The C-Suite Crisis Companies Need to Consider

White Papers | September, 2017

By Mike Magsig

Companies in a number of industries are facing a potential C-suite challenge—an alarming lack of qualified candidates to fill roles that are likely to become vacant, due to retirement and other factors, in the next 10 to 15 years.

Many have yet to realize that CEO and other roles may be at risk; yet sudden vacancies, as they occur, can wreak havoc on an organization’s productivity, company culture, public image and profitability. 

To prevent a potentially drastic operations interruption, companies should be making several proactive moves now. This white paper will examine what elements are fueling the forecasted increase in C-suite vacancies; what steps organizations can take to safeguard themselves against related issues in the future—and how, if the need arises, they can best prepare new C-suite executives so both the individual and the organization experience success.

Executive Summary

At many organizations, boards and C-suite executives spend much of their time focusing on protecting their business model from outside influences. In the process, however, they may be overlooking a greater risk that is emerging from within—the impending shortage of C-suite talent that will be vital to drive value creation in the future.

A number of factors, ranging from demographics to increased market competition, are placing the possibility of filling CEO roles, in particular, that become vacant in the next 10 years at risk.

Even though a considerable number of executives and board directors are beginning to see significant talent gaps emerge in the C-Suite, including the CEO's office, many companies haven’t realized how much is at stake—and many aren’t strategically preparing to address the critical shortfall.

To protect themselves from the potentially damaging productivity and profitability delays and the public image-related investor complications that can arise from leadership uncertainty, companies need to begin taking several steps now.

Issues on the Horizon

C-suite talent will be in high demand in the next decade, and potentially beyond, for several reasons. 

If recent years are any indication, CEO turnover seems set to rise. In 2015, 17 percent of the 2,500 largest public companies in the world experienced a CEO change—more than in any of the previous 16 years Strategy& has been publishing its CEO Success Study.

Although CEO turnover declined in 2016, which the consultancy service provider attributes to the drop in merger and acquisition activity, planned turnovers continue to be more common; excluding CEOs removed as the result of M&A, the share of planned turnovers was 81 percent in 2016, the third-highest rate since 2000.

The planned turnover category includes CEO retirements; and demographic changes certainly appear poised to cause a number of retirement-related C-suite vacancies.

Around the world, population rapidly expanded in the mid-20th century. In the U.S., the baby boom generation—Americans born between approximately the end of World War II and 1964—is the largest generation in U.S. history, totaling nearly 77 million. Roughly 10,000 baby boomers will be retiring on a daily basis for the next 12 years in the U.S. alone, according to the Pew Research Center.

In Europe, populations also increased around roughly the same time period, according to data from Eurostat, the European Union’s statistical office. In the U.K, the Office for National Statistics predicts a significant portion of the generation born around or after 1961 are now in their mid- to late-fifties—indicating they’ll also reach the standard retirement age in roughly 10 to 15 years.

In addition, with a few exceptions, the majority of Eastern European countries are expected to see a marked increase in the proportion of persons aged 65 and older within the next two decades, according to Eurostat.

Canada, too, experienced a mid-century baby boom. Statistics Canada predicts the country’s senior citizen population could comprise 23 percent of the population by 2031, with a growing amount of workforce members approaching retirement age in the next 16 years.

Due in part to the experience required for the role, C-suite members are typically in at least the second half of their career—and, as a result, may be approaching retirement in the next decade.

With a significant number of C-suite members nearing retirement age in the coming years, leadership at many organizations could undoubtedly be affected by the impending wave of retirements.

Factoring in additional concerns, including the stress and demands involved in the role, extraneous requirements such as regulatory compliance, investor advocacy and some professionals’ desire to switch careers to self-actualize, that number could rise even higher. 

A Lack of Qualified Candidates

All those vacated C-suite positions will need to be filled quickly, by highly qualified candidates, to ensure operations continue to flow smoothly. Internal candidates, however, may not be the most viable option at all organizations.

In the last six to nine months, boards and C-Suites have placed elevated prominence upon strategic growth. Some companies are viewing this as an opportunity; others as a defensive measure.

In either instance, for nearly a decade, many executives have been promoted for their achievements in expense reduction, risk management, compliance or capital management—factors that all feed into mitigating profit loss.

Growing optimism permeates many C-suites for improved economic performance over the next 8-12 quarters.  According to a recent Grant Thornton report, many global economies have experienced five consecutive quarters of increased revenue and profitability expectations.

Yet, it’s likely all boats will not rise uniformly with the rising tide—and if growth stalls, CEO successors whose skill set centers on growth-oriented proficiencies like cost reduction and risk management may struggle to address the changing scenario, potentially resulting in inferior performance.

In the past decade, a greater number of companies have appointed an outsider as their new CEO, according to data from PwC’s Strategy&. To find candidates who possess the necessary skills to fill their leadership void, many companies may need to turn to external candidates in the future, as well.

Abundant options, however, may not exist. With a large number of C-suite roles that will need to be filled, and a shrinking group of candidates with the appropriate experience—or even 30 or more years in the workforce—the search to secure talent is likely to be a fierce battle.

Some companies will find competitors are aggressively pursuing, and in some cases successfully wooing, their top talent, which could deplete their succession pipeline.

Even if an organization is lucky enough to land a top hire or appoint its desired candidate from within, it may not be able to count on the executive having a long-continued tenure. The retention strategies many companies may have in place could prove insufficient against heightened recruiting pressures from other organizations. Due to the increased competition that’s likely to exist for top talent, other companies may actively lure top C-suite executives before their employers have realized the return on their development investment.

