Chief Executive Officer & Board of Directors
Given all the dynamics at play in the boardroom, conscientious long-range succession planning can mitigate uncertainty in times of leadership change.
Boards and CEOs need to know what leadership talent exists in the marketplace and the alternatives available in the absence of viable internal candidates.
Sound corporate governance suggests that a CEO is not likely to lead an outside search for a successor; rather, an independent director or the head of the Corporate Governance and Nominating Committee would be more likely to take the lead.
The CEO working with the board should be keenly aware of the early signs of leadership potential in their top executives and be closely involved in developing the skills and talents of those people to achieve the long-term objectives of the business. Identifying, assessing and developing leadership potential and building a sustainable leadership pipeline are critical components of succession planning.
CEOs leave for four main reasons:
- To join another company
- To retire or takes extended leave of absence
- The board decides that a CEO better suited for the current environment or for likely changes in strategy or market conditions is needed
- The board or the organization’s controlling investors decide to dismiss the CEO or are nearing a decision to do so
These first two reasons could be classified as reactive - the departing executive drives the event and the company must respond in some way. The last two scenarios are typically proactive approaches by the board.
The implications are:
Reactive succession - The most important factor in effective succession planning is the amount of time the board has to react. A board can seldom identify and enlist a permanent CEO in two weeks or even two months.
Unless strategic succession planning has been in place for a while, boards may have little choice but to recruit an outsider. One of the most compelling reasons for a board to partner with a leadership advisory firm is to get an objective view of the organization’s needs and the leadership talent available to meet those needs.
If there are viable internal candidates, boards may choose to develop this talent. They may promote the internal candidate to a stepping-stone post such as chief operating officer to gauge leadership ability. Other boards may appoint an interim CEO, perhaps a board member. Again, the more time a board has in these reactive situations, the better.
Proactive succession - This takes place when the board wants a CEO better suited for the environment or changed strategy or market conditions, or need to dismiss the CEO.
A board member once asked us: “If we don’t have time to do it right, how will we have time to do it over again?”
Boards confronting the need for transitional leadership during turnarounds, mergers or acquisitions, IPOs, restructurings or other times of substantial change may turn to an interim CEO. The right interim CEO can steer the company through its volatile period while the search for a permanent successor continues.
Painful and traumatic as it can be, the dismissal of a chief executive can offer organizations an opportunity to renew and refocus on strategic goals. CEOs who can be honest with themselves will recognize that their skills and energy may not meet the company’s needs. If a CEO does not step aside voluntarily, boards must force the issue – but many directors are understandably reluctant to do this.
Boards faced with the unpleasant task of dismissing a CEO may show “mismanaging agreement.” Individually, each may believe the CEO must leave but as a group this becomes obscured and they fail to agree and consequently do not act. The failure to manage agreement is a major source of board dysfunction. By mismanaging hidden agreement the board essentially colludes to fail.
Above all, a board in denial about the need to replace a CEO is most damaging. Conscientious long-range succession planning reduces uncertainty in times of leadership change.
What are the steps in CEO succession planning?
The board conducts transition planning meetings in four phases:
- “Letting go” or ending activities that are no longer relevant to the business, evaluating processes that may need to be started and continuing managerial processes or procedures that are working well
- Gathering data and discussing objectivesPutting short and long-term plans together and implementing them
- Coaching the new executive and evaluating the impact on the company after the executive is placed.
Many boards wrongly believe that succession planning ends with the actual plan. In fact, the plan is just the beginning for activities like creating opportunities to groom internal executives, benchmarking talent in the marketplace and establishing processes to ensure a successful transition after the new CEO is in place.