Getting CEO succession right

By Jane Allen

CEO successio n is complex, risky and important to get right. Whatever the size, ownership structure and activities of an organisation, the Chief Executive Officer is the pivotal person determining the strategic direction, culture and ultimately performance of the business that he or she leads.  

Given this, one could easily argue that the selection of a CEO is the single biggest controllable factor in value creation for a business.  On average globally, a change at the top occurs once every five to seven years and ideally, succession will be a naturally occurring activity instead one of forced turnover.  

A forced turnover at the top will result in an immediate internal appointment or a quick external search that considers external candidates against internal talent.  CEO succession, given the importance, deserves to be more than a search for a CEO at the last minute, even a well executed one.  Below are some thoughts around how to have a planned and thoughtful process.

The board’s role

CEOs run companies, not Boards, but CEO succession should be an issue that is continually on the Board’s agenda. Despite what seems to be a never ending debate about corporate governance, and the different roles of management and the Board directors, what remains virtually unchallenged is that the most important responsibility of the Board is to select and appoint a CEO.

The decision regarding when a new CEO needs to be appointed and then who that should be, should be one taken with great care and the full knowledge of the change process involved and possible consequences of how this leadership transition that will affect others in the organisation.

Given its importance, CEO Succession is a topic for discussion even when the change is not urgent. Many powerful forces work against a change at the top, and Boards and CEOs need to make a special effort to stay honest and know when it is in the best interests of the shareholders to make a change. This often involves the discussion of difficult topics on an ongoing basis. Staying honest is hardest when it comes to people changes.

Debating what is needed in the future

Knowing what to look for is important and this is obvious. But it easier said than done. There will always be characteristics that are going to be better predictors of success in terms of leadership of a specific organisation within a certain timeframe, and these need to be debated and broadly agreed.  

A Board and its advisors need to focus on what is important and continually discuss the difficult trade-offs that they will no doubt be faced with once real candidates, be they external or internal, are being considered. This dialogue and open debate facilitated well will make a board more “fit” to make a value creating and even inspired choice when the time for a final decision is upon them.

A disciplined process must be followed

This process must identify the priorities of the role moving forward and the challenges. Careful attention in a planned succession must be taken to ensure that any positive cultural characteristics are retained and not lost in a CEO succession.

This is critical as new CEOs, be they from the organisation or from the external market will be looking to make his or her mark with in the first few months and as weeks go by a Board’s influence will reduce.  Internal talent must be comprehensively and objectively reviewed as well as potentially available external talent. As the CEO succession process moves towards a through and professional executive search exercise all candidates need to be evaluated thoroughly and consistently against an agreed and prioritised framework.

Everything depends on the quality of the final decision

These decisions are often not easy to make as it is a black and white, winner takes all scenario, and choosing one alternative often means eliminating all others. A fit Board with good advisors will resist the inevitable pull of last minute doubts and emotions that can affect good decision making, irrespective of the process employed.

At the end of the day it is important for a Board to be able to honestly say that they have done not just an acceptable job of CEO succession planning, but an exceptional one, and that this led to an outstanding leadership outcome for shareholders.

(Jane Allen is a partner at Egon Zehnder International’s Sydney office)

(Source: CEOforum)