Succession Planning Best Practices: How They Boost Shareholder Value
Do you think Apple’s stock prices might have dipped if Ted Nugent had been selected to replace Steve Jobs? Not to diminish the leadership capabilities of the outspoken and highly controversial rocker, but this would hardly qualify as succession planning best practices, and would result in a rather precipitous drop in shareholder value.
I bring up this rather outlandish example to prove a point: Most shareholders of Apple would have a distinctively negative reaction to the headline. To lesser degrees, it indicates how succession planning really influences the value of a company, both short and long-term.
It turns out there are now real-life example of succession planning that prove my point. In a recent article, Susan Adams of Forbes writes “there is empirical evidence to back up the claim that succession planning is good for share values.” She points out several examples:
- McDonald’s made long-term plans to replace CEO James A. Skinner with company veteran Don Thompson. McDonald’s cultivates internal talent, assuring that there is always someone waiting in the wings. When the company announced the carefully-constructed succession plan, stock price jumped from $92 to $98.
- A study from FTI Consulting examined 263 transitions at global public companies. They found that planned successions lead to a “narrower range of stock price movement.”
- The public knew about the successor to Steve Jobs at Apple, Timothy Cook (not Ted Nugent, as had been feared). Despite Jobs being hailed as the visionary at the tech company, its stock has sky-rocketed since Jobs’ departure, from $376 to $626.
The takeaway seems to be that shareholders understand the real value of having exceptional, experienced talent waiting in the wings. They understand the inherent value of stability, which stems from integrating a leader well-versed in the company and the industry.
Surprisingly, many organizations don’t understand how important this can be. The FTI Consulting study revealed that 80% of new CEOs had no prior experience in the position of CEO.
This could lead to a long-term decline, as a CEO who doesn’t grasp the marketplace or his/her company’s internal workings will be in a perpetual game of catch-up. We’ve seen enough of these disastrous hand-offs to realize that they just don’t work, which is why these stock prices can be dramatically affected by the release of a succession plan.
Note I haven’t even addressed the effects on morale if a succession plan isn’t well-devised and communicated internally.
Do you have any Jobs/Nugent examples of succession plans gone wrong, and stock prices tanking as a result?
(photo by virtueel_platform)
Rock LaManna is the President and CEO of the LaManna Alliance. The LaManna Alliance helps printing owners and CEOs use their company financials to prioritize and choose the proper strategic transition – including mergers, acquisitions, organic growth, and exit / succession plans.