CEO succession in turbulent times

In the current environment of rapid change, CEO succession planning has become more challenging for boards. As industries are disrupted by new technology and economic and geopolitical shifts, and as shareholder pressure on companies increases, boards are having to think more broadly when selecting their future CEOs. CEO succession planning today requires ongoing analysis of how a company’s competitive landscape will change and what type of leader will be required to navigate the change. It requires ensuring that the current leadership team embraces change and is continually learning.

Companies struggle with CEO succession planning in part because their awareness of the importance of a robust and tailored CEO succession process is not necessarily paired with the specific expertise required to design and implement a plan.

Given sufficient time, most companies likely would opt for an internal candidate, and according to The Conference Board’s recently released 8th annual CEO Succession Practices report, the appointment of internal candidates to the CEO position rose in 2018 to the highest level it had ever recorded, nearly 9 out of 10. That said, most boards want to look both inside and out before making a final decision. Many boards today opt to review, at minimum, a targeted external talent map to ensure they have compared the best of the outside talent pool with any internal candidates.

The context for CEO successions today

For both internal and external searches, there are several trends linking succession issues and strategic issues that are highlighted in the recently launched report and that particularly resonate with observations from our own extensive work with boards and CEOs:

Trend #1: With CEO tenure at a high, many CEOs will be leaving, leading to heightened competition for the best candidates. A trend toward longer tenures began in 2009, with tenure increasing almost every year during the past decade, reaching 10.2 years in 2018, after a record high of 10.9 in 2017. But we expect the recession generation of CEOs to be stepping down over the next several years, creating an opportunity—and a requirement—for many boards to clearly define the skills their next CEO will need in perhaps even more complex times.

Trend #2: Cultural considerations and softer skills are increasingly integral. Many stakeholders may have increased interest in creating a positive company culture in part driven by the many behavior- or ethics-related CEO departures in the past couple of years. However, more companies than ever are also focused on maintaining a healthy and inclusive corporate culture as a result of mounting evidence of a direct connection between culture, the bottom line, and critical reputational considerations. Most notably, great company cultures help attract and retain top talent.

Consequently, when creating the ideal profile for a CEO successor, boards are far more inclined than ever before to define the desired skills of their next CEO in a multidimensional way—including crucial soft leadership skills alongside more traditional attributes such as business-related skills and track record. Often, these softer skills relate to the ability to nurture a values-based, diverse, and inclusive organization; others may relate to specific organizational needs, such as the skills required to build a digital culture (for more, see “Building a digital culture” and “Building digital dexterity in your leadership team”).

Trend #3: Creating diverse leaders and teams is still a priority despite a recent decline. For example, out of a small base of only 25 female S&P 500 CEOs at the beginning of the year, 2018 saw the departure of four female CEOs and the addition of only one, netting out currently at 22. With such a small total number of female CEOs, it’s perhaps not surprising that any fluctuation in a given year is very noticeable. We are convinced, however, that most companies now understand the value of maintaining diverse leadership not just in terms of gender but also in areas such as racial and ethnic diversity, LGBTQ status, or leaders with disabilities.

So, it is heartening to witness demand from clients for diverse candidate slates in CEO searches and to see boards taking steps to build diverse slates. We recognize that our current optimism may be based more on anecdotal than empirical evidence, but we firmly believe there is a change underway and that progress has yet to be reflected in the data.

Getting started

Regardless of whether a board ultimately appoints an internal or external successor, a rigorous process will help ensure the best result, not only in the choice of CEO but also in ensuring the discipline needed for such a critical selection.

Such a process is helped by the fact that the science of leadership development has been advancing at a rapid pace, allowing organizations to identify leadership potential and build on it earlier and earlier in career paths. This also leaves more room for companies to consider candidates with different strengths and skill sets depending on which strategic shifts a company considers most likely. So, whether or not an individual candidate does become CEO, approaching an ongoing succession process in this way will build a strong leadership bench.

While there is no set formula for CEO succession, as boards face the challenge of developing and recruiting CEOs fit to lead in a new era, starting early, thinking about the context, and using a rigorous process will give all boards the best chance of ensuring a steady supply of capable leaders—ready to take on new challenges—at every level.

About the authors

Bonnie W. Gwin (bgwin@heidrick.com) is a vice chairman and co-managing partner of Heidrick & Struggles’ CEO & Board Practice; she is based in the New York office.

Jeff Sanders (jsanders@heidrick.com) is a vice chairman and co-managing partner of the CEO & Board Practice; he is based in the New York and San Francisco offices.