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4 Steps for Planning CEO Succession

Analysis  |  By Philip Betbeze  
   January 11, 2018

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.

Related: Expect M&A Deluge to Continue Through 2018 and Beyond

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.

The board needs to remind the organization's employees that the performance improvement imperative doesn't just depend on the presence and leadership of just one person.

"Where we have seen less effective transition is in the absence of such performance improvement plans," he says.

Step 3: Develop a communication strategy

"When the turnover happens, there's got to be a clear communication plan in place [about] a change in leadership, and to remind people of what the direction the organization is going, particularly with the medical staff," he says.

Much of that crisis-level communication strategy can be prepared prior to a leadership change, if the organization has a forward-thinking vice president of public relations and marketing, who has put together contingencies for a variety of crises, including a potential change in leadership, for example.

"Communication, or lack thereof, in the transition is a vital component," Armstrong says.

Step 4: Boards: Be most vigilant when things are going well

The succession plan is ultimately the board's responsibility to formulate, even though the executive team is often involved. Ideally, the plan should identify an internal successor candidate, and the candidate's name should be shared internally to ensure stability in case of a sudden departure of the current CEO.

Boards should ask themselves what they would do if tomorrow the CEO told them he or she was leaving, says Armstrong. Furthermore, boards should identify someone who could lead the organization on an interim basis while a full search is conducted.

"When someone is involuntarily removed, that's often part of the plan," says Armstrong. "Boards are caught flat-footed more often when things are going well."

Philip Betbeze is the senior leadership editor at HealthLeaders.

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