentum and stalled initiatives to reduced investor confidence and reduced stock rating. 2021 Harvard Business Review research estimated that poor succession planning added up to $1 trillion in lost business value among the S&P 1500 alone.
According to a 2024 Edward Jones report, nearly 40% of businesses don’t have a CEO succession plan, and nearly a third of those wait until one or two years before transition to begin planning. But most experts agree this is not soon enough. McKinsey & Company is just one of several experts recommending starting succession planning the day your new CEO begins.
With this in mind, how do you get started? This article will outline what CEO succession planning is, what it entails, its benefits, challenges, and best practices for beginning your planning process.
What Is a CEO Succession Plan?
A CEO succession plan is a highly structured strategy to identify and develop future executive leaders. CEO transitions occur for many reasons, including:
- Retirement
- Voluntary resignation
- Forced resignation
- Another opportunity
- Termination
- Mergers and acquisition
- Strategic leadership pivot
Without a succession plan, a company works reactively to replace a CEO only after announcing an upcoming departure. With a succession plan, a company works proactively and continuously to identify future CEO talent well in advance of an anticipated leadership change.
CEO Succession Planning vs. CEO Search
| CEO Succession Planning | CEO Search |
| Proactive, strategic, and continuous process | Reactive, time-crunched process |
| Begins years before a transition | Begins after departure announcement |
| Builds an internal talent pipeline | Often includes more external candidates |
| Board-driven initiative | Usually includes an executive search firm |
| Includes investment in internal candidates over time, including development, mentoring, coaching and assessment for the role | Focuses on finding candidates with the necessary capabilities and matching them to the position |
The most effective CEO transition plans include a hybrid approach, using succession planning to develop strong internal candidates while partnering with an executive search firm to identify and maintain awareness of external candidates. By balancing these two strategies, an organization is prepared in advance to launch a comprehensive and targeted CEO search when a transition arises.
The Business Case for CEO Succession Planning
Building a CEO succession plan is in the best interests of a company, its shareholders, and everyone impacted by the organization’s success. Just as CEO vacancies can potentially disrupt an organization on a broad scale, the benefits of investing time and resources in building “a deep bench” are multifold — competitively, optically, and internally.
Minimize Disruption and Reduce Risk
CEO vacancies and transitions inherently spark organizational uncertainty and interrupt strategic momentum. Without a succession plan, critical initiatives may stall, causing investor confidence to waver and market volatility to increase. A clear succession plan ensures a capable leader is at the ready, which minimizes overall business disruption, ensures operational continuity, and keeps organizational strategy on target — all of which inspire investor confidence.
Improve Stakeholder Confidence
The confusion and uncertainty generated by a CEO departure aren’t reserved for the investor and market levels. Employees, board members, and customers all have something at stake and want business continuity and stability. A transparent succession plan provides those things and signals to stakeholders that the company is forward-thinking, strategic, and prepared to lead through change.
Better Market Stability
CEO actions and announcements — from new appointments and strategy changes to annual reports and unexpected departures — tend to impact stock price volatility. Historically, CEO turnover results in increased short-term stock price volatility, as noted by the Federal Reserve Bank of New York in 2003 and, more recently, Fortune Magazine and the Journal of Management Studies. A transparent, swiftly announced succession plan helps to mitigate market uncertainty and reveals a transition that will be managed expertly and deliberately. This sense of confidence can stabilize stock performance through periods of executive change.
Leadership Continuity and Strategic Evolution
The backbone of executive succession planning is maintaining organizational momentum and leading effectively through change. The right plan simultaneously considers preserving institutional knowledge while addressing long-term adaptability.
Talent Development and Retention
By definition, the CEO succession planning process creates leadership development pathways to grow a pipeline of qualified leadership candidates at different levels across the organization. Recent Gallup studies repeatedly confirm a connection between clear pathways to advancement and employee engagement and retention.
Competitive Advantage
Maintaining focus and demonstrating stability during a CEO transition creates a positive impression on stakeholders: the company’s investors, staff, customers, and the public. A succession plan helps make this possible by promoting continuity, strategic advancement, and leadership during change. This inner and outward strength can create a meaningful, long-term competitive edge.
Breaking the Similarity Bias
While it isn’t uncommon for a CEO to select a candidate who mirrors their own leadership style, this “similarity-biased” approach isn’t always what the organization needs. McKinsey & Company promotes avoiding this bias in favor of seizing a defined succession plan as an opportunity for organizational renewal through objective CEO candidate identification.
Holistic Long-Term Organizational Alignment
From defining leadership competencies and identifying and developing future leaders to preserving institutional memory and addressing organizational evolution, succession planning gives a company a holistic, long-term view of its operations, strategies, and leadership goals.
