There are three common mistakes that organisations make when it comes to CEO succession, however, there are a number of steps organisations can take to improve CEO succession and selection outcomes, writes Mark Busine
I’ve never heard a board predict that its newly appointed CEO will fail or is even a high-risk decision. Without exception, CEO after CEO is held aloft before hopeful shareholders and proclaimed the perfect leader to take the company forward. Of course it’s absurd to imagine any board openly condemning an incoming CEO, but data on CEO succession and turnover suggests that many CEO appointments come with a high degree of underlying risk.
According to PWC Strategy&, unplanned and erratic turnover of chief executives cost Australian shareholders $8 billion in 2015. Twenty-three per cent of chief executive turnover in Australia was unplanned – a rate far higher than the global average of 14 per cent.
The task of identifying an effective CEO successor and ensuring C-level leadership continuity has changed dramatically. Complexity, rate of change, board and public scrutiny, and high failure rates have all combined to make CEO and C-suite succession one of the highest-risk decisions an organisation can make. Reducing that risk and sustaining long-term strength and stability in the CEO role and also in the entire C-suite, is therefore a competitive advantage.
So what can be done to improve the approach organisations take to CEO succession and selection? Here are a few things to watch.
Mistake 1: Just in time. Just in need.
Too many CEO appointments are made on a just-in-time, just-in-needs basis; that is, boards fail to plan for CEO succession. Their engagement in a CEO succession or selection decision is driven by a single event such as retirement, resignation or termination. This approach often leads boards to immediately look outside, and while there is nothing wrong with extending the search beyond the company’s boundaries, the decision to do so should be planned and intentional.
There are tangible and intangible risks associated with going outside. Research from the Adelante Group suggests that external CEO candidates have twice the failure rate, shorter tenures and deliver just half the shareholder returns of internal candidates. PWC Strategy& found that CEOs appointed from internal ranks generated median total shareholder returns of 14.2 per cent in 2013 compared with just 0.1 per cent for CEOs appointed externally.
There are other potential costs, including the opportunity cost while an organisation undertakes its external search and the cost of employee disengagement as internal candidates begin to question their own contribution and opportunity within the organisation.
To achieve stability and minimise risk, CEO succession must be treated not as a momentary episodic decision to replace the senior-most leader, but as a continual process in which a cadre of senior executives are growing and expanding perspectives and skills, while working to build the capabilities required of strong CEOs.
Mistake 2: Viewing CEO succession as a risk management activity.
Replacement planning is the process by which boards and executives identify successors or replacements for key positions including the chief executive position. While replacement planning is a legitimate component of a broader approach to succession management, relying on this as your single model of succession carries high risk. This approach to succession treats succession as primarily a risk management activity and misses the opportunity that effective succession management offers – the opportunity to plan and build for the future. Successful companies map their succession plans to a forward-looking view of the organisation.
To leverage the opportunity of succession management, succession methods must move beyond traditional replacement planning. They must embrace a longer-term view of succession that builds the pipeline of leadership talent over time.
Mistake 3: Relying on board member judgement.
By and large, boards remain attached to traditional methods of CEO selection that rely on instinct over objectivity. They are more inclined to defer to board member judgement over robust and reliable data. Even if they acknowledge the robustness of a more objective approach, they dismiss it on the grounds that “it’s not right for us” or that it may “turn off desirable candidates” (note that this is largely a myth).
Some important considerations include:
- The experience bias: Our judgements at this level are often heavily influenced by a candidate’s experience rather than a broader portfolio of success factors including competence, knowledge and personal style. Furthermore, the experience they bring may be associated with a very different set of market conditions and priorities. In a recent study of executive performance, DDI correlated years of management experience with proficiency in 10 key skills ranging from people leadership to strategic thinking. The research found that experience alone was not a strong measure of overall capability. In fact, only three skills (driving for results, inspiring performance and leading teams) were substantially stronger in experienced vs low-tenure leaders. The research found that some skills such as coaching and selling the vision had no relationship to experience.
- Relying on the current CEO is a big mistake: There are many reasons why a CEO should not be involved in successor identification. First, it is ultimately the responsibility of the board as representatives of the shareholders to facilitate a decision that is objective and independent. Second, the CEO’s lens is often influenced by the current strategy (which they have a vested interest in) vs the longer-term strategy. The ultimate risk is hiring in their own likeness.
- Politics over precision: The politics of CEO succession decisions are complex and intense, leaving many boards with a profound sense of accomplishment for simply reaching an agreement. While boards ostensibly assemble to present objectivity and unbiased input, the reality is that political factions are present in nearly all boards.
To ensure accurate judgements about the right person, the assessment and development methods employed must accurately diagnose and develop the full range of leadership capabilities. In addition to these essential assessment and development methods, a clear strategy for constructing the most productive and bias-free decision-making process must be crafted and vetted with the relevant stakeholders.
Three common CEO succession mistakes and solutions
|Just in time, just in need||Start soon and never stop. Adopt CEO succession as an ongoing process.|
|Viewing CEO succession as a risk management activity||Adopt a multipronged approach to CEO succession that addresses current and future needs.|
|Relying on board member judgement||Develop an almost unhealthy obsession with quality data and insight. Test your instinct.|
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