It’s no exaggeration to say that effective leadership succession planning is critical to business performance. Each year, close to $1 trillion of market value in the S&P 1500 is wiped out by badly managed CEO and C-suite transitions.
Recent analyses suggest that with better succession planning, company valuations and investor returns would be 20% to 25% higher. But shockingly, leadership pipelines are weaker than ever. Almost a third of organisations are unsure that their leaders have the skills required to take the business forwards.
What’s going wrong? As identified by our research with Private Equity investors, there tends to be a heavy reliance on hiring external candidates with previous C-suite experience, at the expense of developing internal successors with strong potential. Yet research shows that the premium placed on recruiting external leaders with previous C-suite experience isn’t worth it. Analyses of the performance of 855 CEOs in the S&P 500, over a 20-year period, shows that first-time CEOs on average lead three years longer and with less volatility in performance. For CEOs who led S&P 500 companies more than once, 70% performed better the first time. While nearly every CEO (97%) outperformed the market in their first role, only a minority of CEOs (38%) managed to repeat this in subsequent roles.
HR and Talent Directors experience the pain of failed succession first-hand, so it’s perhaps unsurprising that many aim to rely more on internal promotions for key positions in future. Clearly, though, there’s work to be done to bolster internal talent pipelines if they’re going to deliver.
The importance of potential
A solid understanding of how to identify and develop leadership potential is critical to this, yet many myths pervade this complex area. We reviewed the academic literature and then interviewed 18 practicing business psychologists to identify what works, what doesn’t, and what needs to change when it comes to leadership potential.
The findings revealed four key myths and associated pitfalls which all talent practitioners must address within their talent management practices when it comes to identifying future leaders:
In order to create a thriving talent pipeline, organisations need to provide leaders with the opportunity to develop their potential. There are many ways to encourage this such as through stretch assignments, mentorships, secondment, external learning, leadership training and workshops and assessment.
Talent pipelines do not drive themselves, intervention is required from HR and learning and development specialists. Unless thoughtful planning and investment is made to accelerate leaders' development, leaders will leave to fulfil their potential elsewhere.