Key Components of an Effective Succession Plan
A solid CEO succession plan involves the board of directors and any relevant stakeholders in these key steps:
| Established Roles and Timelines | Roles and responsibilities for board member involvement are defined, and clear timelines are established. |
| Defined and Adaptable Leadership Profile | A detailed framework outlines the requisite proficiencies and traits of the next CEO, addressing immediate, medium-term (1-3 years) and long-term (5+ years) needs. |
| Candidate Evaluation Standards | The succession planning identifies potential future executive leaders and develops a system for evaluating internal and external candidates against the profile. |
| Development Initiatives | The company outlines preparatory initiatives, assignments, education, mentoring, and board exposure to prepare potential successors for the CEO role. |
| Emergency Succession Plan | To address unexpected CEO exits, protocols must be in place to maintain stability, including interim designation, assigned authority and communication plans. |
| Regular Plan Appraisals | The board of directors reviews the succession plan regularly to initiate any necessary changes. The plan should be assessed at least annually and during major changes or market disruptions. |
10 Steps to Implementing a CEO Succession Plan
1. Devise a Succession Planning Task Force
Form a committee of board members and relevant stakeholders dedicated to overseeing the CEO transition planning process. Define the committee’s authority and responsibilities, and a plan for reporting back to the full board. The board will have final authority, but the task force will help advise throughout the process.
2. Produce a CEO Leadership Profile
Compile the ideal CEO requirements and leadership traits, including technical skills, background experience, and cultural fit. Consider the requirements needed to lead the organization into the future. The compiled CEO profile will drive the succession plan and serve as the benchmark for evaluating qualified candidates.
3. Evaluate Your Internal Talent Pool
Start internally to identify top performers with the potential for the succession pathway. Using the ideal CEO profile as a guide, evaluate internal candidates, noting their strengths, weaknesses, and estimated timeline for readiness.
4. Map the External Talent Market
Explore external talent possibilities and potential timelines. Consult with executive search firms to gain an understanding of the potential talent for a candidate matching your CEO profile.
5. Customize Successor Pathways
Design individual development plans for each internal candidate, including stretch assignments, executive development education, exposure to the board, and mentorship connections.
6. Design Emergency Succession Protocols
From naming an interim CEO and securing company data to developing a communication plan and establishing decision-making procedures, document what happens in case of an unexpected CEO exit and who does what.
7. Define Timeline for the CEO Transition
For planned CEO departures, establish key milestones and develop a detailed schedule for transition, depending on the notice given and the estimated timeline for identifying talent. Having clearly established timeframes helps to maintain stability. For emergency departures, create a separate plan outlining both interim procedures and long-term transition.
8. Schedule Regular Reviews for the Plan and Process
Even the best plans don’t remain relevant forever, especially in dynamic business environments. Establish at least one review annually in which the succession plan is updated according to changing organizational and market landscapes.
9. Plan a Stakeholder Communication Strategy
Outline a specific plan for sharing information with key stakeholder groups and the media. When planning for different groups, such as employees, investors, customers, and the public, considerations include tailored messaging, timing, privacy, and transparency.
10. Put the Succession Plan in Writing
Once the CEO succession plan is formed, create a formal document detailing all aspects of the plan and subsequent protocols. Establish who is responsible for storing and maintaining the document and the review schedule.
The Role of the Board
The board has several critical responsibilities when a CEO transition takes place:
Oversight Responsibilities
The board typically drives succession planning and oversees the plan and the process to ensure continuity and growth. During CEO transition, board members often support the executive team by stepping up involvement in operations to provide stability and guidance.
Candidate Criteria Development
The board establishes the profile for the ideal candidate, considering all aspects of the next leader alongside the organization’s values, goals, and strategic direction. The board will discuss the promotion of internal candidates vs. identifying external executive talent.
Timeline Management
The board creates a succession plan long before a CEO’s planned departure, often soon after a newly-appointed CEO begins a term. During an actual transition, the board ensures adherence to this plan while developing realistic timelines for the steps and overseeing progress.
Stakeholder Communication
As with any significant organizational shifts, the board assumes the lead in communication strategy. When a CEO’s departure is announced internally, the board will work with the executive staff to plan information sharing among employees, customers, investors, and the public.
CEO Succession Planning Best Practices
1. It Is Never Too Early to Begin Planning
Experts agree there is no such thing as premature succession planning. Developing the ideal candidate profile and ensuring alignment with organizational culture and goals takes time. Identifying and assessing candidates takes time, as does creating leadership development opportunities. Every plan step is strategic and involves assessment, evaluation, and development. Get buy-in from the current CEO and board early and allow enough time to mindfully and strategically establish a succession plan that spans time and accounts for disruptions and the unexpected.
2. Get Specific When Defining the Role and Future Needs
A successful succession plan dives deeper than just replacing the existing CEO and replicating their skills. Boards must consider where the organization is heading and what kind of leadership is needed for the years ahead. The ideal candidate profile must leave no stone unturned, outlining specific competencies, experiences, and traits the next CEO needs.
