By Wilhelm Crous
October 11, 2023
This week, Mpho Makwana resigned as the chairman of Eskom. The reasons for his resignation remain unclear, but it followed the rejection of the Eskom Board’s recommendation for the vacant CEO position by Minister Gordhan. In recent weeks, media reports have been replete with stories of executives resigning or being forced out in Corporate South Africa, including companies like Prosus/Naspers, Pick n Pay, and Transnet. In these instances, the succession process appears to have been fraught with challenges. However, one can contrast this with the recent announcements from First Rand, which reflect a succession process that is seamless, meticulously planned, and of global standards.
I was reminded of an insightful article in the Harvard Business Review by Fernández–Aráoz, Nagel, and Green on the substantial cost of inadequate succession planning (1). Amongst other things, they pointed out that ineffective succession practices lead to high turnover rates amongst top-tier executives, resulting in significant value erosion for companies and their investment portfolios. Their study of S&P 1500 Companies revealed that poorly managed CEO and C-Suite transitions could eliminate nearly $1 Trillion annually in market value. In essence, proficient succession practices can boost company valuations and investor returns by 20% to 25%. Though this research focused on US companies, I believe the situation in South Africa isn’t vastly different.
The authors argue that a predominant flaw in succession practices is the overwhelming inclination to appoint leaders from outside the organisation. Such decisions carry three significant costs (2):
- Underperformance by companies that hire mismatched external CEOs.
- The departure of intellectual capital from the C-Suites of companies these executives leave.
- Reduced performance of ill-equipped successors in companies that do promote from within.
The argument goes that outsiders can and will “shake things up”, turn the company around, change culture and infuse new ideas. Contrary to this belief, the study shows that externally hired CEOs are 84% more likely to leave within their first three years, often due to underperformance. Additionally, whilst companies might favour external CEOs for their proven track records, the data indicates that 70% of S&P 500 CEOs leading multiple companies performed better during their initial tenure (3).
An unintended consequence of insufficient succession planning and excessive external hiring is the escalating CEO compensation as firms vie for the same top-tier executives. For instance, from 1978–2018 in the US, CEO pay surged by over 1000%, whilst the average worker’s salary saw a meagre increase of 12%.
To enhance succession management, Fernández-Aráoz et al (4) recommend:
- Initiating succession planning earlier than anticipated.
- Actively identifying and nurturing emerging talent.
- Granting promising executives board positions or increased access to it.
- Rigorously defining the ideal CEO or executive profile and seeking both internal and external candidates that fit this mould.
- When collaborating with search consultants, steer clear of typical perverse incentives.
Developing pipelines for specialists is another challenge. While organisations laud specialists they often lack a structured blueprint for their holistic development. At KR, we’re not just committed to highlighting these issues; we consistently strive to make a meaningful difference and assist companies in thriving. With this in mind, we are addressing the crucial topic of succession planning in a half-day online seminar on 19 October. We’re excited to announce that Ken Jonasen, a renowned authority on specialist pipelines and the global CEO of the Leadership Pipeline Institute, will be joining our line-up of esteemed speakers. As the author of “The Specialist Pipeline,” Jonasen will share his invaluable expertise at the Succession Planning online seminar. To find out more click here: https://tinyurl.com/yc2uu268
1–4 Fernández-Aráoz, C., Nagel, G., & Green, C. (2021). The High Cost of Poor Succession Planning: A better way to find your next CEO. Harvard Business Review (May–June 2021).