Thursday Jan 30, 2025
Thursday Jan 30, 2025
Thursday, 30 January 2025 00:20 - - {{hitsCtrl.values.hits}}
The costs suffered, or the benefits enjoyed in having the right CEO are enormous
In a rapidly changing business and societal landscape where artificial intelligence (AI), digitisation, diversity, equity and inclusion (DEI) and environmental, social and governance (ESG) issues are featuring prominently and where the public’s expectation of boards to engage more on risk oversight, strategy, investments, mergers and acquisitions (M&A), talent and performance management is on the up, the role of the board is undergoing significant change. As new topics pile on to the board agenda there are signs that boards are neglecting what is arguably its crucial deliverables, being the appointment of the chief executive officer (CEO) and the succession planning of the CEO.
There is anecdotal and empirical evidence to confirm that poorly implemented CEO succession will inevitably result in the rapid erosion of company value, damage the reputation of the board and the company and negatively impact on the effectiveness of the designated successor. Further, poor CEO succession will result in a disruption to the company’s operations and may cause key senior managers to jump ship.
Although planning for the company’s next leader has always been a critical board responsibility, modern boards, bombarded and overwhelmed by governance and operational demands of stakeholder activists and overzealous regulators, have tended to not give their due attention to CEO succession, appointment, performance, and performance monitoring. Even long-established companies with solid business models, motivated employees, cultures of innovation and track records of accomplishment have struggled to sustain their past success in the absence of the right CEO.
In a post-pandemic business world strewn with volatility, uncertainty, complexity and ambiguity, the operating models of most companies have undergone, and are undergoing, significant transformation. Against this background, boards are compelled to regularly identify, review, reevaluate and recalibrate the skills, competencies, and attributes which a CEO must possess in driving long-term growth and in ensuring sustained viability.
Boards must ensure that the current CEO is armed and enabled to deliver the company’s vision, mission and purpose through continuous training and development and that there is a CEO succession plan. The right CEO can take a good company to new heights, transform a struggling company, develop the executive team, entrench a positive corporate culture, work constructively with the board, and create value which is usually a multiple of his or her cost to company. The wrong CEO, on the other hand, can injure or kill a company and be the board’s nightmare. The board therefore carries a heavy responsibility in appointing the right CEO and in ensuring CEO succession.
The forced resignation of Pat Gelsinger, the CEO of Intel, on first December 2024 following an ultimatum from the company’s board to step down or be fired is a case in point. Gelsinger who had assumed the mantle of CEO, Intel, in February 2021 after having been associated with the company for over four decades was tasked with turning around the iconic American tech giant which was struggling to protect its market share against fierce and unprecedented competition. The company was also plagued with production delays and suffering from the departure of top talent. During his tenure, the company’s prospects had continued to decline, and it was increasingly evident that the company had failed to capitalise on a major technology wave and the injection of billions of dollars by the United States government in support of the domestic chip manufacturing industry.
The key reasons cited by the board in asking Gelsinger to resign were a 33% drop in Intel’s revenue, a 66% plunge in the company’s share price, a $ 17 billion loss in the third quarter of 2024 and the failure to positively leverage the AI boom which had boosted many of its rivals.
The most famous board intervention in CEO terminations and appointments was the firing of Gil Amelio as the CEO of Apple in 1997 and the rehiring of Steve Jobs, Apple’s co-founder, as an adviser, initially, and as the CEO eventually. It was a pivotal moment in Apple’s history. The firing and the rehiring were crafted, engineered, and driven by Edgar Woolard Jr, the then Chairman of Apple and previously the highly successful Chairman and CEO of Du Pont. He had concluded that Apple was in “a total death dive’ and that a leadership change had to be made if Apple was to survive.
