How to Improve the Odds of a SMOOTH CEO SUCCESSION: Tailor your CEO succession planning process to your company's specific needs and ensure long-term success.

• Author: Sorensen, Aaron

Boards are charged with maximizing the long-term value of a business for its shareholders by ensuring management is executing a winning strategy, identifying and managing risks, and holding the C-suite accountable through oversight and rewards. While CEO succession planning has long been part of the board's remit, the failure of several high-profile CEO transitions highlights the challenges in getting succession planning right. Because of an erosion of confidence and market value, they also resulted in bringing back the likes of Bob Iger to Disney and Sergio Ermotti to UBS.

What is the cost of succession planning gone awry for shareholders? Estimates are wide-ranging and difficult to tease out but are undoubtedly in the hundreds of millions of dollars for Fortune 500 companies that get it wrong. These costs are brought into sharp relief in the recent case of First Republic Bank, the market value of which eroded from a peak of nearly $40 billion in 2021 to $2 billion because of poor succession planning. As described in The Financial Times in late March, First Republic was "hit by a succession crisis before the Fed began raising rates" and, according to a source familiar with First Republic's management and strategy, represented "a tale of failed CEO successions" as several successors for Jim Herbert didn't pan out. Interestingly, recent research finds that "boomerang CEOs" perform significantly worse than other CEOs, so simply trying out an interim CEO or bringing back a previous CEO doesn't appear to be a prudent strategy, especially in dynamic industries or when the boomerang CEO is also a founder.

Microsoft's succession plan offers a contrast to First Republic and an example of the value in getting it right. In 2014, CEO Steve Ballmer announced that he would be retiring within the next year. Microsoft's board and C-suite had been preparing for this transition for several years and had a deep pipeline of leadership talent to choose from. The company ultimately selected Satya Nadella, who had been with Microsoft for over 20 years and had a strong track record of success within the company, as the new CEO. This smooth transition was made possible by Microsoft's careful and thorough succession planning process, which helped to ensure the continuity and success of the company. Microsoft's market value has risen significantly under Nadella's leadership. The company has continued to be a major player in tech and is taking a leadership position in the AI boom.

The question for directors and boards is how to improve the odds of getting succession planning right, especially when the stakes are so high with CEOs, CFOs and other critical roles. Based on my experience guiding clients through succession planning decisions, here are some practices boards can put into...