How To Make Sure Your Next CEO Is A Winner
from
March/April 2006
by William A. Pasmore and Roselinde Torres
The change in leadership at a public company is
often a critical event, made all the more complicated by the interplay
of corporate politics and personal emotion. Over the past 10 years the
pressures besetting the CEO have only intensified. Increased demands
for performance and shareholder return are adding significantly to the
burdens of the job.
The result is a profound change in
the succession process and the role of the board. In a new book
excerpted here, Building Better Boards: A Blueprint for Effective
Governance, contributors William A. Pasmore and Roselinde Torres, both
Mercer Delta consultants with extensive experience in succession
issues, outline the moves a board should make—before, during, and after
the transition—to maximize the odds of a successful handover. This
excerpt pertains specifically to what the authors describe as a
“collaborative model,” in which the standing CEO and the board are
working together to groom and install an internal candidate.
Successful transitions rarely just happen; they require careful
planning. Broadly speaking, a board’s objective in the CEO succession
process—and it is a process—is to first identify the leading candidate
for the position and to move that candidate into the CEO job in stages,
while continuing to develop and assess him or her. During this
development period, it’s crucial for the board to leave itself room to
maneuver—to allow board members to change their minds if new
information or insights suggest that their first choice was a mistake.
Of
course, the great danger in viewing succession as a process is the risk
of overlooking the powerful emotions that are almost always present.
The CEO who’s relinquishing the job and his anointed successor go
through an intensely personal experience that can drain emotions and
strain longstanding relationships, even in the best situation. The
board bears a tremendous responsibility to recognize and rise above the
emotional issues, to view the players objectively, and to provide
continuity.
This is why the best approach to
succession—both finding the best candidate and keeping the runners-up
engaged—is methodical and not ad hoc. Below is an outline of five
distinct phases, which define the process and hopefully provoke thought
on how your board might best approach succession. In the first phase,
the lead candidate is identified and placed in a role, such as chief
operating officer or head of a core business unit, that tests his or
her ability to lead at a more senior level. The second phase is the
confidential designation of the new CEO, who uses this time to think
through the structure of the company and the composition of her new
executive team. The next phase, which may be short, is the official
announcement of the heir apparent. The fourth phase is the overlap
period, during which the new CEO runs the company but the departing CEO
continues in some other role, such as chairman of the board. Of course,
there are different approaches to the overlap phase, ranging from the
incumbent’s immediate departure to an overlap lasting several years.
The fifth phase occurs when the incumbent CEO is gone and the new CEO
is fully in place and working through a “freshman year.”
Here is a closer look at each of these critical phases:
Phase 1: Candidate Test Flight
The
first phase of the transition process begins with a “test flight” of
the final candidate or candidates under conditions that simulate the
running of the enterprise. Typically, the formal position is that of
head of the largest business unit, vice president, CFO, or COO. By this
time, many people are aware that the candidate is being groomed for the
top job and that it is “hers to lose.”
Boards must
remain vigilant during this phase for warning signs of future problems.
Directors need frequent and direct access to the candidate, both during
and outside formal board meetings. Without its own “test data,” the
board would be forced to rely on secondhand assessments of the
candidate’s performance.
Boards that play a more active
role during the test flight stand to gain important benefits. Above
all, they are in a better position to certify their choice of
successor. They also have more data on which to base developmental and
transition plans. And not surprisingly, they begin to develop a
stronger relationship with the heir apparent sooner, leading to a
smoother transition.
Moreover, boards that engage
early in this process can provide mentoring that will help prepare the
candidate to assume the full responsibilities of the new role. Finally,
they can understand more fully the context within which the transition
will take place, so they can be better prepared to attend to the
business and leadership issues that the new CEO must confront.
Phase 2: Designation as CEO
The
second transition phase begins when the new CEO is appointed and lasts
until the new executive team is in place. If there is one phase that
has received insufficient board attention in most successions, this is
it.
During this phase, three things are happening
simultaneously. First, the old CEO is leaving. The board and the
outgoing CEO must decide when the actual transition will occur. If they
determine that there should be an overlap period between the
designation of the new CEO and the departure of the outgoing CEO, they
need to establish how long it will be. The board must decide whether
the new CEO would benefit from the old CEO’s guiding hand or whether a
clean break is better. This decision has huge consequences; it directly
influences the latitude afforded the new CEO to address business issues
or even to be recognized as the company’s leader.