Though initially impressed by the energy and passion of Amelio, Woolard convinced the board that Apple’s chances of recovery were very slim if Amelio remained at the helm. Sales were on a steep decline. Critical employees were fleeing the company and cash reserves were dwindling. He urged his colleagues on board to re-employ Steve Jobs who was then running the Pixar Animation Studio. According to Woolard the most difficult call was to Amelio, who had recruited Woolard to the board. “On July 4, 1997, I called Gil and told him that we just had to make a change,” Woolard said in an interview with Directors & Boards magazine. “I told him that he was a great guy and that he had done a good job at other companies but that he just wasn’t a fit for Apple.”
The board of General Electric (GE) must be faulted for giving up its basic right of appointing a new CEO. It transferred that responsibility to its Chairman and CEO Jack Welch when he announced his retirement. The enigmatic Jack Welch was the Chairman and CEO of GE from 1981 to 2001 and during his reign the market capitalisation of GE increased from $ 12 billion in 1981 to $ 410 billion in 2001. Against the backdrop of such a performance and a variety of other organisational and individual accomplishments it was not surprising that the board was comfortable to defer to Jack Welch’s judgement in a highly publicised CEO selection process.
The sales-focused Jeff Immelt was recommended by Welch as his successor. Upon his retirement from GE in 2001, Welch stated that his effectiveness as its CEO for two decades would be measured by the company’s performance for a comparable period under his successors. As it so happened, Immelt presided over GE in the next 16 years and at the end of his tenure GE had lost $ 300 billion in shareholder value. When asked his views, Welch declined to comment other than to say that Immelt had to contend with the ninth September terrorist attacks amongst others. It was obvious that Immelt never developed a clear strategy for the enterprise and repeatedly tried short-term fixes, all the while depending too heavily on financial earnings, rather than innovation.
In 2013, the Microsoft board recognised that the company needed a leadership change as its stock had remained flat since Steve Ballmer had taken over from founder Bill Gates as the CEO in 2000. Microsoft had missed taking a lead in multiple innovations, including smartphones, search, online purchasing, and social media because of its focus on its proprietary Office and Windows software applications.
A specifically appointed board committee chose insider Satya Nadella as its next CEO. He was aggressive in challenging Amazon in the cloud with Azure, acquiring LinkedIn in social media and Activision/Blizzard in gaming, and investing heavily in OpenAI to gain control of ChatGPT. But most importantly, he transformed Microsoft culture from an arrogant bureaucracy into an empowered organisation focused on growth and empathy for employees and customers. Microsoft stock rose rapidly as an affirmative response to Nadella’s strategy.
These anecdotes illustrate the risks and challenges companies face during CEO transitions, and they raise some obvious questions: What were their boards doing while the ‘shit was hitting the fan’? Why did they fiddle while their companies burnt? Why did they fail to select the right CEOs in the first instance or when did they notice that the incumbent CEO was not performing?
The leaders of tomorrow will be vastly different from the leaders of yesterday. We live in an era of profound, rapid, and unpredictable change. The need for a board to be proactive has never been greater. It is expected to ensure that its organisation maintains excellence in leadership through smooth transitions from one CEO to the next and in ensuring that the incumbent CEO has, and the next CEO will have what it takes to be effective in the current and emerging business environment.
Based on my experience as a chairman, director and CEO, there are sequenced steps which the board can take, and several features it must include, in its CEO succession planning for it to be effective, these being:
Board ownership of this critical deliverable must be cemented by the establishment of a board committee led by the senior independent director. Such committee must work closely with the CEO and must formally report to the board at every board meeting. The board of directors must not assign this duty to an individual whether it be the Chairperson, CEO, or to a search firm. Although implemented through a board committee, the entire board must be held fully accountable for CEO succession planning.
Given the complexity of the role of the CEO, particularly in medium to large sized organisations, comprehensive preparation of identified internal candidates must begin immediately following the installation of a new CEO. It must be a constant, ongoing process that is managed as closely and attentively as any of the company’s critical business issues. Several timing aspects such as the expected departure date of the incumbent CEO, the state of readiness of the internal candidates and the time it may take to bring them to fruition, the mechanics of handover/takeover and the role of the outgoing CEO, if any, post the appointment of the new CEO must be considered.
