Is your talent pipeline ready for a leadership change?

Activist investors today are increasingly forcing out executives they deem unfit to lead — à la Tiffany’s CEO in early February. Some talent shakeups are abrupt, while others are carefully planned, such as Dr. Toby Cosgrove, the longtime CEO of the Cleveland Clinic, who announced in early May that he will step down by the end of 2017.

No matter the timing, leadership transitions are woven into the fabric of business at all levels. According to EY’s proprietary corporate governance database, 35 percent of S&P 1500 companies experienced a change in CEO in the last eight years, whether because of retirement, resignation, dismissal or ill health. Most of the transitions that followed were internal promotions.

Many companies may think they have succession plans in place, but in reality, 91 percent do not have formal plans that clearly articulate how the next generation of C-suite executives will come about. According to a report from the National Center for The Middle Market, just 14 percent of firms give themselves an “A” grade when it comes to overall talent planning effectiveness, while more than 40 percent of companies graded themselves a “C” or lower for reasons ranging from the fact that they only identified the CEO’s successor or they need plans to better prepare talent for succession.

So, how do you boost your grade from satisfactory to excellent? Take the time to develop a comprehensive and objective succession plan across all levels of the organization. Succession planning is about more than just CEOs or even the C-Suite. It should be an ongoing, bias-free process of selecting people across the organization with the right talents, identifying those with high potential and developing them into future leaders.

Here are five things I invite you to consider as your company establishes its succession plan:

Start sooner rather than later

Starting early is the key to success. Developing your plan can take more than a year to complete, and implementing the tactics and strategies can take three to five years. However, whether your company is a startup or well established, now is always a good time to begin planning. It’s never too late to craft a succession plan — even if your company has been around for a while. Resources for corporations and family-owned business from EY’s Center for Board Matters can be found here.

Know your talent pool

A colleague once told me, “If you have to go outside your organization to fill a top spot, it’s an indictment on your ability to properly develop your talent pool.” So, how do you assess your company’s talent and develop what you’ll need for the future? Start with these questions:

  • What are the skills needed for each role?
  • Are we evaluating and measuring those skills objectively?
  • How are we rewarding and developing our current talent?
  • Does our talent pool reflect a diverse set of experiences?
  • What motivates our talent to grow within the company?
  • Have we clearly defined high-potential performance attributes and identified individuals in that category?

If you are leading the charge, think of yourself as a coach. Successful coaches are constantly reviewing their rosters against objective criteria at every level. They want to have the best players in the right positions with the experience needed to win. Could our Chicago Cubs have won the World Series last year without some serious changes in the strategy years ago?  Did they re-think strategies around scouting, player development, character and chemistry?  Do you think they got to know their players intimately and engaged with them at a deeper level? I’m not a baseball expert but I think the answer is “yes”, and your company should be no different.

Apply data to succession planning

Sometimes leaders reward behaviors that mirror their own behavior versus analyzing objective criteria. This inherent bias can easily derail a thorough evaluation of talent. My colleague Randy Beck, who specializes in succession planning at EY, has followed this phenomenon for years. He also has studied various methodologies to remove natural bias when predicting the full potential of a leader and has found that using a predictive talent tool is a good way to counteract natural biases.

Additionally, it always helps to take a closer look at the bigger picture around talent in your industry. Some sectors, such as public utilities and manufacturing, have aging workforces and will need to think of phasing retirement plans to help develop the next generation of talent. Other industries, such as consumer products, retail and health care, rely heavily on millennials who generally have much higher turnover rates. The rapid advancement of robotics and artificial intelligence across most industries will add still another layer of complexity in understanding future talent needs. These factors make succession planning even more challenging, and more critical.

Make the follow-up investment

Think beyond the time and money investment you’re putting toward a succession plan and focus on what’s next: talent. Identified leaders need a higher degree of investment, whether it is an executive sponsor, interaction with the board or participation in executive-level projects. Build upon the strengths of your talent by giving them specific, targeted experiences — the same type of experiences that have contributed to making your current leaders successful. It also helps to integrate succession planning with compensation by incentivizing leadership and development goals linked to the long-term strategic plan.

I’m extremely proud of the work my firm does to recruit, retain and develop top talent. We expect our people to lead at a high level. To get there, we provide access to experiences and relationships, including mentors, sponsors, feedback and leadership opportunities, which enable advancement and contribute to successful careers. Perhaps professional services is unique because people are generally upwardly mobile. However, even if your company’s career paths aren’t clear, I suggest looking at succession planning through a lens that assumes people will welcome additional responsibility to move up. This view will help shape the development plans needed for effective succession planning.

Revisit the succession plan frequently

Think of the plan as a dynamic, continuously evolving framework. Leading companies regularly — either annually or quarterly — re-evaluate their succession plans to affirm they have correctly identified high-potential performers or to discover new ones, and to drive accountability for developing talent. These five guidelines provide a mindset shift that succession planning is about much more than leadership transition. It’s about having the processes in place to ensure talent is constantly being evaluated and developed to create a strong bench ready for the next inning, series or season.

Kim Simios is the Managing Partner of Ernst & Young LLP in Chicago.