4 Steps for Planning CEO Succession
Because of recent healthcare organization consolidation activity and general turnover, there could be uncertainty around CEO longevity. So, what's your plan for succession?
The hospital and health system CEO turnover rate is hovering around 18%. That's about average historically, but generally, that means many hospitals or health systems will have to replace their top leader every five years or so.
And being part of today's—and perhaps unprecedented—consolidation market, healthcare CEOs don't necessarily know how long they will have to implement essential performance improvement plans, given the disintermediation the industry faces from a move away from expensive inpatient care and its high-fixed costs, among other challenges.
Neither do boards, who are constantly aware that high performers are in danger of being snatched away and who can't afford to linger on leaders who don't show improvement.
And even with the recent M&A activity a suitor might come along and take the company and its top leader out through a merger, boards must manage the organization's succession plan as if its long-term future is as an independent entity, says Mark Armstrong, vice president of consulting operations for Quorum Health Resources, which provides consulting services and interim leadership for hospitals and health systems.
However, "the consolidation craze is going to continue in the near future, so a lot of turnover comes from systems being acquired or merged," Armstrong says.
Boards and to some degree, CEOs themselves, should focus on the following preparatory steps regardless of the climate of the industry as a whole, even if a change in leadership is not on the immediate horizon.
Step 1: Just be prepared
As reimbursements decline and costs go up, there's more pressure on margin performance. That's adding to the uncertainty around CEO longevity, but so are other factors, such as the aging of the candidate pool, and a willingness to bring in top executives with clinical experience, for example.
A complicating factor in CEO turnover regarding consolidation is that while there's been a lot of activity on the merger or acquisition, there's not a consummate level of attention to integrating the two entities, Armstrong says.
"Some of these newly acquired organizations were suboptimally integrated, so we're also seeing de-consolidation," he says, adding to leadership volatility over the long term. "I can't say we routinely see systems that are unprepared for executive turnover, but more often than not, they are less prepared than they should be," he says.
Step 2: Develop a performance improvement plan that outlives a CEO change
Where Armstrong and his colleagues at Quorum have seen CEO transitions go smoothly is where there's a clear performance improvement plan in place and good management of those plans so everyone knows the organization's objectives.