According to our most recent study on succession management, a quarter of companies do not begin planning a CEO's successor until they are made aware of the current CEO's departure.  Such lack of executive succession management often costs companies billions of dollars.  Enduring organizations continuously identify potential candidates (yes, more than one) and groom them over many years to ensure their readiness.  Waiting until a CEO leaves to look for a successor damages investor confidence, employee confidence, and even business viability.  Let me explain why.

First, sometimes a change of CEO takes place without notice.  Look at McDonalds, for example.  In April 2004, McDonald's named Charlie Bell as CEO and president after CEO Jim Cantalupo died of an apparent heart attack.  Then, in November 2004, only seven months later, Bell notified the board that he had colon cancer and Jim Skinner was named CEO.  Because of McDonald’s strong succession management process, the company was able to quickly fill the top spot without disruption to the business (a sign of strength to investors and analysts).

Second, it takes many years to develop and ready an executive for the CEO position.  Consider the recent announcement of H. Lee Scott Jr.’s retirement as CEO of Wal-Mart Stores.  Although this may appear abrupt to an outsider, the transition had actually been in the works for the last two years.  According to a recent article in the Wall Street Journal, the search began with Directors examining the company’s corporate strategy, reassessing the role against these goals, and then examining internal candidates. In addition, the board conducted a benchmarking study to learn of potential external candidates. Mike Duke, an internal candidate and former head of international operations, was selected.  Having identified Scott’s successor before he exited the company will also enable a more seamless transition.

At the very least, an interim replacement should be identified - someone who can carry the reigns in the short-term but has not been necessarily deemed qualified as a permanent replacement.  Sprint-Nextel, for example, recently lost a top executive in charge of one of their main business units.  They tapped their president of strategy and corporate development as a temporary replacement while they search for a successor.

Whether in a rising economy, a bad economy or a stable economy, one thing is for sure:  the reign of a CEO will eventually come to an end.  And CEO transitions are happening more often than before.  A CEO, even a good one, is likely to remain in the position for only 5-7 years.  Duke, for example, is expected to hold the Wal-Mart CEO position for only five or six years.

Would your company be prepared to fill an abrupt departure of its CEO? What is your company doing to ensure a big hole isn’t left at the top of the company?