Link between Financial Performance and Succession Planning

 

Companies that promote their chief executives from inside vis-à-vis recruiting from the outside have a much higher financial-success rate. In other words, successful companies identify and nurture their intellectual capital. It’s not just my experience. It’s been confirmed by a global human resources study.

The report comprised an analysis of 500 S&P non-financial companies from 1988 to 2007. “Homegrown CEO: The Key to Superior Long-Term Financial Performance is Leadership Succession,” was conducted by Indiana University and the international consulting firm, A.T. Kearney.

Its conclusions will work for both the public and private sectors.

From 25 industries, 36 companies were singled out including these global brands: Abbott Laboratories, Caterpillar, Colgate-Palmolive, DuPont, Exxon, FedEx, Honda, Johnson Controls, McDonald’s, Microsoft, Nike and United Technologies.

The study’s salient conclusion: Businesses that promoted CEOs as part of succession plan were more successful and their chief executives lasted on the job much longer.

“Moreover, the study found that no non-financial S&P 500 company with externally recruited CEOs generated 20-year performance numbers that surpassed or even equaled those of the top 36 in all of the study metrics,” according to A.T. Kearney’s Web site.

The results were based on these metrics:

• Return on assets
• Equity and investment
• revenue and earnings growth
• Earnings per share (EPS) growth
• Stock-price appreciation

Ironically, CEOs recruited from the outside proved to be more costly in other ways. The salary, bonus and equity incentives were 65 percent higher for such candidates. Additionally, 40 percent of them only lasted two years or less. More than 60 percent failed to last four years.

This means succession planning is crucial. Naturally, the promoted executive knows the firm’s culture, and must have a good track record with a positive leadership style developed over a number of years within the company.

The study’s four recommendations:

1. Make certain the board is heavily involved in the process.
2. The screening process must start early in the potential CEO’s career.
3. The company should install a nominating committee, and should not abdicate its responsibilities to the incumbent CEO.
4. Get buy-in from the incumbent CEO about the concept.

Further, my sense is that you’ll need a plan for a series of lateral moves so the talent gets intimately aware of all your company’s processes. The person will grow if provided development and training programs, as well as placed in various leadership roles and special projects. It’s best to identify and nurture the growth of all future leaders.

This is also good for overall teamwork and morale. Other employees will notice and will appreciate you more as an employer.

By the way, if properly implemented, your company won’t suffer if a person gets an attractive offer and leaves prematurely. To use a baseball metaphor, you’ll barely even notice the vacancy – because you’ll have a great bench from which to draw.

So, if you want a longtime foundation for financial success, strategically establish succession planning as a policy. You’ll be happy you did.

From the Coach’s Corner, here are related Biz Coach resource links:

• Management — Why It’s a Mistake to Overlook Succession Planning
• HR Management: Which Employees Are Most-Likely to Quit?
• Human Resources – Profit By Not Letting Your Stars Become Free Agents
• Are You Successful In Keeping Female Talent?
• If Mergers & Acquisitions Tempt You, Consult HR Pros

“Let our advance worrying become advance thinking and planning.”

-Winston Churchill

 

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.