Succession Planning

ontents

Introduction

The purpose of this report is to highlight a problem faced by the CEO of a company in deciding who will be the next person as his successor to take up the role as the next CEO of the company. This is an important issue that most of the companies in not only developing economies but also in developed economies face due to lack of future planning. Many companies spend huge amount of money and investments in order to research for the market conditions in the future. They conduct market analysis; make strategic policies and plans in order to drive the company smoothly over the years to its mission and vision that was set when the business was started. These are the companies which make a time line in which the specifically define what goals do they have to achieve in the short run and what goals will they achieve in the long run and how will they achieve these goals. However, what many of these companies do not think upon is who will be the person who will make it all happen or let things go in the right direction as it was planned initially.

This is where succession planning comes in. the purpose of succession planning is not just to identify the person when the time comes for the CEO or head of the company to retire, but it takes into account a comprehensive training program in which a couple of candidates are first identified to be eligible for the post, then one of the is short listed to be the best for the organization and then that particular person is trained under the supervision of the retiring CEO for around 4 to 5 years in which he learns how decisions are being taken and what is the basis or the essence behind making several decisions.

However, it is the responsibility of the Human Resource Department that it follows a strict succession plan procedure from the very start of the business. it should keep in mind when a CEO is about to come to its age of retiring and when should the search of a new CEO should be started. This is a long process and it has to be done with great care. The reason is the fact that the best policy is to bring someone from within the organization for the organization to let the transition be smooth. However, this will mean that when one layer is upgrades, many other layers down in the hierarchy of the business will have to be upgraded as well. or, it can be the case that there is no one in the lower posts capable enough to be given the higher posts. Thus, applicant search for that post is necessary as well. Moreover, it is the responsibility of the human resource managers and teams to identify who are the people with which the new CEO is comfortable and happy to work with and take decision more easily. With this, the human resource department has planned ahead already that when the new CEO will take charge, who will be the ones filling the posts down in the hierarchy and who will be the ones working close to the new CEOs in order to let him settle and to let the transfer of authorities and the power to be successful.

Thus, in this report, we will first start with a brief description of the problem that the company faces. Then we will discuss what succession is planning in its true sense and how it must be carried out. The paper will draw a picture of the problems that this particular company will face by not chalking out a succession plan way before time and how the company will lose focus from its goals and the essence of particular decisions in case of such a management inefficiency. The paper will also chalk out a two phase framework for succession planning in which the report will recommend how it should be done and how things can work out for this particular company. A chart showing the essentials of succession planning will also prove to be helpful for the readers to better understand the major elements of succession planning.

A brief analysis of the cost that the company will incur due to inefficient succession planning will also be presented in order to quantify the losses of inefficient succession planning or the benefits in case of timely and comprehensive succession planning (Forbes.com staff, 2008).

The Problem

The company that we are discussing to study the problem is Saudi Aramco. The current CEO of the company has been working with the company since around 25 years now and it is time for him to leave the company as he has reached his retirement age. The current CEO has gained a lot of experience in the company about the market and about how to handle the entire business as he has been there with the business in both good and bad times. The CEO was the one who had to make decision on behalf of the company by taking the risks on his shoulders thinking about a lot of people and stakeholders including shareholders, customers, employees, legal authorities, suppliers, distributers and the company’s image as well. All these responsibilities do appear to be small but when you have to decide and priorities which one of the stakeholders is to be given more importance in both good and bad times, it is the CEO who has to take a decision analyzing all that information and gut feeling that other members of the organization cannot even think of. The current CEO had the capability of behaving like the father of the company. The reason is the fact that just like the father who acts like the head of the family, he looks at situations in a totally different manner, he has that long term approach and a scope of thoughts and ideas that other members of the family cannot think. He knows what will be the implications of certain decisions and what other decisions have to be made in case of those implications. He has the future of the company as he wants it to be in his eyes and he takes decision.

Now the major problem that this particular CEO faces is that he has not actually planned who will be his successor and neither did he realize all this time that all the subordinate high post managers that were likely to be his successors are also going to retire shortly. Now there is no one to carry on all those activities, decisions, vision and planning that the current CEO had planned for the company to be taken into account in future and any other CEO from outside or from way below the top management would come and implement his own strategies (Business Week, 2007).

Although, optimistically speaking, we can say that the new blood in the organization refreshes it and gives it a new line of thinking and approach to make better decisions, but, the fear that the current CEO faces is the fact that there will be a lot of conflicts between the ideas of the new CEO and his own CEO. Although the goals and the mission will be the same, but, the current CEO might have taken a different approach towards the goal and it will now be time to show its results or take new decisions which the new CEO might not know. There he will take a different approach and both time and money will be wasted which can actually cause great losses. An example of this can be the fact that in order to start a new subsidiary, the current CEO might have invested into a project which will then be taken over in the future so that to provide expertise to the new subsidiary. However, when the new CEO comes in and looks at the investment in a project, the new CEO may think it as a useless investment and blockade of cash flows and insist in pulling out the resources. Although the new CEO will also work for the subsidiary but he doesn’t know the main reason why this investment was made in a project and what benefits would have been reaped.

