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Chief executive succession plans: what boards should do next

By Jessica Tasman-Jones

This article is brought to you by Agenda, an FT Specialist publication that focuses on corporate boards

The increasing number of resignations by chief executives means that UK boards should ensure succession plans are in place.

The reasons CEOs give for leaving range from retirement to looking for a new challenge. After two years of the pandemic, some cite burnout.

In the US, CEO departures in May were up 22 per cent on April and up by 52 per cent on May 2021, says Challenger, Gray & Christmas, an executive placement consultancy.

Its turnover data for January to May represent the highest numbers since the firm began to track CEO movements more than two decades ago.

The trend is repeated in other countries, says Sharon Sands, a partner in the London office of Heidrick & Struggles, the executive search firm.

CEOs are resigning because of fatigue, for family time, to pursue philanthropic activities or because they wanted to retire earlier but the pandemic dictated otherwise, Sands says.

In the UK, FTSE 100 CEO resignations have yet to return to pre-pandemic levels, but Sands expects the UK to follow the global trend.

In 2020 there were 22 changes of CEO in the FTSE 100. This was followed by seven changes in 2021, with four more in 2022 so far, according to Heidrick & Struggles’ figures.

Companies can tend to put succession plans on hold while they manage crises but Sands says such planning should be long-term and continuous. “We are often asked, ‘What’s the best time to start thinking about CEO succession?’ The [answer is the] same day a new CEO starts their tenure,” she says.

Companies should review multiple candidates for future CEO opportunities, as well as immediate opportunities, she says.

Careful succession planning gives boards a chance to consider different types of candidates, says Alison Kay, UK managing partner for client service at EY, the financial services firm.

The potential surge in CEO resignations means that companies looking for executive talent will have to dip into an ever more competitive market, especially if they are seeking people with the strongest potential.

Companies in the US that want to attract top talent should be prepared to pay, says Justus O’Brien, co-leader of the board and CEO practice at Russell Reynolds Associates in New York. This is despite the anger shown by investors over salaries and bonuses this proxy season.

“I expect executive compensation to continue to go up even as the watchdogs and boards look at executive compensation more closely,” O’Brien says.

Factors such as the rush in CEO retirements are unlikely to have much effect on their replacements’ pay, says Rodion Skovoroda, senior lecturer in finance at the Open University.

He does not expect CEO pay to rise significantly, even if high turnover becomes normal. Equity-based pay in many companies will be affected by the weak stock market performance, Skovoroda says, meaning that overall pay will probably be lower.

Companies wanting to attract younger executives may also have to offer flexibility in terms of workplace location and a stronger focus on environmental, social and governance matters, say industry watchers.

In turn, many companies want more than leaders with hard skills, such as finance or supply chain management.

Soft skills are in demand, driven by experience gained during the pandemic, when leaders needed empathy and social skills to inspire workforces, says Russell Reynolds Associates in a recent article in the Harvard Business Review.

“In the past, hard skills were top of the list for most companies but now communication skills, people skills, persuasion and culture-building skills are emerging at the top of the list,” O’Brien says.

CEOs now have to answer to a wider range of stakeholders than just shareholders, Sands says. They need to be able to take a stand on societal issues, in line with the company’s purpose, she says.

Agility is another consideration given uncertain market conditions, says Kay.

Companies and directors anticipate a tougher business climate, fuelled by supply chain dilemmas, rising inflation, Russia’s invasion of Ukraine and the lingering effects of the health crisis.

Although succession planning can be sidetracked during crises, Sands says the best organisations see challenges, such as Brexit, the pandemic and inflation, as drivers for a plan if their CEO does resign.

This article is based on a piece written by Neanda Salvaterra for Agenda.

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