Why So Many Companies Fail at CEO Succession Planning
It is easy to see how a smooth change in leadership is critical to the success of any organization. A poorly executed CEO succession has immediate negative effects on stock price, strategic momentum, company reputation, and employee morale. There is every reason for a board to get succession planning right, but too often the process is not given enough consideration. When board members adopt a lazy, reactive approach to assuring a frictionless change at the top of an organization, they fail to deliver on one of their chief obligations to shareholders. Why is succession planning so poorly practiced? Here are five reasons that can be easily corrected, if only directors will take ownership of the responsibility.
CEO Succession Is a Rare Event
There are few opportunities for board members to develop expertise handling this task. Though boards seem to recognize the importance of finding an experienced director to lead committees like Audit, Risk, and Compensation, it is too often the case that the leader of the Succession Planning committee is someone "leftover" after the other assignments. With a lack of expertise, it is no wonder so many efforts underdeliver! The solution is simple: Boards need to recruit members with experience shepherding an organization through a change at the top. There are examples where a change at the top has been expertly navigated: Adobe, Coca-Cola, Merck, Fluor, and Avnet, to name a few.
The Process Never Ends
Too many boards view succession planning with a mañana mindset: "When we need our next leader, we'll crank up a process to prepare one" is the typical refrain. This approach is naive in its underestimation of the complexity of preparing leaders. Grooming a new leader is a continuous process—it begins long before the chief executive officer plans to step down and it ends long after the new CEO has taken the reins. Truthfully, it could be argued that the process never ends.
Board members can offer a variety of reasons as to why succession planning is placed on the back burner. Sometimes it's because directors see their recently appointed, high-performing, or young CEO as an indication that the time is far off. Sometimes it's because the board does not want to make the incumbent CEO suspicious as to its intentions. But this is not a back-burner issue. It is easy, for example, to imagine that in the early spring of 2010, the BP board was not spending much time thinking about a successor to the company's young and popular CEO, Tony Hayward. The Deepwater Horizon disaster—and Hayward's flippant response to that disaster—quickly changed the board's priorities.
Focus on the Past
Too often directors look in the rearview mirror to understand what the company needs for the road ahead. A good experience with the departing CEO leads directors to want "another one of those." A bad experience predisposes directors to someone who provides a stark contrast to the exiting executive. Continuing with the focus on the past, the selection committee then dusts off the job description used five or 10 years ago to commence its search. Though there are lessons to be learned from studying the past, it is clear the real test of a candidate's viability is the degree to which he or she is prepared to lead the company over the challenges ahead—not the degree to which he or she provides the desired contrast (or similarity) to the departing CEO.
Some examples where boards have managed that transition well include the selection of Jim Skinner at McDonald's, Rex Tillersen at ExxonMobil, Richard Anderson at Delta Air Lines, and William Swanson at Raytheon.
The CYA Era
In the post-Sarbanes-Oxley era many boards have adopted what politely could be called a compliance-based approach to succession planning. There is a plan of some sort so that everyone can say there is a plan. A compliance approach allows directors to quickly point to an organizational chart with names in boxes. The names are all described as "ready in one to three years." There is also the infamous "name in the envelope" for the next CEO or emergency candidate, but private conversations with directors reveal a lack of consensus about the quality of the choice. In short, these compliance-based plans are simply not operational.
It Becomes the CEO's Job
Finally, boards often make the mistake of delegating the task of succession planning completely to the CEO. As good of a leader as the CEO might be, that does not mean he or she is best positioned to choose a successor. First, very few CEOs have any experience evaluating and choosing a CEO. They are quite likely biased by their own style and experiences. They may prefer a successor who will solidify their legacy when it comes to the direction of the company, when instead they need to be able to dispassionately evaluate what the company needs going forward. Regardless of the CEO's capabilities in identifying successors, the board of directors simply needs to own the process. Succession planning is no more properly delegated than any of the other board responsibilities. Of course CEOs play a role, but they must not be the owner of the effort.
Each of these threats to effective succession planning is avoidable as long as directors are able to recognize them as bad habits that do not serve the company well. If a board fails to do so, the odds increase that it will be caught by the surprise departure of a CEO. Should that happen, it is a best practice to always be in a position to name a consensus interim CEO in an emergency—the Cathie Lesjak to Hewlett-Packard's Mark Hurd.
More generally, the board needs to regularly delve into the company's strategic plan to develop and then continually revise the skills and experience profile for the next CEO. This allows the board to regularly assess the internal candidates against the forward-looking needs of the company, to identify the gaps, and to take the steps required to address them. Coincidentally, this effort also gives the board a framework to repeatedly assess the incumbent CEO and provide real feedback to him or her. Such an effort is also valuable as the board assesses external hires.
Finally, directors need to recognize how context matters. For example, when a company's top management team is excellent, the board can take a bit more risk in a successor than it can when the team is weak. The board could also take into consideration organizational design changes such as creating the COO role for a period of time and/or separating the chairman and CEO role for a period of time to allow the newly appointed CEO to focus on running the company while receiving coaching and mentoring from the chairman. Any way you look at it, a board can have multiple strong options as long as leadership continuity is a process it prioritizes and proactively addresses.