Tuesday October 30, 2012
Tips on planning CEO succession
HOW many times have we seen or heard a CEO leaving (or left) yet the process of “search” just got underway barely weeks from incumbent's official departure date. There's no denying that change is traumatic. Small businesses, families, even governments are at their most vulnerable when control is transferred from one leader to the next. Organisations are no exception. In fact, the months after a new CEO takes up the reins are almost always negative quarters, no matter how competent or experienced the new leadership is on paper.
It's no wonder then that corporate boards have a tendency to put off thinking about CEO succession until it's a knee-jerk reactive response to an illness, scandal, or investor discontent forces them to scramble to fill their top slot. Even worse, boards may keep an underperforming CEO in the hot seat simply because they're afraid of disruption yet prefer to accept the normal.
But boards should not look at CEO successions as events to be avoided or delayed, rather from very early stage the new CEO signs his/her contract as part of KPI (key performance indicators). CEO succession is or should be an ongoing process based on strategic long-term thinking, the development of a strong executive talent pipeline, and an acceptance of change as a regular part of corporate culture. Approached this way, succession becomes part of the natural growth and development of the companies.
Besides minimising risk and insuring against catastrophe, there are other compelling reasons for boards to get their hierarchies in order. When a corporation is thrown into crisis by the sudden loss of a chief executive; panic and/or a lack of due diligence can delay the transition of power. Worse, it can result in the selection of a candidate who isn't qualified or ready to step up to the plate.
Building a sustainable and reliable talent pipeline, however, is an undertaking that many boards don't have the expertise, or frankly, the time to do on their own. And yet it is essential to achieving sustained growth for their companies.
Research undertaken by Korn/Ferry International on the pitfalls of CEO succession found that, indeed, a CEO transition is something to worry about. We looked at 132 Fortune 500 companies that underwent CEO transitions between 2003 and 2005 and then tracked their performance over the next half-decade. Even factoring for the recession, the results were sobering. Almost half of the CEOs were gone by 2010, many of the companies were acquired or participated in mergers after changing CEOs, and a large percentage underperformed the rest of the Fortune 500. Only 16 companies were identified as having consistent, strong growth after handing over the captain's chair.
The difficult question to answer is why so many companies stumbled during and after their transitions. A statistical analysis showed that the education level of the incoming CEO didn't matter much, previous experience as a CEO was negligible, the industry they worked in, their age and gender, and a concurrent appointment as chairman of the board made little difference in their profile for success. Candidates recruited from outside the firm did not outperform internal hires, and vice versa though of the successful companies, a larger percentage chose internal CEO successors who had more than 10 years experience at that company.
Board's due diligence
What that means to us is that there's no magic-bullet CEO profile that can turn a company around. Knowledge and experience is not enough. It all comes down to due diligence on the part of the board in figuring out which potential CEO successor aligns with their goals and strategy, fits with the culture, and has a vision that resonates with the rest of the company. To some extent, success of candidates also depends on state of maturity of business and what position the company is in. Succession planning process cannot be ad hoc, it should be rooted in a firm framework so that it's not undermined by random thoughts or feelings.
Still, a board can spend decades grooming someone they believe is the perfect candidate to take over their organisation, only to find when the day comes, that the entire market has changed and CEO Right is now as outdated as a pager. Instead, a smart board develops options: a whole crop of potential C-level executives with a diversity of skills, experience, and outlook to face whatever challenges come next.
Investing in that kind of talent pipeline will produce generations of leadership. The best time to build that pipeline is now, before the unexpected happens. In fact, boards should be looking two or three CEOs ahead, starting by identifying internal candidates, then asking do they have the skills and leadership styles that mesh with future growth plans. Or can those skills be developed? A robust programme of assessment, focused development, executive coaching will, over time, give directors a broad bench of executives ready to lead, no matter the situation.
Not all CEO candidates have to come from within the organisation though. Part of succession planning is also identifying and tracking the stars outside the company who also have the potential to lead it in the next decade. Not only does keeping an eye on the Who's Who of the entire industry give the board a benchmark for assessing their own internal candidates, it gives them the option to reach outside the hierarchy if they decide the company needs external talent.
For the succession planning process to work, however, corporate boards need to strive for their own gold standard in other areas of governance. Directors need to be aligned enough to do some long-term thinking without a short-, mid-, and long-term business strategy, there's no way to identify short, mid, and long-term CEO candidates.
And the board has to make CEO succession planning a priority. Not only should there be investment in training, coaching, and actively managing the work experience of future candidates, the board needs to maintain an open and ongoing dialogue about succession and the progress of their candidates.
One best practice is for boards to commit at least a half-day each year to focus on the succession process, and individual board members also should commit to interacting with internal candidates in various settings. After all, data may help determine the right person for the job, but there's no substitute for knowing a candidate's personality and management style first-hand.
Six critical steps
A CEO succession plan that can serve your business for years should begin with these six critical steps:
● Align the board around the business strategy and map out short-term, mid-range and long-term goals. It's no use identifying new CEOs to lead the company into the future if the future is not clear;
● Build leadership profiles. Identify the attributes needed to lead the company to its goals. Ask what skills your ideal CEO today would possess; and what would the ultimate CEO look like five or ten years into the future?
● Identify high-potential talent. Find the people inside and outside the company who have leadership potential and fit your CEO leadership profile. Ask what each candidate needs to develop, and create a roster of talent that the board can analyse to determine the depth of talent in the organisation;
● Develop the talent. Once each candidate's areas of weakness or inexperience have been identified, create a training or development plan for each. This might mean putting them in a management position they've never dealt with, giving them overseas assignments, or improving their technical or business skills;
● Coach the candidates. CEO succession candidates should receive one-on-one time with high-level executives to learn more about C-Suite functions and to troubleshoot any problems they may face. Internal mentoring is incredibly valuable, but so are external executive coaching programmes that might shore-up vital skill sets in less time; and
● Transfer knowledge. Long-term planning is often the first thing abandoned in the chaos of daily business. Establish mechanisms that maintain succession planning despite board or management turnover. This may mean requiring presentations to the board periodically, or letting an outside consulting firm manage your succession planning to maintain the momentum.
The benefits to building a deep CEO bench go beyond avoiding transitional crises; it can be a positive step in the natural growth and development of the company.
Having an entire pipeline of CEO-calibre executives working throughout a business, and having a system that identifies and develops leaders, adds value to a company, no matter who eventually inherits the corner office.
● The writer, managing director of Korn/Ferry International in Malaysia, believes in life and work, you must learn to manage what you can control and not what you can't, as those you can't are just simply beyond you to worry too much about.