When
a standing CEO holds the chairman title as well, the succession process
offers an opportunity for the board to assess whether these two roles
should be split. In our view, there is no universally right or wrong
answer to this question; each board should decide what is best based on
due consideration of the company’s business circumstances and the new
CEO’s qualifications. But any board that has not faced this situation
should be forewarned that it can easily emerge as a major point of
contention with a new CEO—particularly a successor chosen from inside
the company, who may feel insulted by not being granted the same title
and power as his predecessor.
The second thing that
happens during the designation phase is that the new CEO assembles the
new executive team. The extent of change is usually dictated by the
company’s success; the weaker the business performance, the greater the
expectation of wholesale changes in the top team.
Boards
that assume a more active role during this phase of the transition need
enough knowledge of the capabilities and relationships among potential
senior team members to help the incoming CEO make the best choices.
Clearly, boards that have been on top of the talent-development issues
all along will be in a better position to provide real assistance.
Boards
differ in the roles they play during this important phase. Intervening
boards will insist on approving the slate of senior team members.
Engaged boards will work hand in hand with the new CEO to review
choices and provide advice when necessary, while leaving the ultimate
decisions to the new leader. Disengaged boards will do neither,
trusting that the CEO will make appropriate choices and deal with the
consequences.
Next comes the trickiest part of the
designation phase, when the new CEO begins forming his relationship
with the board. Until now the directors held the power to decide the
candidate’s fate, making it less likely that the candidate would
challenge the board on its advice, decisions, or composition. But as a
full partner, the new CEO must now be willing to engage the board on an
equal footing and call for any needed reforms in board processes. The
new CEO may even need to call for reformulation of the board to provide
greater independence, expertise in emerging business issues, or
stronger financial oversight.
Phase 3: Official Announcement
During
the official announcement, the new CEO is signaling his intentions
about running the company to employees and external stakeholders. As
Franklin D. Roosevelt discovered, the “first hundred days” are critical
in establishing the tone and tenor of a leader’s tenure. From the
board’s perspective, it’s important that the candidate have a plan and
have shared it with the board to get feedback and support. As part of
that plan, the CEO and the directors should agree on the actions the
board will take during the first hundred days to help solidify the new
CEO’s leadership of the company.
During the
official-announcement phase, the board should visibly support the new
CEO. Just as the CEO should have a detailed communication plan for the
first hundred days—and beyond—the board should develop its own
communication plan to ensure that the new CEO receives the required
public support.
Phase 4: Overlap
Although
overlap with their predecessors can be extremely beneficial to new
CEOs, boards should be aware that strong departing CEOs may create
roles for themselves that threaten the success of their successors.
Some outgoing CEOs have made it impossible for the next person in the
job to operate. Micromanaging decisions and raising doubts with the
board about the new CEO’s abilities are signs that the old CEO is
having trouble letting go. It’s up to the board to provide an objective
assessment of what’s best for the company and then make the right
choice regarding the outgoing CEO’s role.
Phase 5: Freshman Year
The
first year of any CEO’s tenure is a strong predictor of his ultimate
success in running the company. In fact, success in the first year is
so critical that many CEOs never see a second year.
During
the freshman year, there is intense pressure to improve business
performance, declare a strategic direction for the company that
reflects the latest developments in the market, forge relationships
with key customers and external stakeholders, build an effective
executive team, be the spokesperson for the company, meet employees,
influence the culture, sponsor executive development, and, at a
minimum, gain the confidence of the board. Clearly, doing all these
things well requires talent and enormous effort.
In
times past, boards could afford to be patient with CEOs who were
learning their craft. There was a degree of tolerance for on-the-job
learning. Not anymore; today the margin of error and tolerance for
mistakes are a fraction of what they once were. Even celebrity CEOs
have limited time to prove their worth in a world dominated by
quarterly reports, unprecedented transparency, and relentless
second-guessing. Boards feel pressure to consider removing new CEOs who
fail to measure up in the eyes of important publications or analysts.
Shareholder wealth, difficult to create, can be wiped out overnight by
unfavorable reports concerning the CEO or the board.
It’s
important that the board and the new CEO agree on a process to assess
the CEO’s performance. The new CEO has a right to know where she stands
with the board and what her options are for dealing with issues that
arise.
She should meet with directors individually to
understand their feedback and advice. Beyond that, though, the CEO and
the board should design a more formal process for data-gathering and
feedback that provides the new chief executive with an up-to-date
“report card” on her performance.