Consider current and upcoming challenges, like digital transformation, market expansion, or industry disruption. Beyond what makes your current CEO successful, expand on what qualities and characteristics will help the next CEO drive your organization in the future. This forward-thinking approach starts with details and ends in long-term success.
3. Build and Maintain a Talent Pipeline
You’re not just seeking one ideal candidate to take the reins — succession planning is a long-term strategy designed to develop a bench of high-potential leaders for your organization. Create a thorough, multi-level plan that develops leadership throughout the organization, ensuring a strong succession of qualified talent for generations.
Continually monitor and update development plans, growth opportunities, and talent assessment. By building a pipeline rather than plugging in a single replacement, you build upon institutional knowledge with each promotion and provide long-term sustainable stability.
4. Strike a Balance Between Internal and External Candidates
Your succession strategy should include internal and external talent. Internal candidates typically bring cultural fit, institutional knowledge, and smooth integration, while external talent brings fresh perspectives, broader market knowledge, and innovation. Develop internal talent and maintain relationships with executive search firms to identify strong potential external candidates in your industry. The board and stakeholder groups want the best CEO for the job, so ensure your pool isn’t limited.
5. Establish a Succession Planning Task Force
McKinsey & Company recommends forming a task force established by the board to make the succession planning process less personal and more a natural series of necessary business events. This committee can be formed of board members, the current CEO, and business function leaders to define and map the candidate qualities and ensure expanded perspectives. While the CEO and board would still have the most control of the process itself, the process would be less limited to similarity bias by opening up initial input.
Common Succession Planning Challenges and How to Mitigate Them
Internal Resistance to Change
CEO succession planning naturally strikes a certain level of anxiety within an organization. Current CEOs may not prioritize discussing their replacement, and employees may fear the worst about the impending unknown.
Solution: Address succession planning as a healthy part of organizational growth and a positive sign of the organization’s commitment to long-term stability. Get the CEO involved early to help the rest of the organization feel comfortable about succession planning.
Talent Pipeline Gaps
Even companies with a solid plan for internal development can discover critical gaps in their pipeline, especially in specialized areas like technology innovation or newly emerging business functions.
Solution: The best way to find gaps is to do regular inspections. Check your current leadership assessments against new and emerging needs. When you identify a gap, develop a targeted program for finding and developing talent to fill the gap, and find mid to senior-level talent who could grow to C-level leaders one day.
Knowledge Transfer
A long-tenured CEO naturally develops deep organizational knowledge, long-standing industry relationships and fine-tuned decision-making skills. When a longstanding CEO leaves, their depth of expertise can vanish forever, presenting a knowledge gap that can take years to fill and hamper a new CEO’s start.
Solution: Don’t assume CEO knowledge will transfer. By the time you realize the sharing hasn’t happened, the information is gone. Start planning a structured and phased transfer process well in advance. Include meetings with the board, and consider retaining the existing CEO as an advisor for a limited time to retain access to that knowledge.
Cultural Preservation
Organizations often worry that a CEO change — especially with an external candidate — will disrupt their culture. Yet focusing too heavily on cultural preservation can lead to selecting safe but uninspiring candidates.
Solution: Consider which aspects of your culture are genuinely foundational and which might benefit from change. Broaden mindsets to avoid similarity bias in cultural evaluations. Assess every candidate’s cultural intelligence — the ability to work within your organization’s culture while thoughtfully evolving it as needed. This balanced approach maintains your core identity while allowing for healthy cultural development under new leadership.
Final Thoughts
CEO succession planning is a strategic plan for a normal, healthy part of organizational growth. Rather than an emergency plan for upheaval (though you’ll need one of those, too), CEO succession is a long-range investment in company success. The resulting bench of qualified CEO successors and a pipeline of up-and-coming leaders transform executive transition from a disruption to an opportunity for continued growth.
FAQs
Who is responsible for CEO succession planning?
CEO succession planning is primarily the responsibility of the board of directors, though they tend to collaborate with the current CEO and executive leaders.
Should a company prioritize internal or external candidates for CEO succession?
A company should consider internal and external candidates. Internal candidates can be developed through the succession plan, while an executive search firm can help source C-suite talent that fits the role and organization.
How long does the CEO succession planning process typically take?
CEO succession planning is a long-term process and organizational strategy that starts years before a transition is expected. Once a plan is created, it is continually reviewed and revised over time. Plans also incorporate emergency succession protocols for unplanned CEO exits.
What role does the current CEO play in the succession planning process?
While the board manages the final selection, the current CEO should ideally be involved in succession planning from as early as day one. The current CEO can help identify and develop internal candidates as part of the succession planning task force.
