CBM: TK Kerstetter, President & CEO, Corporate Board Member
Winum: Paul C. Winum, Ph.D., Managing Director and Practice Leader, CEO Continuity Services, RHR International Company
CBM: You spend a great deal of time talking to and advising directors. If you could have their attention for just 15 minutes, what advice would you offer to improve their effectiveness as a board in managing CEO succession?
Winum: I believe that the most important and impactful decision any board of directors makes is the selection/de-selection of the Chief Executive Officer. Getting this decision right can have enormous positive influence on the success of an organization and getting it wrong can be disastrous. Unfortunately, many boards don't exercise the degree of rigor in managing succession that this critical responsibility warrants. Too often, CEO succession is delegated to the current CEO who then delegates it to the SVP of Human Resources. Then, periodically at board meetings, there is a quick look at the depth chart, a brief discussion then it’s on to other agenda items. Rather than viewing CEO succession as a narrow task of picking a successor, the best boards regard CEO succession as a core business continuity issue that demands a comprehensive, on-going process of oversight and management. Just as boards are stepping up their attention to risk management in financial exposure of a company, good governance dictates the utmost rigor in managing CEO continuity.
CBM: We know that managing CEO succession is one of the most critical duties of a board. What criteria should boards use to determine whether or not they are doing a good job in this area?
Winum: If the succession process is effective, the company’s competitive strength and financial performance should be tangibly enhanced compared with prior performance history. In addition to better performance, a well managed CEO succession process will result in the following outcomes:
1. An aligned board and executive team on the company’s vision and strategy.
2. An effective, well-prepared CEO in place at all times.
3. The risks associated with CEO transition are well managed and minimized.
4. The opportunities associated with the CEO transition are fully leveraged.
5. All key stakeholders believe that the succession process in the company is fair, well executed and results in good succession decisions.
The net results of a CEO succession process can only be determined several years after the CEO succession event occurs.
CBM: What are the most prominent risks associated with CEO succession and how can directors best mitigate these risks?
Winum: Risks are abundant in CEO succession. Here are five of the most costly:
1. The performance of the organization deteriorates
2. Stock price and market valuation declines
3. Respect for and confidence in the board and management team is diminished in the eyes of key stakeholders
4. Loss of key customers and executive talent
5. Significant organizational inertia and expense associated with another change in CEOs.
My firm has identified 10 dimensions that must be well managed to achieve excellence in CEO succession. The best boards outline specific methods and metrics for managing policies and practices in each of these dimensions and evaluate how well they are doing. Lastly, they continuously update and improve their practices to ensure that this critical function is the best that it can be.