The above discussion is just an over view of what we can experience in a situation where there is no succession planning, but, in the following discussion we will come up with theoretical knowledge of how the negative aspects of no succession planning will adversely affect the organization under discussion (Batridge, 2005).

The first negative impact that no succession planning had on the organization is that the CEO along with consultants and HR department was not able to make levels and differentiate people who will be brought up in the business to handle key jobs in the future including the post of the CEO. One of the implications that we see due to this is the fact that the potential candidates who are eligible to be screened for higher posts did not had any clue of what there capabilities were, how valued they were to the organization, what skills do they need to polish, what skills do they need to use more often and what lacking do they need to overcome. Succession planning is a way to keep the upcoming people in the top management motivated and keep them focused on the ladder that they have to climb, the amount of input they have to actually put in order to earn the seat of a top manager or a CEO or the level of expertise that they need to prove is needed. Therefore, there was no such thing in this organization which leads to confusions like we see today that there is no one who can be given this opportunity along with the subordinates of the CEO who are also going to be retired one after the other. The purpose is to bring a CEO who comes with an agenda, carries on those tasks which have been initiated by the previous one and add value to the operations to get to the goals and vision of the organization more quickly.

Moreover, the current CEO might have made strategic plans for the coming five ten or fifteen years. He might have planned how the company will arrange funds and what resources will the company need. But did he realize the fact that in order to execute these strategic plans and projects, the company will also need a strong successor or leader in the organization who will actually make this happen?

No the company did not do any such thing. The company looked for all the resources but not the human capital. It did not align the goals with the human capital abilities ten fifteen or twenty years down the line when someone else would be sitting in the CEO chair and controlling the empire.

Moreover, when we see problems such as no succession planning, no one even knows who is going to be brought and everyone is just looking forward to the lucky one whose name will be called out of the lucky draw. Although this is not the case as the current CEO will choose the best amongst the best, but it is also not sure that the decision is free from personal biases. Thus, it might be possible that the CEO chooses his best friends in the organization whom he trusts the most to take over the job and gives it to him leaving doubts and disgust in the hearts of other potential candidates. Succession planning has to be done systematically, proper screening process in complete transparency in an environment where ever body gets a chance. But in this case, this is also not done and now everyone in the organization who will find his chance will try to come close to the CEO in order to remember them when taking the decision (Sims, 2007).

Also, as there was no proper succession planning, any person who will be chose from the organization will most probably belong to a certain department of the organization with certain expertise. This person is not trained or exposed to all departments of the organization. For example, in Unilever Pakistan, the marketing director who was supposed to be promoted as the CEO of the organization was not promoted and the decision was freeze just because of the fact that he did not have any experience in the finance and sales department. For this reason, the same CEO was made director of all the departments of the organization in order to let him know what actually happens in a department inside out.

Furthermore, a company is often known by the culture it has, the values it gives and wants from the employees and the relations it has with the outside world. Who decides this policy and what is the thought process to actually help things happen in the way they are ought to be. The CEO obviously and all these activities are needed to be there in the next CEO of the company as well. If the new CEO will have all these qualities, he will have the main essence of the company.

Not to mention the losses that the company will have to face in the future, this negative impact will be discussed later in the report.

Moreover, as all the subordinates are actually on the age of retirement, thus the company might expect two or three changing CEOs every year as one after the other employees will get retired. Now every year, policies will change, every CEO will experience his new options and ideas. Even if the company now thinks about succession planning to be completed in the next three years, still, all the CEOs will train the new CEO in their own way. They will tell their own experiences and the efficiency of the new CEO will not be up to the mark as it was expected from the current CEO. The level of effort and time needed will be immense and a lot of critical decisions will go down the drain in pursuit of training and development programs for the successor (Business Week, 2007).

Phase plan

Now the plan that will be recommended in this part of the paper is simply divided into two parts. The first step would be train the upcoming CEO for his job for at least 5 years before the current CEO leaves the company. and the second phase will mark the 3 year plan in which the leaving CEO will help and assist the new CEO in order to help him take decisions and supervise and recommend to him in his decision making and vision process.

Starting with the first phase, we see that the presence of the existing CEO is important because of the fact that he is the most important and experienced person in the whole team. Therefore the fact that the new CEOs themselves need time for training and until the time they will be trained they will reach the retirement stage, therefore the existing CEO has to stay another five years with the business and wait until he comes up with a new fresh candidate who at least has the age of serving 10 to 15 years for the company after becoming the CEO. Therefore, the company will extend the contract of the existing CEO for another 5 years so as to identify the best person. This is not the job of the HR department, but this has to be done on the organizational level. One person has to be selected from so many candidates and also these candidates need to be verified with the staff to see whether the candidate is compatible with the work environment or not. Then this selected candidate will actually be trained in these senses that he will have to know some of the skills that the CEO has. He will be taught how he is responsible for the entire company and how broadly his vision has to be in terms of decision making and administrative powers. The upcoming CEO will be sent to different departments for more experience and now how of each of the department as the director of the respective departments so as to make him understand watch department carefully without earning disrespect from rest of the employees. Moreover, the new CEO will not be only polishing the technical skills that he must possess to run the origination but he should also know how to lead different teams and become a role model for the rest of the organization.

