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22 May. 2019 | Comments (0)
Virtually all Board members would agree that CEO succession planning is one of their most important responsibilities. Why is it then that so many companies are ill prepared for the departure of the incumbent CEO, especially if that’s the result of poor performance, ethical issues, death or incapacitation? Numerous consulting firms produce best-practice summaries, and The Conference Board issues an annual CEO Succession Practices report--but too many Boards continue to struggle with this fundamental task. To counteract the phenomenon this article describes seven typical miscues in CEO succession planning—along with suggestions for how improved practices can lead to the preferred outcome: selection of a new CEO who is equipped to address the company’s critical challenges and opportunities and who enjoys the support of the Board.
Wait Until the Last Minute
Perhaps it’s human nature to procrastinate on a difficult and sometimes contentious task, and some Boards are concerned that raising the issue of succession planning will send the wrong signal to their incumbent CEO. Nonetheless, waiting until a succession crisis occurs or the CEO abruptly announces his or her intention to resign effectively turns succession planning into a selection exercise and restricts the Boards options. When the Board thinks about CEO succession primarily in selection terms—or has boxed itself into a corner by waiting until the CEO’s departure is imminent—it puts pressure on the Board to recruit someone from the outside in a hurry or promote an internal executive who may not be fully equipped to succeed as CEO. In either case the risk of failure goes up significantly.
Companies that do CEO succession planning well view it as multi-year activity that goes through different phases leading up to a more “active” period as the CEO’s departure gets closer. A longer planning horizon provides the Board with several advantages: the ability to think critically about the CEO skillset required for success in the future; to identify, develop, and get to know the top internal candidates; and to scan the external market for potential candidates.
Focus First on the “Who” Versus the “What”
Companies that have prepared poorly for the departure of the current CEO tend to jump immediately to consideration of candidates to fill the CEO role, the “who.” As a result, Board members are less likely to think carefully about the organization’s strategic challenges and opportunities and the corresponding set of skills, experience, and personal attributes a new CEO will need to lead the company forward. Without taking the time to consider the organization’s future-oriented needs, they are more likely to try to find someone who replicates the outgoing CEO (if they liked him or her) or lurch to the opposite extreme if they didn’t.
A more useful approach is for the Board to create a CEO “success profile” that outlines the mix of required skills and experience. Great leadership skills should certainly be part of such a profile, but what other skills are especially important? M&A, global experience, strategic skills, the ability to engage with important key stakeholders? What is the premium placed on growth and change versus continuity—and what does that imply for required CEO attributes such as risk taking, decisiveness, and comfort with ambiguity? Board agreement on such a success profile provides a common point of reference for the consideration of external candidates as well as the identification, development, and testing of internal ones.
Hand Succession Planning Off to the Incumbent CEO
Some Boards get confused about the role of the current CEO in succession planning and in the process abdicate their own responsibility. The incumbent should definitely be involved, especially in “quarterbacking” activities involving internal candidates—but delegating succession planning to the incumbent can lead to real problems. First, many CEOs prefer successors “in their own image,” i.e., executives who share their own values and business philosophies, even when business conditions require a new CEO prepared to lead the organization in a different direction. Some CEO want to reward loyal “lieutenants”: trusted staff who have faithfully executed the CEO’s agenda but lack the ability to operate independently as a “number one.” And some CEOs, either intentionally or unintentionally, keep potential internal candidates perennially beyond reach of grasping the baton of succession.
Successful Boards start with the understanding that they are ultimately responsible for an effective succession planning process leading to the selection of the new CEO. The incumbent should definitely be involved as well as, in many companies, the Chief HR Officer and an external succession planning adviser. Typically, the CEO identifies internal candidates whom he/she believes can progress to the CEO level and should communicate to the Board the strengths, development needs, and readiness of those candidates. However, to avoid “CEO bias,” Board members should take steps to get to know those candidates to assess their skillsets and readiness independent of the CEO’s evaluation. Boards should review the development plans of internal candidates and be prepared if necessary to “force the issue” to move a candidate into a new role or expand his/her responsibilities as preparation for success as CEO.
Pre-Determine Whether the New CEO Should Come from Inside or Outside the Company
At the point when they decide to engage in CEO succession planning, some Boards declare a strong preference for an internal or an external candidate. Some say they need the continuity an internal candidate would presumably bring. Some argue that an external candidate is required to take the company in a new strategic or cultural direction. It’s a false, unnecessary choice that can have major downsides, and it prevents the Board from utilizing the dual “levers” of considering both internal candidates and external ones.