Some boards feel that
assessing the performance of the new CEO in his first year is simply
too early and may convey a lack of trust in the new CEO’s capabilities.
CEOs who have run into problems in their first year would strongly
disagree. They would say that it’s much better to be involved in
ongoing dialogue with the board about performance issues than to
discover that private conversations have been taking place among board
members, or the entire board, behind closed doors.
The
evaluation criteria for the CEO should be consistent with the selection
criteria. Boards sometimes surprise a CEO by introducing entirely
different performance criteria once the CEO is in office. For example,
the governance committee of a retail company asked us to conduct an
evaluation of the CEO because of a downturn in the company’s
performance and an alarming turnover rate among senior leaders. When we
asked about the dimensions and process used to evaluate the CEO’s
performance, we were told that the board held one executive session a
year at which they discussed the CEO’s strengths and areas for
development. We learned that in selecting the CEO, the board had
developed specific performance criteria and identified a set of
possible risks that could cause the CEO to derail. However, these
criteria and risks never surfaced as part of any of the CEO’s annual
evaluations. Instead, the governance committee and board relied on
general impressions, because the company had been performing well in
the first years of the CEO’s tenure. Ultimately the CEO was removed
from his job. Had the board used its original CEO-selection criteria,
it might have seen early indicators of the CEO’s troubles and
intervened to avoid the significant loss of shareholder value and the
feeding frenzy by competitors that occurred when the CEO was removed.
The
flip side of the CEO-assessment story is that the new CEO and the board
should agree as well on how the board will work and be evaluated.
Agendas for board meetings need to be set, processes for conducting
meetings reviewed, and criteria for assessing individual directors and
the board as a whole put in place. Although such matters seem mundane,
they are extremely influential in determining the character of the
relationship between the board and the CEO. It’s in the interest of
both parties to treat these discussions seriously, considering a range
of options before settling on solutions that are right for the company
and board. The CEO will find it difficult to change these arrangements
as they become set over time. The best opportunity to shape board
dynamics and governance processes is at the beginning of the CEO’s
tenure.
Replacing The Founder
Some
boards face the additional challenge during succession of replacing the
founder of the company with a “professional” CEO. These transitions are
always complex and challenging and may be a defining moment for an
organization. Discussing the founder’s succession can be touchy. The
directors don’t want to cause offense, and the founder is often in no
particular hurry to find a replacement.
The founder and
CEO of one pharmaceutical company continually put off discussions about
succession. Finally, when pushed by an influential board member during
a private session, the founder revealed that he had an envelope in his
desk drawer that contained the name of his successor. But it wasn’t to
be read until he died—because that was the only time someone else would
run his company.
The board is in a unique position to
prepare the founder and the organization for the future. What’s more,
it has a duty to guarantee a CEO succession process that ensures the
institution’s viability. Framing this process as a fiduciary
responsibility helps make the board’s intervention less personal.
Although every situation has unique requirements based on the founder’s
personality and other circumstances, there are some ways in which
boards can help the succession process along:
-
Encourage the founder to imagine the company without him by talking about it in five, 10, or 20 years under various scenarios.
-
Institutionalize
the founder’s legacy by having him articulate core values and
incorporating them into the selection criteria for the new CEO.
-
Support
the founder’s emotional process of letting go by helping him consider
other contributions he can make to society, public policy, his
community, his family, favored charities, and so on.
-
Strengthen
the board’s effectiveness as a team so it is capable of having
constructive and candid conversations both with and without the founder
in the room.
-
Build consensus among influential board
members and help them overcome their reluctance to address thorny
issues with the founder, either collectively or in on-on-one
conversations.
-
Stay close to the new CEO who
succeeds the founder. The successor faces an inevitable mourning period
following the founder’s departure and will have the difficult task of
balancing the old with the new. It will be at least a year before the
uncertainty over the change in leadership subsides.
In
the end, the board’s greatest challenge is to act responsibly and to
resist being intimidated by or granting undue deference to a figure of
legendary proportions in the company.
Excerpted with permission from Jossey
Bass, a Wiley company, from Building Better Boards: A Blueprint for
Effective Governance by David Nadler, Beverly Behan, and Mark Nadler.
Copyright 2006 by Mercer Delta Consulting, LLC. This book is available
at all bookstores, online booksellers and from the Jossey-Bass web site
at
www.jbp.com
, or call 1-800-956-7739.
