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Avoid the pitfalls of executive turnover: make succession planning a priority

Companies today realize the importance of having a crisis plan. From natural disasters to financial missteps, the global corporate world understands how emergencies impact the bottom line. According to the results of last month’s PI Worldwide survey, 53 percent of respondents feel their organization is not prepared to deal with a sudden departure of a member of the senior management team.

Recently, David Stern, the Commissioner of the National Basketball Association (NBA), announced he will retire in February 2014 after serving in the position for 30 years. Stern gave plenty of notice and, in fact, has already tapped a successor, Adam Silver, the current Deputy Commissioner. With a firm plan in place, the transition is expected to go smoothly. In another executive departure, Progress Software Corp. President, CEO and Board Member Jay Bhatt announced he would be stepping down to lead another software company. The news came within a year of his appointment and during a time when the organization was already restructuring its business. Although the company acted quickly to appoint a new chairman and launch a search for Bhatt’s successor, the company’s share price fell 13.1 percent, and management anticipates a subsequent revenue dip. And in one last, prominent example, Citigroup’s surprise announcement that CEO Vikram Pandit would immediately step down after heading the finance giant for five years sent strong ripples — indeed waves — through the business community.

Even as evidence indicates that at least some degree of change in the C-suite is commonplace, this spate of turnovers at the top underscores the clear repercussions on a company —both short- and long-term, positive and negative— with leadership change. Besides the impact on shareholders and the company’s public reputation, any change in leadership can be disruptive to the various dimensions of an organization, such as employee morale, organizational culture, and financial performance.

Organizations invest substantial resources in getting the right key senior leaders into the right roles and setting them up for long term success. When it does not work out, regardless of the circumstances, the impact is significant. Direct and indirect costs of replacing a CEO vary widely. One research study pinpoints the cost of replacing a top-level manager at about 150 percent their base salary (Phillips, Reisman, Friedman, Galinsky). According to The Right Leader: Selecting Executives Who Fit by Nat Stoddard and Claire Wyckoff, the average replacement figure for a CEO after just 18 months ranges from $12 million for small-cap firms to $52 million for large ones.

Download the complete article published by the American Management Association to learn more about:

  • Why Leaders Fail
  • How to Predict Success in the Search for a Successor
  • The Process of Planning
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