On one hand there are real benefits to promoting an executive from inside the company. Such candidates know the organization, the business, and the industry; and as some Boards say, it’s better to be familiar with “the devil you know rather than the devil you don’t.” So, if a company has well-developed internal candidates who can hit the ground running and are prepared to address the organization’s strategic opportunities and challenges, that’s great. However, if the Board has any questions about the readiness of internal candidates, there are real benefits to “calibrating” internal candidates against external ones to ensure the best candidate in terms of the success requirements defined for the position. Some companies have profited handsomely by bringing in a new CEO, but the risks of a hiring mistake go up considerably. Relevant industry experience and “hard” skills such as M&A or new product development experience are relatively easy to evaluate in a candidate. However, the softer skills of leadership are harder to assess-- skills like the ability to build and motivate a strong leadership team or to lead change—and more often than not these are the make or break skills that determine a new CEO’s success. So, jumping to a premature preference for an external candidate creates unnecessary risk.
Not Developing and Testing Internal Candidates
When Boards focus primarily on the “who” should be the next CEO, they tend to look for people with the “right stuff” and, as noted, tend not to consider the skills, experience, and personal attributes required for success as CEO. In reality few internal candidates are ever fully prepared to succeed as CEO, because the responsibilities of the CEO position are fundamentally different from any other job in the company. Who besides the incumbent CEO has been tasked with orchestrating communication with a Board of Directors or leading the creation of an enterprise strategy?
Companies that have been successful in developing new CEOs internally typically employ several important practices. Their identification processes include in-depth assessment. Once a candidate is identified, he or she is compared to the CEO success profile. What skills and strengths have they demonstrated? What capabilities do they need to exhibit? What actions are required both to develop and test those capabilities? Often, such developmental steps involve the assumption of new areas of responsibility to help the individual develop new skills or a broader perspective. As part of their consideration of internal CEO candidates, some Boards keep track of “what we know” and “what we need to know” about the individual. They use the latter to evaluate whether the candidate is gaining from developmental experiences, an important indicator of the individual’s ability to continue to grow should he or she be named CEO.
Relying Exclusively on Search Consultants to Check References
After Board members conduct interviews with external candidates for the CEO position, it’s typical to ask the search consultant who presented the candidate to conduct reference checks on the finalists before an offer is made. Usually, these are three or so references provided by the candidate. This can be a slippery slope, even when the most professional search consultant is involved. Since most of us have been candidates at some point in our careers, we know the list of references tends to include “friends and family,” i.e., close contacts selected so they will say glowing things. And once a search firm has a candidate the client likes and who seems to be gliding toward an offer, the search consultant’s primary motivation is to conclude the search.
Depending on the candidate’s job situation, it is important to conduct reference checking discretely in order not to jeopardize the situation of a candidate who is employed. However, recognizing how crucial it is to fully understand a candidate’s past job history and leadership capabilities, many Board members conduct reference checks using their own networks and, in some cases, employ an independent reference checking firm to contact references beyond the “friends and family” list. Doing so does not have to involve skullduggery. Often an independent reference checking firm will do research to find people with whom the candidate has worked in the past and then review those names with the candidate before reaching out for additional references.
Making a Decision and Declaring Victory
All too often Boards are elated when they have made a selection decision and think that succession planning stops there. Whether an internal candidate is promoted or someone is hired from the outside, it’s important for the Board to think through how best to position the new CEO for success. For an internal person such post-selection activities may, depending on the experience of the individual, include media training or connecting the new CEO with external stakeholders such as major customers or government or regulatory bodies. For an external hire such activities might involve orientation meetings across the organization or coordinating meetings with leaders of important industry groups. What’s key is for the Board, working with the incumbent CEO and often the Chief HR Officer, to anticipate gaps in the new person’s experience and be willing to help where necessary.
This article describes seven common pitfalls in CEO succession—and highlights ways to avoid them. None of the steps require Herculean effort by the Board working with the incumbent CEO. What’s important is being aware of these obstacles and pursuing a well-coordinated succession planning process to avoid them. The first imperative—avoiding the tendency to wait until the last minute—often entails weaving CEO succession planning into the company’s normal executive talent management process so the topic is part of a normal, ongoing dialogue with the incumbent CEO.