CEO, succession, leadership
The former chief executive of a Fortune 500 company once confided to me after his chosen successor didn't get the nod: “I'd been grooming a great executive in whom I had great confidence. But the job went to someone else in the end, an outsider.”
His lament wasn’t just for the executive, who didn’t really miss out at all but who went on to become CEO of another company, but for the board which took a risk with the new CEO. Of course, the board members collectively held their breath for six months while the incoming CEO made his changes and started to develop and execute on the new strategy.
Boards generally make two major mistakes:
1) They don't know about anyone who's not within proximity of the CEO's team.
2) They simply don't believe there is a viable successor within.
Every big company these days has a succession plan: for governance reasons, because shareholders demand it and because it makes them feel better. But most plans are thrown out the window as soon as the need arises for a new leader. The challenge isn't to have a plan, but to have a blueprint that is adaptable to the dynamic nature of the succession process and the shifting demands on the CEO position.
Here’s a surprising trend: At the 1,000 largest US companies (by revenue), 80 new CEOs were appointed and only 44 of them, or 55 percent, were promoted from within (latest available stats 2008). That's a breakdown in the system. A failure rate of 45 percent means far too many plans aren't working.
Fear is the factor behind many board decisions. If the current CEO walks on water and has delivered great results, the board is worried about the successor's ability to maintain the momentum. Conversely, if the CEO has performed poorly, the board worries about if and when the successor can turn the business around. To get through this barrier, I’d recommend that boards let go of some urban myths, including:
External candidates are more promising. Boards wrongly evaluate the internal candidates against their current CEO not on their first day in the role but on their last day! Meanwhile internal candidates hear over and over that they are still just a year or two away from being ready. It’s a recipe for losing good people.
CEO succession planning is single-person event. When boards take on succession planning, they often focus on the CEO role. However, it’s not one role but a constant assembly and reassembly of a leadership puzzle with many pieces. As each piece is selected –from CEO, CFO and COO to sales and marketing chiefs and other C-level officers – the shape of the remaining pieces becomes clearer. External factors such as company strategy, economic conditions and the like also affect the way the puzzle is solved.
We have a great internal candidate. We don't need to look outside. This is myopic. Boards need to run inside and outside searches concurrently. It is simply good governance, and shareholders should mandate it.
Boards should also be continually focusing their succession planning on the moving target of the knowledge, skills and abilities the next CEO will need. They need to design their plans not only to choose the new CEO but also to provide support as he or she finds his or her legs in the new role.