CEO turnover is one of the most disruptive events in a company's life cycle. A change at the top is accompanied by a significant measure of risk. When the highest-ranking officer is ousted, trades away or retires, the organization feels the impact in a number of ways—from employee confidence to public confidence.
Some companies will find the news splashed across major media outlets around the world (think George Zimmer), and people often keep watching for a big or small mistake. So what's ultimately at stake in a CEO shake-up is the company's reputation.
In its white paper "The $40 Trillion CEO Succession Risk," Korn/Ferry states that "collectively, there is a $40 trillion reason why succession planning has to evolve." That statement derives from the theory that "the total market capitalization of the world's publicly traded companies is approximately $40 trillion—shareholder value that is put at risk whenever companies transition to a new" CEO.
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Succession risk, however, is not limited to public companies. There are 5.7 million private businesses in the United States, and, while some are small, an overwhelming number are not. In fact, 8.6 percent have more than 500 employees, according to the white paper "Corporate Investment and Stock Market Listing: A Puzzle?"
Private companies are not legally required to have a board, but many do and should practice similar CEO risk management planning to public companies.
To most effectively hedge against CEO succession risk, a CEO successor should be able to meet not just immediate needs but future business goals.
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To that end, the C-suite and board should not make their bet based on candidates' historical performance as a way to calculate future results but must assess candidates' real leadership competencies.
For example, how do they make decisions? Are they emotionally strong? What is their value system and response to uncertainty? Do their measurable competencies match up with what is needed for the strategy?