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A Good Succession Plan Saves Money

According to a recent analysis done by Harvard Business Review (HBR), the S&P 1500 forgoes close to $1 trillion in market value each year due to poorly managed CEO and C-suite transitions. HBR estimates that better succession planning alone could help increase annual company valuations and investor returns by 20-25%.[1] Given the significant monetary value attached to succession planning, one would assume that most leaders make a priority of this strategic process. However, less than one in four boards have a formal succession plan in place.[2]

SIGMA has worked with thousands of organizations across North America, and what CEOs continuously tell us is that they don’t plan for tomorrow because they can hardly keep up with the demands of today. Planning for succession certainly requires an investment of time and effort, so let’s compare the price of planning against the risk of not having a plan and see whether it’s worth the cost.

The Price of Planning

Establishing a succession plan requires the full commitment of governance boards, executives, HR departments, and employees. Critical roles must be identified, successors must be nominated, and a development plan needs to be put in place. Unfortunately, for most companies this level of involvement is not worth the cost.

Research shows that among today’s large governance boards, members spend less time interacting with corporate leadership than on any other activity. Only 55% of board members claim to understand the strengths and weaknesses of their company’s executives, and fewer than 25% participate in their firm’s performance evaluations.[3] Instead, most boards’ time is devoted to monitoring accounting, risk, and financial performance. These activities are important, but they do little to groom in-house talent, which is the cornerstone of succession planning.

Proper succession planning takes both energy and time. Board members must be willing to interact with leaders, understand corporate needs, and plan together for the future. Consequently, this level of involvement is a significant investment, and for most companies, it’s a price they are unwilling to pay.

The Risk of Not Having a Plan

Far greater than the price of planning, however, is the risk of not having a plan. A study of the world’s largest 2,500 public companies showed that unplanned succession costs firms an average of $1.8 billion in shareholder value,[4] and a comparison of companies forced to name a CEO successor revealed that those who took longer performed worse.[5] Apart from the typical seven-figure severance package and six-figure retainer accompanying forced succession, large companies would have generated an average of $112 billion more in market value during the year before and after a planned succession.[6]

Unplanned succession also forces companies to look for talent quickly. Companies that don’t prioritize succession planning often don’t invest in internal talent development, leading them to rely on external hiring when the time for succession comes. For example, studies show that over 20-30% of todays’ boards replace outgoing CEOs with external hires, compared to 8-10% during the 1970s and 80s.[7] And these new habits are costly. For instance, on average, salary, cash bonuses, and equity incentives for outsider CEOs amount to $3.2 million more than for those promoted from within. This cost comes despite the fact that internally promoted CEOs tend to outperform their external counterparts in the long-run, delivering superior market-adjusted shareholder returns in 70% of preceding years.[8]

Unprepared companies face a few other direct and indirect costs associated with not having a succession plan:

Direct costs

  • Severance packages
  • Recruiting/executive search firm expenses
  • Unplanned board meetings, with unexpected travel costs
  • Time spent reviewing resumes, holding interviews, screening candidates, and discussing alternatives
  • Premiums paid for unplanned and/or external hires
  • Lawyers, consultants, public relations, etc.

Indirect costs

  • Time and capacity lost while onboarding unprepared candidates
  • Perceived instability within the organization
  • Damage to third-party relationships (ex. clients, suppliers, discounts, or contracts established based on relations with outgoing leadership)
  • Lower morale and disrupted team dynamics
  • Costs of establishing new strategy and procedures
  • Further turnover as employees leave for more stable organizations
  • Loss of revenue, earnings, and stock prices (for public companies)
Six consequences of not having a succession plan: lost money, time, relationships, shareholder value, performance, and employee morale.

Download Infographic: The Cost of Not Having a Succession Plan

The Bottom Line

At the end of the day, most companies understand the importance of succession, but not succession planning. Time-pressed leaders, therefore, struggle to justify significant up-front costs with indefinite long-term gains.

However, given the fact that nearly 40% of today’s CEOs are failing to meet performance expectations within 18 months of taking on the job,[9] something about today’s leadership transitions is clearly not quite right.

In short, a good plan costs time but saves money. It protects your company from forced succession, lack of in-house talent, and damage to client, shareholder, and public relations. It also increases organizational efficiency, boosts morale, and develops your leadership bench. Finally, the benefits of a working succession planning reach far beyond the role it fills, and the risks of not having a plan tomorrow undoubtably justify taking time to plan today.

SIGMA Can Help

Confident that succession planning is worth the cost but unsure where to start? SIGMA offers flexible in-person and online services that will bring your leadership team together to create a plan that works for you. Our consultants can help you get six months’ work done in just two sessions and deliver a custom 12-month Succession Plan in 4 to 6 weeks. We’ve helped thousands of organizations across North America develop their people potential and increase organizational effectiveness. Contact us below to get started today.

[1] Fernández-Aráoz, C., Nagel, G., & Green, C. (2021). The High Cost of Poor Succession Planning. Harvard Business Review.

[2] Cloud, J., Matza, R., Plaut, T., Rosone, B. 2015. Business succession planning: Cultivating enduring value. Deloitte.

[3] Harrell, E. (December 2016). Succession Planning: What the Research Says. Harvard Business Review.

[4] Forbes. (May 12, 2015). The $112 Billion CEO Succession Problem. Forbes.

[5] Harrell, E. (December 2016). Succession Planning: What the Research Says. Harvard Business Review.

[6] Forbes. (May 12, 2015). The $112 Billion CEO Succession Problem. Forbes.

[7] Harrell, E. (December 2016). Succession Planning: What the Research Says. Harvard Business Review.

[8] Harrell, E. (December 2016). Succession Planning: What the Research Says. Harvard Business Review.

[9] Harrell, E. (December 2016). Succession Planning: What the Research Says. Harvard Business Review.

About the Author

Sharon Van Duynhoven

Office Manager

Sharon brings our tests and assessments from the development stage to marketable product. She ensures quality control at every step of a project, edits technical documents and manuals, and artistically enhances reports and resources. She also manages contracts with clients across the globe and answers technical questions.