In the second phase we will see that the new CEO is now in the stage where he has been promoted and a lot of problems will start too stuck right away. He will be earning both resentment and recognition from the lower management. A lot of external pressure and problems will come in as a tool of frightening the new CEO from the competitor brands. The company has to let the new CEO try different things and take decisions in accordance to the percent that has already been set by the elders. The leaving CEO will supervise different situations and let the new CEO find out how important in nature are these decisions and how carefully they are to be taken. The new CEO will also have to learn how to perform in teams after the existing CEO leaves permanently after three years after leaving (Forbes.com staff, 2008).

Laslty, when we talk about the losses and profit that the company can make in both cases. We assume that the compensation of the existing CEO is $100000. The compensation of the new CEO is the same, but in case of no succession planning, this extra for 5 years along with some bonus in the remuneration of the upcoming CEO will be an extra cost on the firm in which the existing CEO is actually taking full remuneration but not adding much value to the company.

Also, the amount of projects and the investments that are halted and treated as junk value must also be included in the cost as it might cater to larger share.

Lastly, if there is no succession, the business can cost itself its own self. The reason again is that without a leader, a nation cannot be successful and rise. A revolution is needed in all over the world to start thinking as this is the time when all the opportunities can be explored.

Many CEOs who are being trained along the way in the appropriate manner save a large chunk of the company’s rules and values and this is what they have ingrained inside them. Thus, they are better able to understand the dynamics of the organization rather than hiring and HE consultant who charges heavy fees and then comes up with a good match. Nothing can be of better help then one owns self.

Estimates and Charts

Activity COST WITH SUCCESSION PLANNING COST WITH ‘OUT’ SUCCESSION PLANNING
Training of New CEO USD 25000 USD 100000
Extra Compensation to the Leaving CEO for another 3-5 Years

NONE

Number of Years*Last pay that leaving CEO recieved

Projects Completed (DEADLINE/COST) 1 Year / 1Million Dollars 1.5 Years/ 1.25-1.35 Million Dollars
Decision Making AS good as nothing happened, might increase costs by USD 20000 Very Slow, certain to increase costs and losses due to delays for more than USD 100000

Now, if we explain the above diagram, we see that the company will have to bare a couple of costs in case of not having a succession plan. Obviously, even with a succession plan, the company will bare some costs in training the new CEO, but, that cost will be much lesser. The fact is that when a new CEO is being trained under a succession plan, the HR team plans out events in such a way that the new CEO will get opportunity to look and handle real life situations as the Current CEO faces them. for example, when planning a meeting, the new CEO can go with the current CEO as well to attend and see how the goals and missions of the company are safeguarded in the meeting. No workshops and extra mock meetings will have to be called in order to make the new CEO fit and ready to handle situations.

Moreover, the leaving CEO will have to be paid additional compensation for training the new CEO. The reason is that if the succession plan was in place, he would have simply realized the right time and left the job. But, now he cannot and thus he will also expect from the company to compensate him throughout the process.

Also, projects and deadlines will also find problems without a succession plan. The reason is the fact that the new CEO without a succession plan will make changes in designs and strategies because he does not know why certain decisions were taken by the preceding CEO. This will cause in more time needed to make amendments and several thousand dollars to be spent in making costly alterations.

Following is the estimated rise in costs of the company in case of no succession planning.

Conclusion

Succession planning is very important and it must be done in all the companies as it is necessary for keeping a constant supply of leaders in the organization and a constant supply of expertise that is aligned with the initial goals and vision of the company. New CEO who comes from a non company background does not have an idea of the culture of the organization which is really important for the company’s employees to work comfortably. Thus these CEOs donor get a chance to serve long. Moreover the inside information of the company is kept into safer hands of the new CEO from the same company.

References

Batridge, T (2005, May, 4). Why is succession planning important?. Retrieved on December 14,2009 from http://www.ameinfo.com/59276.html

Business Week (2007, July, 30). Why Succession Planning Matters. Retrieved on December 14,2009 From http://www.businessweek.com/smallbiz/content/jul2007/sb20070730_940924_page_2.htm

Ingbritsen, R (n.d). Why succesion planning. Retrieved on December 14,2009 from http://www.smallbusinessdelivered.com/whysuccessionplanning.html

Forbes.com Staff (2008, July, 01). Why Succession Planning Matters. Retrieved on December 14,2009 from http://www.forbes.com/2008/01/07/ceo-survey-executive-lead-ceo-cx_sm_0107succession.html

Semyour, S (2008, Jan, 17). The importance of Succession Planning. Retrieved on December 14,2009 from http://www.management-issues.com/2008/1/17/opinion/the-importance-of-succession-planning.asp

Rothwell, W (2005). Effective Succession Planning: Ensuring Leadership Continuity And Building Talent From Within. Amacom

Sims, D (2007). Building Tomorrow’s Talent: A Practitioner’s Guide to Talent Management and Succession Planning. Author House

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