CEO Succession: Common Board Mistakes
Absent the need for a performance turnaround or a sharp shift in strategic direction, many boards find less risk in promoting an inside executive to the CEO role than recruiting a CEO from the outside. A 2007 Hay Group study of 150 of the world's largest companies found that more than two-thirds favored internal over external candidates as a successor to their CEO.
But the preference for an internal candidate carries with it the obligation to identify and groom that person deemed the best fit sufficiently far in advance of a projected CEO transition. The grooming process could involve "stretch" assignments, exposure to key areas of the business outside his or her traditional comfort zone, education, coaching, having the top candidate sit on an outside board, and various other developmental experiences.
If the succession planning process starts a year or even two years prior to the target date of the CEO's retirement, many candidate-development initiatives either aren't an option or can be superficial at best because there isn't enough time to do them properly. As a result, high-potential internal candidates are compromised and sometimes even ruled out because they lack an important component and there isn't time to close the gap.
Starting too late also precludes the board from adopting a two-stage outside hiring process. If a board has four or five years before a CEO transition event is anticipated, there is an option to hire in an outside executive to either a staff or line role who may have credentials to become CEO. If the new hire performs well and acclimatizes to the corporate culture, he/she may join the pool of internal candidates for success planning purposes and may be groomed further. However, a time horizon of two years or less precludes this option. Any outside hire at this stage is likely coming in either directly as CEO or as Chief Operating Officer, tantamount to being "CEO-in-waiting."
Cookie-Cutter CEO Criteria
If your board hasn't paid sufficient attention to creating, tailoring, and achieving board alignment on the criteria for your next CEO, you're off on the wrong foot right from the start. All too often, this key step in the CEO succession planning process is given short shrift. One board member will bring in a list of CEO requirements developed by another board he or she sits on that "looks pretty good". Or the senior HR executive will download a cookie-cutter list from an article on CEO succession planning or from some other company's Web site and circulate it through the board for comment.
The way to do determine the board's criteria for the CEO spot is fairly simple: Start by taking into account the company's strategy, business model, desired corporate culture, and ownership structure. Interview all board members, the CEO, and all members of the executive team to get their input on these factors and on their implications for future leadership. Then, design a highly tailored outline of future CEO criteria based on all of these inputs.
As a board, you should go over this outline very carefully—discuss it, modify it, and prioritize from among the many requirements in terms of "must haves" vs. "nice to haves" in a future leader. Only then do you have a useful tool against which to gauge potential CEO candidates—and one that the board, the CEO, and key executives have all been engaged in developing.
Insufficient Candidate Information
A very experiences corporate leader once told me: "Leadership is like art. I know it when I see it." Yet the choice he and a board he served on made for their next CEO proved disastrous. He later admitted that the board hadn't gone to the effort of getting multiple perspectives on the candidate. They'd made the choice based on his polished boardroom presentations and what the board felt was a charismatic personal style.
Unfortunately, that kind of decision-making is all too common. While board members are experienced businesspeople and generally have good instincts about leadership, they need to recognize that those instincts alone are insufficient. Due diligence today means gathering multiple perspectives on CEO candidates before a making a decision.
Here are guidelines for gaining different perspectives on CEO candidates:
• Get the current CEO's perspective. He/she knows the job better than anyone else and works with the internal candidates every day.
• Have a professional third party assess candidates against the CEO-role profile. Such assessments nearly always surface useful insights about candidates but should never replace the board's ultimate judgment.
• Make sure the CEO succession plan incorporates a number of well-planned opportunities for the board to get ongoing exposure to top candidates.
• See how a top candidate functions in a "stretch" assignment such as a shift from a staff job to a project management or even line role or an international assignment;
• Find out how the candidate is perceived by his/her subordinates or peers. These are often done as 360 evaluations.
The key is to design the CEO succession planning process to provide the board with multiple perspectives on the candidates and make sure there is plenty of board exposure to and information about the candidates being generated along the way.
Time and again, boards acknowledge that their single most important decision is choosing the CEO. Recognizing some of the most common mistakes boards make in this area is the first step in avoiding them.
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