CEO Succession: Making the Next Move

The number one responsibility of any board of directors is to ensure that their organization has the ability to sustain excellence in CEO leadership over time, with seamless transitions from one leader to the next. This process is pivotal as CEO successions are always disruptive. Changing the head of an enterprise impacts company culture, board/CEO relations, and perceptions from multiple constituencies inside and outside the business. Depending on how it is managed, the disruption that occurs can impact performance in a positive, neutral or negative manner.

And yet, according to new studies by RHR International, more than half of today's directors don't know when their CEO plans to step down, and just 6 in 10 are prepared for an emergency succession. [See CEO Succession: A View From the Boardroom.]

Given the importance of CEO succession and the risks associated with a failure to manage it — why would a board fail to take a good hard look at its own processes for addressing what is arguably, their number one job? The disparity between how important this issue is and how prepared many boards are to handle it can be attributed to several reasons. It is a challenging process, it takes time, and the mere mention of it precipitates a host of organizational dynamics that must be managed.

This issue of Executive Insight sheds light on the complexities of CEO succession and the misconceptions surrounding the process. It also offers practical guidance for creating an effective program which results in increased shareholder value, enhancement of the brand, the ability to attract top talent, and a positive corporate reputation.

The 7 Myths of CEO Succession
There is tremendous misinformation, and just plain bad advice, available in abundance to board members on the topic of CEO succession. For example, directors are often pressured to look outside the company for the next Chief Executive. However, the individual who looks good at a distance may not be better than the internal candidate known to the board for years, allowing them to have much better insights into his/her weaknesses. Other myths surrounding succession planning may add to the board's failure to address the issue in a positive, constructive manner.

Outsiders have the same chance of success as insiders.
False — CEOs hired from outside are more likely than an internally developed leader to: 1) oversee poorer financial returns, 2) cost significantly more in compensation, and 3) fail at a higher rate.

There are not enough good candidates.
Maybe — If a company does not have enough talent, it is a problem well beyond CEO succession; this is a broader issue of overall effectiveness. A board must insist on robust, meaningful talent recruitment and development.

The complete process should not take more than a few months.
False — CEO transitions are disruptive and as such constitute a business risk. CEO succession should be an ongoing discussion, just as other risks to the business. Chief Executives leave at times and in circumstances both expected and unexpected. CEO succession is a planned process — not a stale plan on the shelf.

The right person will succeed, the wrong person will fail.
False — There is much attention given to "the right person" and not a small amount of intellectual capital has been developed to analyze people for this purpose. Tools and methods can, of course, be useful. They may also have little value, or even distract attention from more substantive issues.

Talented people will leave the company.
False — It is an unfortunate assumption that CEO transitions are always accompanied by the loss of talent near the top. This may not be avoidable in all cases, but a thoughtful and methodical process will prevent it in most scenarios. It is often a lack of care that leads to this loss of talent — usually talent in which there has been substantial investment.

Directors will cooperate to pick the best candidate.
False — Deep and very real conflicts exist among board members for all kinds of reasons. Unresolved, these lead to insincere commitment to a decision and aggression merely gone underground. The succession process, when done well, leads to a board that is more aligned, more clear about strategy, and better able to set expectations and establish a strong working relationship with the new CEO.

We are good at it.
Maybe — Directors rely, most often, on their past experience. If they deem the outcomes successful, they assume that repeating a process will give the same result. For example, one director indicated that the best place to get your next CEO is on the board itself. This is quite ironic in that many consider it a failure of the board if a director must step into the CEO role. This director has only experienced this method of succession, and has concluded that it is the best way.

What does a good, robust, CEO succession process look like?
Often in succession discussion, the conversation goes quickly to — "who?" This is ill-advised and leads to comparisons of people on unclear, ambiguous criteria that are merely implied. Instead, the organization must design a blueprint of the successful new leader based on the external landscape, goals and strategy, then compare candidates to this description. It sounds simple, but there are always areas of disagreement among the board members. These must be discussed and resolved, otherwise the directors will be operating with different criteria and the entire process will be undermined. Achieving alignment is influenced by a host of factors, many of a social-psychological nature, meaning they are not always obvious. However, they are powerful and must be brought into the light of day.