To retain their executives, businesses will need to employ ongoing retention strategies—or face what could amount to an almost constant recruitment threat from competitors. These retention strategies could take varied forms that would also aid in a company’s developmental practices; for example, serving as independent corporate directors.

Preparing for the C-Suite's New State

Despite indications retirements and other factors could mean more organizations will need new CEO and other C-suite executives in the future, a number of companies don't appear to be adequately prepared to address high-level vacancy issues.

More than half—58 percent of companies—don’t have an emergency succession plan or a long-term succession plan (54 percent) in place, according to data published in a 2016 issue of MIT Sloan Management Review.

More than half of the companies online service XpertHR spoke with for a 2015 survey said they handle replacements as a demand arises; only about a third of respondents said they had designated a potential CEO or top executive successor; 71 percent either hadn’t or didn’t know if their organization had a succession plan.

The first step toward shielding a corporation from this talent depletion involves making the board and current C-suite executives aware that this mission critical issue must be addressed. Once the severity of the situation is understood, the organization can devise multiple strategies to reduce its risk.

Begin by looking internally for possible future candidates for C-suite roles, and securing training and development opportunities to accelerate their readiness for future positions. Deploying fact-based assessment technology—behavioral assessment tools, for example—can help identify high-potential leaders and technical performers within the company who may be contenders for accelerated development.

Internal structural changes can also help an organization prepare. Consider introducing programs that provide enhanced incentive awards for talent development, such as cash bonuses for development performance, and revising talent recruitment and retention practices to build diverse teams that represent customer demographics and broad-based thinking, which can help you identify C-suite candidates who will be able to understand and accurately represent customer, industry and other needs. Talent conforming to a company's foundational framework and culture will transcend traditional gender, ethnicity, age, and geographic boundaries; better strategies can be developed through discussions that involve various perspectives.

Looking in-house for potential future C-suite executives can help you develop and guide talented employees into those roles; relying solely on internal candidates, however, isn’t always the most secure option.

Some employees may not be ready when you need a C-suite replacement. HR professionals and non-HR C-suite executives, in fact, expect developing the next generation of leaders will be the No. 1 human capital challenge in the coming decade, according to research from the Society for Human Resource Management.

Cultivating leaders takes time, and you may not, in some instances, have years to do it. It’s difficult to know when each and every position will become vacant; C-suite executives may give ample notice if they’re retiring, but other scenarios may provide little warning—for example, when United Airlines CEO Oscar Munoz suffered a heart attack roughly a month after being appointed to the role in 2015.

United’s Corporate Governance Guidelines state recommendations for CEO successors are to be provided annually, and a committee is responsible for reviewing the succession plan with the board chairman and CEO periodically. Yet due to Munoz’s recent appointment, some news outlets, including the Washington Post, speculated the company may not have a had a chance to identify a candidate. After a few days, the company’s general counsel was tapped to step in to fill the position on a temporary basis.

Establishing a robust talent pipeline—identifying potential external C-suite candidates and attempting to build a relationship with them long before you may actually need to bring that person on board—can help guarantee you have qualified, pre-screened C-suite replacement options, should you need them, if the time comes.

Engaging outside recruiting assistance can establish a thorough, demographically varied talent base—and a window into best-in-class recruiting and retention practices in the external market.

In past decades, companies often established a mentoring relationship early on in an executive’s career to guide the individual through any unapparent cultural pitfalls. If your organization doesn't already follow that practice, you may want to consider establishing a formal network of mentors and coaches for the current CEO and several layers beneath the role. A sounding board can be an invaluable asset to executives who are in the process of assuming higher levels of responsibility. Recently retired leaders who have built high performing teams can make excellent mentors.

Positioning the C-Suite for Success

Companies can take a number of other steps to prepare CEOs for success, based on the organization’s individual leadership state.

Companies with new, first-time CEOs—of which there are a growing number—may need to consider a different approach than the way CEOs have traditionally interacted with board members.

The single greatest reason for first-time CEOs’ failure is their inability to build an effective relationship with their boards, collectively and individually. A board culture that is attuned to personal development of its C-Suite executive can help a first time CEO overcome the insecurities derived from the common misperception that they might be the most knowledgeable person in the boardroom.

Boards and the C-Suite leadership team can also benefit from building a clearly defined template for talent evaluation.

The old McKinsey mantra of strategy-drives-structure-drives-staffing still holds true; yet basic foundational recruitment and development efforts can reinforce the organization’s leadership culture.

The talent evaluation framework could include a number of elements; for example, being able to build high-performing teams through effective empowerment and delegation, or candidates possessing exceptional EQ/IQ that influences others to reach higher performance levels and make prompt and decisive decisions.

The template could also include other desired qualities, such as an ability to demonstrate leadership agility in which executives learn from their experiences and successfully apply those lessons to new situations, or simply being able to communicate with clarity vision, mission, strategy and execution while actively listening.

Whichever criteria companies choose, the act of establishing a recruitment framework—along with other pre-emptive moves, such as earmarking potential C-suite candidates and increasing the organization’s emphasis on talent development—can help your organization successfully prepare now for any potential executive-related hiring needs that may arise in the future.

In reality, a company never truly knows when a major vacancy could pop up, leaving it with an immediate need to fill a crucial role. The impact on operations can be profound.

However, even if a vacancy occurs with little to no warning, provided you’ve worked to increase internal C-suite candidates’ skill sets and created a pool of highly qualified talent options, you’ll be ready to take action the moment it’s needed, making your company—and its bottom line—much less likely to be affected.