When properly planned and thoughtfully executed, CEO succession offers a company far more than just the transitioning of its top leader. It enables organizations to envision new opportunities for growth, and realign and strengthen processes and systems throughout the enterprise. Readers will learn how to manage the succession process to achieve the best possible outcomes.
In a joint RHR International/Chief Executive magazine study of 236 corporate directors, 95 percent of respondents acknowledged that CEO succession is a critical business continuity issue. Nevertheless, more than half (53 percent) rated themselves as “ineffective” in executing their responsibilities in the CEO succession process.
In our new book, Inside CEO Succession: The Essential Guide to Leadership Succession, RHR International has created a comprehensive resource designed to help corporate boards develop an expertise in CEO succession. It is one that accounts for this Knowing-Doing Gap and that pays attention to the psychological tensions that attend every step of the process.
This article describes ten important dimensions of effective CEO succession. They are based on RHR’s years of business experience, a deep understanding of human and organizational behavior and motivation, the insight of our clients and our ongoing program of research.
Ten Key Dimensions
In the course of our succession-planning practice, we have concluded that there are 10 key dimensions for effective CEO succession planning. These essential elements – what we consider the ingredients for success – will help any organization build and maintain a successful CEO succession program. Each of these dimensions must be maintained to ensure that the risks inherent in each leadership transition are minimized and the best outcomes are achieved. Having best practices in place to manage each of these 10 dimensions in a continuous process will ensure that a board of directors is operating at peak effectiveness and efficiency, and that its CEO succession-planning program is, without question, a best practice.
1. Establish Board Ownership, Involvement and Oversight
More than at any other time in history, stakeholders today expect a company’s board of directors to have a command of the entire CEO succession process. An explicit, ongoing program for managing this critical responsibility should be chartered into the bylaws with a board committee given explicit oversight duties. Care must be taken to ensure that the directors do not assign this duty to a sole individual or entity, whether it is the CEO, the chairman or a search firm. The real current of understanding must run more deeply than simply acknowledging who owns the process and why. It comes from knowing how to best navigate the interpersonal dynamics between the board and the CEO and among the directors themselves.
We have always believed that the entire board should be entrusted with full accountability for CEO succession planning. Over the years, we have discovered that greater success in succession is dependent upon the presence of a lead director or non-executive chair who personally orchestrates the way in which board ownership for this process is defined and managed, in partnership with the CEO.
2. Set Succession Time Frames
Boards of directors must ensure that the companies they serve have the ability to sustain excellence in CEO leadership by ensuring a seamless transfer from one leader to the next. Given the complexity of the role of the CEO, comprehensive preparation of internal candidates should begin at least five years in advance of an anticipated transition. A succession conceived and completed in too short a time does not allow for a change of direction or recovery from mistakes. For this reason, CEO succession planning must begin immediately following the installment of a new CEO. The planning must be a constant, ongoing process that is managed as closely and attentively as any of the company’s critical business issues.
Several timing aspects must be considered: the expected departure date of the incumbent CEO; the time it might take to develop internal talent for the role; whether (and how long) the outgoing CEO should remain on the board; when to involve a search firm; and the time of the transition from one CEO to the next. Since boards generally meet only a few times a year, it may be helpful to think of a succession process in terms of the number of board meetings until the expected transition rather than in terms of months or years.
3. Prepare for Emergencies
An emergency succession plan ensures the continuous coverage of executive duties and safeguards the interests of the company’s stakeholders, reputation and value-creating activities. It also provides guidelines for the board when it must appoint an interim CEO. Yet, 40 percent of the directors we surveyed claim that they are not prepared for an emergency succession in the event of a sudden, unexpected or unplanned departure of their company’s top leader.
An absence of leadership is, among other things, an embarrassing indication of poor board governance. Moreover, it has an immediately damaging effect on the company’s market position and share value. Boards never know when they may have to implement an emergency CEO succession plan. For this reason, boards should always be thinking about a succession plan.
When a company is blindsided by the sudden departure (or loss due to tragic circumstances) of its CEO, boards must react immediately, though calmly and decisively. They must assure the public, customers and employees that new leadership will soon be in place, either permanently or on an interim basis. A good plan considers multiple contingencies, looks at the top three levels, includes a communication plan and process steps. It must be more than “who will step in?”
WHO, WHAT, WHERE?
4. Align Strategy and Profile
Before discussing the “who,” the board must come to an agreement on what the right next leader should look like, that is his or her skill set, industry knowledge and leadership history. The key questions are “who – for what, when and how.” For a successful CEO transition, the board must agree on the strategic direction of the company and on the requisite capabilities to lead the company into a particular future. If the directors cannot agree on strategic direction it will have even greater difficulty agreeing on the requisite capabilities.
Before discussing prospective candidates, it’s vital for the board to determine the current market position of the company, its collective vision and direction for the future, and the strategy and culture required to achieve its near and long-term goals. Political dynamics and competing agendas, often unacknowledged, are significant impediments that can derail or misdirect the board. They can lead to hastily or poorly chosen successors, regardless of how buttoned up a board’s succession planning program may have been.
The full context of what the next CEO needs must be derived from solid, broad-based information that has been vigorously and openly discussed among, and agreed to, by every board member. Once the criteria are clear and relevant, discussions of candidates – compared to the strategic criteria – will be more meaningful and systematic.
5. Build a Talent Pipeline
Creating a culture of development, not just among the executive team, but two or three ranks deep in the organization, sustains a company’s performance at all levels and ensures the retention of key talent. Even if the board goes outside the organization to select the next CEO, a corporate culture that identifies and develops its talent is more likely to have committed, effective and trusting employees.
