Perhaps, the most common mistake in CEO succession planning is the utter absence of a plan.
Companies that don't make cultivating talent a top priority can hobble the executive succession process. Rakesh Khurana, an associate professor at Harvard Business School, recently coauthored a study of 20 large companies and found that the ones that failed to groom talent from within neglected potential leaders and, in turn, didn't attract job seekers who saw opportunities to advance at competing firms. Of the 20 companies Khurana and his coauthors studied, half had no succession plan in place for positions from vice president on up.
Putting succession planning in the hands of the CEOs rather than corporate boards is a recipe for disaster, says corporate governance expert Nell Minow, editor and co-founder of the Corporate Library research firm in Portland, ME. Yet, it happens time and again, particularly in the case of executives with commanding personalities who exert a great deal of power over their boards.
There can be legitimate reasons for choosing an outsider. New blood can bring respectability after a scandal or a slump. Jeffrey Sonnenfeld, a senior associate dean at the Yale School of Management, says that though only 3 to 4 percent of Fortune 500 companies hired outsider CEOs in 1980, that number is close to 40 percent today. A 2004 Booz Allen Hamilton study of 2,500 major companies found that insider CEOs delivered shareholder returns 1.9 percentage points higher than outsiders did. "Boards think the savior must come from the outside," says Sonnenfeld. "We disparage the internal hire."
Source: BUSINESS 2.0, June 2006