It can take months or years to identify, groom and prepare talent to take over a critical c-suite position. That's why it's important to begin the succession process as early as during the recruitment process, when you first meet the new talent.
Thinking about the future is second nature for chief financial officers. Preparing your company for transitions into new product technologies, investment portfolios or information systems is an integral part of your job and you do that job very well.
But have you prepared for the day when you will pass your financial baton to a new generation of finance leaders? Numerous business surveys demonstrate that many CFOs, especially in small to medium-sized businesses, have never developed a succession plan for their own job title.
The Situation Today
Only 52% of CFOs have identified a successor, according to a recent survey by Robert Half Management Resources. Percentages correlated strongly with the organization's size, ranging from 37% of firms with 25 – 49 employees up to 68% of those with 500 – 999 employees.[1-2]
A 2018 survey by Korn Ferry cites even worse numbers, with 81% reporting no “internal, ready now successor" and only 34% having a succession plan in place.
Risks of an Unplanned Exit
Having a successor identified, trained and ready to take over in the event of retirement, resignation or illness is beneficial to both the organization and the CFO. On the other hand, an unplanned or unprepared-for exit can:
- Fail to capture the legacy knowledge and wisdom that the departing executive —especially one who is completing a long tenure — could have passed along to a designated successor.
- Disrupt operations and personnel in the finance department, inhibit the company's ability to engage in long-term financial planning and perhaps impede compliance with financial reporting requirements.
- Jeopardize customer goodwill, shareholder confidence and public perceptions of the company's stability, especially if the CFO should depart during an economic downturn or when the company is otherwise experiencing a period of financial stress.
- Deny the departing executive a clean exit, because he/she might be obligated — either contractually or ethically — to maintain some level of involvement with the company until the successor is appointed and up to speed.
- Leave a black spot on the departing executive's resume or legacy, as someone who did not act in the long-term best interests of their employer, “leaving them hanging" without a smooth transition.
"Succession planning is not just about continuity," said Tim Hird, executive director of Robert Half Management Resources, in remarks accompanying the release of the survey. "In addition to preparing the company for inevitable change, it creates a culture of professional development, enhances knowledge-sharing between existing leadership and helps identify and retain future leaders.[2,4]
Benefits of the Long Game
Why do so many finance leaders, in a profession known for its aversion to risk, neglect a process that protects long-term stability and profitability? It's certainly not for any lack of responsibility. When most CFOs make an exit, they hope to leave behind better-performing, “world-class" organizations and be remembered as “strong talent developers," according to Deloitte.
Perhaps it has something to do with the short-term thinking that permeates today's fast paced business climate. In the Robert Half survey, 64% of those without a plan “said it was because they were not planning to leave the company in the near future."[6-7]
However, just as the finance function is increasingly about strategic thinking, preparing for succession similarly requires a long-term outlook. A CFO's average tenure in the top 1,000 U.S. companies is 5.1 years, according to Korn Ferry. While smaller businesses or different industries might have different averages, any organization that practices standard three-to-five year planning should develop critical personnel contingencies at least that far ahead.
Another 17% cited as a reason “a lack of qualified candidates" in their organization.[9-10] Yet, six out of 10 CFOs are promoted from within the company, usually from within the finance department itself, according to the University of South Carolina's Center for Executive Succession.
Best Practices for Candidate Development
To improve candidate development and prepare for an eventual succession, follow these best practices:
- Recruit ambitious, mid-career professionals that you would feel comfortable mentoring along an upward career path. Over time, the brightest stars will shine and you can funnel them into executive training programs.
- Avoid the "farm system" as a way of developing talent. As a financial leader, you should own the process for identifying, training and developing your replacement. Incorporate this responsibility into your measurement of performance for annual reviews.
- Once hired, offer your best talent advanced opportunities to demonstrate leadership. Among those CFOs who prepare their potential successors, popular methods include exposing them to board members and business leaders, and placing them in rotation programs, according to the University of South Carolina study.
- Discuss human resources development with your CEO and Chief Human Resource Officer (CHRO) or, in the case of smaller businesses, your equivalent management and personnel leadership. The CHRO can help you to recruit and nurture talent, while reporting progress to the CEO will help to maintain stability in the c-suite.
- Treat the succession plan as an ongoing commitment. Don't just list a potential successor in the plan document and then file it away to be forgotten. Include it in your quarterly or annual document review. Is the finance department facing new challenges that require potential successors to upgrade their knowledge base or skill set? Has your talent roster changed, requiring a new succession list? Do financial incentives for key leaders need to be revised, to ensure this important strategic initiative is embedded and aligns with their financial incentives? After all, you get what you incent.
- Expect the unexpected. Cover all possible contingencies, such as a sudden disability, illness, death or retirement, as well as the higher likelihood of a long tenure with the company with a seamless transition.