CEO succession planning — both a business and a governance issue

2015 was dubbed the ‘killing season’ for Australian CEOs, with the sudden resignations of a raft of high-profile leaders, including Woolworths’ Grant O’Brien, Myer’s Bernie Brooks, Orica’s Ian Smith and Santos’ David Knox. In fact, 35 of the ASX top 200 companies replaced their CEO last year, giving Australia the dubious honour of leading the world in CEO churn at a rate 35 per cent higher than global multinationals, according to PWC’s 15th annual CEO succession study.

CEO churn shreds shareholder value

The PWC report also highlighted that CEO turnover in Australia results in a loss in shareholder value of approximately AUD$8 billion. Add to that a drop in market confidence, possible brand damage and potential loss of further executive talent, and the risks of a poorly planned CEO exit are great indeed.

Boards need to lift their game

CEO succession planning has always been an important governance issue, but the research shows it also has a big impact on the bottom line. Put simply, good succession planning makes good business sense. Yet, the PWC report suggests that Australian boards are not as focused on succession as their international counterparts. Only 77 per cent of CEO successions in Australia are planned, compared to the global average of 86 per cent.

Moreover, research from the Adelante Group reinforces the need for boards to lift their game in the internal recruitment stakes. Despite the fact that external CEO candidates have twice the failure rate, shorter tenures and deliver just half the shareholder returns of internal candidates, only 68 per cent of ASX 200 CEO appointments in 2013 were internal appointments — well below the global average of 76 per cent. 

What best practices should boards consider?

Structured leadership development

CEO succession planning should be an ongoing and structured process linked to talent management, leadership development and good governance. It should not be a kneejerk reaction triggered by the unforeseen departure or need to despatch an underperforming CEO. A strong leadership-succession process involves crafting an individualised development plan for each candidate that combines assignments to stretch their abilities, with coaching, mentoring and opportunities for constructive feedback.

Rio Tinto’s recent appointment of new chief executive, Jean-Sebastien Jacques, who replaces Sam Walsh, has been applauded as a model of successful succession planning. Jacques was previously head of Rio’s copper and coal division. According to the Australian Financial Review (AFR), he was selected from a strong field including at least four other internal candidates as well as external contenders. The AFR stated that his appointment was the culmination of a ‘carefully planned, long-term process that began the day Walsh started as CEO three years ago, when chairman Jan du Plessis said to Walsh: “we have to start thinking about who will replace you as CEO”’.

Alignment with future strategy

Another important factor for a smooth CEO transition is the board aligning candidate selection with the future strategy of the company. That means identifying the right CEO profile and skillset to help the business achieve its objectives within the next three to five years. And as the needs of the business will change over time, regular reviews of what changes are necessary will help ensure the succession process remains relevant and forward-looking. 

Gordon Cairns, chair of Woolworths Limited and Origin Energy said that company chairs always need to be prepared to appoint a potential CEO — whether they be an interim ‘seat-warmer’ or the strategic choice for the top job. ‘You have to have to have a name in the envelope if there’s a tragedy, and names in the envelope for a three to five year timeframe. And they may not be the same people’.

Watch this space …

This week, ASX chief executive Elmer Funke Kupper resigned without warning, following the commencement of a probe by the Australian Federal Police into a $200,000 payment made by gaming company Tabcorp to the Cambodian government in 2009 while Funke Kupper was CEO of Tabcorp. The payment is suspected to have been a bribe, and Funke-Kupper has stepped down to give the investigation his full attention. In the interim, he will be replaced at ASX by chairman Rick Holliday-Smith while an executive search is conducted for a more permanent appointment. 

It will be interesting to see how this succession unfolds.

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