Top 10 Reasons Boards Fail at Succession Planning

11/16/2009 11:46 am ET | Updated May 25, 2011

The failure of Bank of America to announce credible progress on naming a new CEO continues to generate interest in the topic of how well other companies are doing with this important matter of corporate governance. The SEC's recent Letter on Shareholder Proposals has also thrown fuel on the fire and has enabled investor groups to target companies with weak succession plans. Given the downside, some boards are scrambling to get their houses in order.

There are a number of reasons for poor performance on this issue -- no one owns succession planning, boards tend to give priority to compliance and "dead-line" driven duties, boards are reluctant to be perceived as disloyal to the CEOand succession planning is more art than science. But the Bank of America provides an excruciatingly public example of how this issue can go wrong for the board.

Here are the top ten reasons that boards fail at succession planning:

1. The CEO and HR have it covered - we don't need to worry about it.
That was then, this is now. A key risk management responsibility of the board is insuring effective leadership for the company. It's good to be King, so CEOs may have a hard time putting the steps in place for their own exits. Succession is a fundamental responsibility of the board.

2. We are primarily interested in just the CEO role.
Well-managed companies typically have a strategy of promotion from within. Given the high rate of failure and short tenure by outside CEOs hired for a turnaround, it's crazy for the board not to know what's being done to prepare the best internal candidates for the future.

3. We have dinner once a year with executives to get a chance to know them.
Would you be comfortable making a marriage decision on the basis of such limited dating? The board needs to get to know potential successors and to see them in action - not just at dinner.

4. The CEO is still young so we have time to deal with this.
What happens if your young CEO gets recruited away? Or fails and has to be replaced quickly? Boards will always need an emergency back up plan as well as a sense of alternative players who could be ready at different times. This means starting at least 3-5 years before an anticipated CEO transition event (e.g. retirement) so as to give time for meaningful development of top candidates.

5. Our emergency plan is a list of 1-3 names provided by the CEO.
The emergency plan needs to be more robust and one that is fully vetted by the board. Don't assume that the board's view on what's needed and the CEO's view are the same. Does it include: readiness/risks of internal candidates, who should be named CEO in an emergency, will it be a permanent or interim appointment and a logistics and communications plan? The emergency plan should cover not only the CEO but also other top officers and the "company plane crash/scandal" scenario .

6. We look at the succession plan once a year.
Given how rapidly markets are changing and will continue to change, a Board would be foolish not to revisit this topic on a recurring basis - at least two to four times per year. "There needs to be buy in from the full board on the criteria for the future CEO, and access to data on internal candidates through multiple lenses, including formal executive assessments", says Dr.Gary Hayes, a leadership advisor who works with boards on these issues. This data should only provide insights to the board; it should never replace the board's ultimate judgment.

7. There is no board committee to oversee leadership succession.
Many boards are now assigning this responsibility to the Governance and Nominating Committee or to the Compensation Committee. The issue requires ownership and deep knowledge by a segment of the board.

8. It's not included in C-level performance appraisal or compensation.
We know that what's rewarded is what is delivered. If this issue isn't part of the scorecard, it is likely to get little attention from management, who need to do the heavy lifting to actually develop people.

9. The crisis de jour always comes first - we have more urgent matters to address.
Being a board member has become much more complex, particularly in a down market. The issue of succession is important and is often urgent, so there must be a plan and the opportunity to review it regularly.

10. Our CEO's doing a good job and we're in a recession so we won't challenge her on this topic.
We know that the definition of "good job" can change quickly, so the board may have to change the CEO or be confronted by the CEO's desire to opt out. It's better to have a plan than the assumption that the current leadership will both be successful and will stay forever.

"The sea change in the regulatory environment globally means that boards need to pay significantly more attention to the issue of leadership excellence as well as CEO succession. This issue is now on the agenda of investors, analysts and regulators Succession planning is now as important as executive compensation and boards are retaining independent advisors to help them evaluate their company's processes and key leaders," according to Bruce J. Sherman, a succession planning expert. The days of positioning these matters as elements of day-to-day business that are clearly the responsibility of management only are over.