Succession Planning Presents Different Challenges For Private vs. Public Company Directors

The responsibility of ensuring a successful CEO transition is well understood and broadly practiced by public company directors. Public-company CEOs are hired by the board either from within or from external sources. They are retained by the board based on their performance. The public-company board has absolute authority to make decisions to hire and fire the CEO when their performance or ability to serve is not adequate.

In contrast, many private-company CEOs are owners, having founded, purchased, or inherited the company. Owners have the authority over key decisions such as who serves as CEO. Most private-company directors serve on an advisory board, which does not have authority over who serves as CEO.

Private-company boards, intent on good governance, should engage in succession planning but lack the clear authority held by the public company. Directors regarding who serves as CEO. In that context, succession planning is different in private companies and may present the types of challenges described below:

Challenge: CEO owner or founder is no longer an effective leader. The CEO may encounter declining health and resist being replaced. The board is faced with the dilemma of either accepting and condoning the CEO’s reduced capabilities or confronting the issue of the CEO’s ability to serve at a highly sensitive time. The CEO may no longer possess the skills required to keep the company’s operation competitive and efficient. In some cases, the business’ scale, critical success factors, or business model have evolved away from the CEO’s capabilities. Often the CEO resists strategic or personnel change, despite declining performance.

Challenge: Owner expects an (unqualified) relative to become CEO. The severity of this frequently occurring situation depends greatly on the lead-time available. Immediate and near-term CEO change requires the board to support the new CEO with mentoring and oversight by an executive chair. Succession that will occur over a longer time enables the board to objectify readiness and oversee a development program of training, experience building, and mentoring.

Challenge: Owner’s CEO choice is not supported by the board. There will always be companies whose owners insist on a successor CEO who does not have board support. In such cases, the board can best add value to the succession process by making explicit which critical management talents most need augmentation and suggest alternatives to obtain the needed support. For example, if the new CEO does not know the industry, the board might recommend adding talent in the sales or marketing functions.

Succession Planning Best Practices

Most private company boards will encounter at least one of the succession planning challenges cited above. Succession planning is not complex, is best begun now, and at a minimum, should consider the following best practices: 

• Establish succession planning as an ongoing process. Start now to ensure maximum benefit and update the plan semi-annually.

• Develop criteria for the next CEO The criteria should reflect the specific skills required. (Avoid relying solely on personality traits whenever possible.)

• Communicate the succession plan (at a general level) with the executive team.

• Identify high-potential internal candidates and create professional development programs for each.

• Create a “what if” plan with the owner that prioritizes succession options based on alternative scenarios

Succession planning can provide multiple benefits to a private company. 

• Owners are more likely to embrace efforts that are intended to ensure continuity versus be reflective of a performance evaluation.

• The potential for selection of inside candidates provides a rationale and motivation for an executive development program.

• Executives who are provided professional development opportunities typically raise their performance levels.

The benefits of succession planning are greater than just ensuring a qualified CEO successor. Executive performance, morale, and retention of employees can reach higher levels when succession planning is structured and objective, and will have lasting impact on the entire executive team and the company.

R. John Fletcher is the managing partner of Fletcher Spaght, a strategy consulting organization,which he founded in 1983, and managing director of Fletcher Spaght Ventures, a venture capital fund. Prior to FSI, Fletcher was a senior manager at The Boston Consulting Group. Fletcher currently serves on the boards of Axcelis Corp., Clearpoint Neuro, and is chair of Metabolon. He previously served as chair of Spectranetics during its turnaround and subsequent sale to Philips NV; for this work, he was selected in 2018 as the NACD Directorship 100 Director of the Year.