Next in line: Drafting a succession plan

Target. JCPenney. Starbucks.

While all of these companies were once leaders in their field, faulty succession planning contributed to their decline in status. In Target's case, Gregg Steinhafel's flawed handling of market expansion in Canada led to the company's write-down of $5.4 billion for losses incurred. JCPenney was initially lauded for its hiring of Apple's Ron Johnson for its CEO position; however, the praise ebbed as his misunderstanding of Penney's customer preferences cut into the company's profits. Having once served as CEO, Starbuck's current CEO left retirement to release Jim Donald from his position in an attempt to add a jolt to the coffee chain that had oversaturated the market with its brew. In resuming his role, Schultz has fueled the company's return to relevance. 

In studying the financial aftermath caused by poor leadership choices, CEOs nearing retirement age should not be criticized for approaching the topic of succession planning with caution. Handing over a company to an individual, regardless of his or her pedigree, carries risk. According to a study conducted by PwC in 2014, shuffling leadership negatively influences profits and cuts into stock value. Of the 2,500 publicly traded companies surveyed, PwC "found that median total shareholder return fell to negative 3.5 percent in the year after the change."

In spite of these risks to the bottom line, succession planning is not a task that should be completed at the last possible moment. If you have the luxury of time, you can create a detailed strategy that will increase the odds of selecting the right replacement for your company.

Here are some elements to include in your company's plan:

1. Identify the goal of the plan.

Do you intend on handing your business to your offspring or do you want to promote an outsider who can introduce a fresh perspective? Which type of individual will best support your company's mission? The qualities of an ideal candidate will depend on the goal your company embraces.

2. Take emotions out of the equation.

Those who have a vested interest in preserving their legacy within the company may be prevented from taking the long view due to their emotional attachment. In this case, it may be necessary to hire an outside adviser with experience in seeking out viable candidates. In addition to a familiarity with the succession process, these corporate head hunters have other resources at their disposal that your company may not.

3. Don't attempt this process alone.

Those who oversee well-regarded companies know the secret to their success lies in their ability to delegate. In choosing to relinquish some responsibility for the planning, you will not be bogged down by minutiae. Focusing on the big picture will improve the odds that you will identify a candidate best suited for a future leadership position. For large corporations, it may be necessary to hire accountants to study the financial health of the enterprise and lawyers to ensure that the hand-off occurs smoothly.

Having selected a candidate, most outgoing CEOs remain in the company during a transitional period to limit conflicts introduced by new management. While change in leadership may be unsettling to consider, it is more unnerving to envision the problems that will develop in a leaderless organization. Those taking the time to invest in a sound succession plan will be rewarded by the stability their plan promotes.

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