Ensure the existence of an emergency succession plan including the process to follow in appointing an interim CEO if circumstances so demand. An absence of leadership, following an unplanned event, is, among other things, an embarrassing indication of poor board governance and it can have an immediately damaging effect on the company’s market position and share value. In such situations, it is essential that employees, the public, customers, and other stakeholders are kept appropriately informed. The plan must contain, amongst others, a communication process and a ‘to do’ checklist.
For a successful CEO transition, and for that matter even while the incumbent is in office, the board must agree on the strategic direction of the company and on the requisite capabilities and competencies of the CEO to lead the company into the envisioned future. Therefore, before discussing the “who,” the board must come to an agreement on what the next leader must possess in terms of skill sets, traits, and behaviours. The key questions are “who – for what, when and how?” Once the criteria are clear, discussions of candidates, in relation to the strategic criteria, will be more meaningful and systematic.
The talent pool must be reviewed regularly. A bespoke development plan must be in place for each candidate. As a means of assessing their mettle, the candidates must be challenged with specific assignments. These assignments must be relevant and must bear a real risk of failure to allow the board a full view of what each candidate can accomplish under pressure. Even otherwise, creating a culture of development in the organisation is a must. It sustains a company’s performance at all levels and ensures the retention of key talent.
Notwithstanding the existence of an internal talent pool and the ongoing development of identified candidates as a part of CEO succession, the company must stay abreast of external talent which it may want to call on in the event of an emergency or other ‘drop dead’ situations. An externally hired CEO’s annual compensation can be seventy-five to one hundred percent greater than that of an internal appointment. Further, an externally recruited CEO is likely to have less loyalty and may not fit into the company’s existing culture. These must be kept in mind. In instances where a culture shift is required, an externally recruited CEO may be a better fit. Where there is external recruitment, extra effort must be made to closely communicate with key internal staff who may otherwise leave.
As was described earlier, the cost of a failed CEO selection can be enormous. Similarly, the benefits of a ‘right’ CEO can be priceless. The CEO selection decision must be grounded in a thorough, in-depth, and objective assessment of each candidate. The ‘authoritative’ guide for this is the leader profile, this being a blueprint that defines the requisite leadership skills and character traits expected of the successor CEO. Given the uncertainty associated with predicting the important ‘hard’ skills of the future, evergreen ‘soft’ skills such as integrity, empathy, trustworthiness, and transparency et cetera which apply in any circumstance must be sought. Though personality and cognitive abilities may not be easily discernible in an interview or discussion, they can be gauged accurately through a professional assessment.
Do not consider CEO succession as an event but consider it as a process. Ensure that the knowledge, wisdom, and insights of the outgoing CEO are positively leveraged. This will help in avoiding, or minimising, potential dissonance/misalignment between the incoming CEO and the C-suite and the incoming CEO and the board. Also allow time for the outgoing CEO to familiarise the incoming CEO with his or her vision as well as knowledge of the company and the executive team.
Agree performance targets and standards with the incoming CEO and use those as the benchmarks against which actual performance is measured. Review meetings must be held at least every quarter in the first two years. After that, the normal company review timetables can take over. The early identification of problems lends to timely course corrections. The information gathered can also be used in evaluating the CEO succession process.
In a CEO transition, give close attention to the relational dynamics among the affected parties. The chairperson of the board committee dealing with CEO succession must, where necessary, have one-to-one discussions with C-Suite employees. He must also keep staff informed of the CEO succession progress. Forces of ego, position power, fear, and uncertainty seldom rise above the surface in business. Therefore, it is better they are proactively addressed than be left to simmer below the surface.
In conclusion, the costs suffered, or the benefits enjoyed in having the right CEO are enormous. Boards must apply their time and expertise in enhancing the value, and reducing the risks, of CEO succession. The time and expense involved in creating and applying a solid CEO succession plan is an investment that will pay for itself very quickly.
(The writer is currently a Leadership Coach, Mentor and Consultant and boasts over 50+ years of experience in very senior positions in the corporate world – local and overseas. www.ronniepeiris.com.)