With the development of a leadership pipeline, the executive team ought to be more accepting of the new leader, for each team member will have had a chance to audition for the role. In a corporate culture that has not developed a pipeline, an unplanned departure of a CEO will always force a sudden and superficial assessment of executive talent and prompt an external search. It will also create a competitive, untrusting environment from which an unprepared CEO will most likely emerge –and most likely be rejected.
Regular discussions and reviews of the prospective talent pool must occur, and candidates provided a customized development program with challenging assignments. These assignments must be meaningful and bear a real risk of failure in order to allow the board a full view of what each candidate is capable of accomplishing under pressure.
6. Source External Talent and Manage Search Firms
Care must always be taken when hiring external talent. An externally hired CEO’s annual compensation can be 75 to 100 percent greater than that of an internal appointment. In addition, an outside CEO is less likely to stay long term and has a higher risk of early failure. This can damage confidence in the board and the company. Stock prices can be negatively affected and key people may leave, leading to further reliance on external talent and perpetrate a cycle of failed successions.
As part of the succession-planning program, external candidates must be identified and their career paths monitored for successes and failures against circumstances and events in their own company and industry. Although boards may not have the capabilities to identify and monitor qualified, accessible external talent, input from search firms can provide useful information about viable candidates.
Search firms will be most valuable in identifying appropriate external candidates when they thoroughly understand the requesting company’s culture, the alignment of its board, and the company’s strategic direction. It’s ultimately the board’s responsibility to select the proper candidate from the slate of internal and external talent.
PEOPLE & PROCESS
7. Select the CEO
The consequences of a poor decision are enormous, which is why the CEO selection decision must be grounded in a thorough, in-depth assessment of each candidate. The foundational guide for this is the Leader Profile, a blueprint that defines the requisite leadership skills and character traits expected of the successor CEO.
Boards need insightful information on, and meaningful interactions with, each prospect. Assessments should examine the nominee’s knowledge, skills, competencies, social intelligence and other personal attributes in order to form a broad picture of each candidate’s capabilities and potential. Presentations alone are not adequate, nor are resumes or letters of praise. The fact that 60 percent of board members rate themselves as having inadequate interviewing skillssuggests the need for a deeper analysis of candidates from unbiased individuals.
Given the difficulty of knowing what skills will be most important in the future, critical attributes that transcend any situation are critical. These include integrity, trustworthiness and sound character. Though personality and cognitive abilities are not readily identified in interviews, they need to be taken into account and can be gauged accurately through a professional assessment.
8. Proactively Manage the Transition
Too often, CEO succession is viewed as an event rather than a process. As a result, the needs, wisdom, and experience of the outgoing leader are not always leveraged. This can potentially lead to a misalignment between the incoming chief executive and the board, which in turn can cause strategic dissonance between the new leader and the rest of the C-suite. Well-managed successions allow time for the outgoing CEO to familiarize the incoming CEO with his or her vision as well as knowledge of the company and the executive team.
Our research indicates that 41 percent of directors do not pay sufficient attention to either the integration of a new CEO with the board or strategic differences that might arise between them. This is easily one of the greatest reasons for short, unsuccessful tenures and the high rate of CEO failures.
Once the successor is in place, it is tempting for the board to breathe a sigh of relief and feel that the transition process is complete. However, the executive integration process is much more complex than most directors realize. While the first 100 days are critical, current research shows that successful integration actually takes between 12 and 18 months. The transition should not be considered complete until this milestone has been reached.
9. Measure Performance and Improve Progress
After the new CEO is selected and the transition is completed, the board needs to attend to two more important tasks. The first is gauging the new CEO’s first-year performance. This is critical to identify any early indicators of problems that need addressing. The second is to conduct a review of the succession process itself, to capture lessons learned while they are still fresh and to make adjustments for the future.
Each leadership changeover is unique and will usher in new personalities, behaviors, business dynamics, human relations and interactions. For these reasons, every succession brings additional knowledge and discoveries that must be added to the board’s institutional memory. This is an important concept since the makeup of the board could change dramatically in five to seven years. We believe that the most constructive position is one in which boards and CEOs view measuring performance as a partnership. With this mindset, engaging in regular and professional reviews of expectations and performance should strengthen, not strain, the relationship between the board and the CEO.
10. Manage the Dynamics in CEO Succession
While each of the previous nine dimensions of effective CEO succession planning defines a specific stage in the succession process with tasks and outcomes, this tenth and final dimension addresses the relational dynamics among the various players involved in each stage of the process.
Moreover, this tenth dimension speaks to the personal emotions and challenges that have a direct bearing on the thoughts and actions of the executives involved, affecting how they view themselves and their relationships with their peers and superiors. These driving (often conflicting) forces of ego, position power, fear, and uncertainty seldom rise above the surface in business. Yet they add a layer of complexity when left unresolved or only shared in private with a spouse, close friend, or mentor.
Our point of view is that boards and CEOs can be far more productive and successful if these emotions are acknowledged and resolved. By effectively managing the personal feelings that will always well up during succession planning, stakeholders can channel their experiences and energy into a powerful, productive force for the benefit of the organization, and ultimately, themselves.
THE BOTTOM LINE
The costs of not getting CEO succession right are enormous. They are also obvious and subtle, and immediate and long lasting. Expertise in the governance process and organizational behavior, applied with rigour and independence, reduces the risk and increases the opportunity. The time and expense involved in creating and applying a solid CEO succession plan is an investment that will pay dividends to a company for years to come.