Commencing the process of CEO succession, without first agreeing on the strategy and market factors that impact the role, is the highest risk to successful CEO succession, according to a Korn Ferry research report.
Board members may assume they are on the same page, but if they haven’t explicitly discussed strategy and how it dictates the leadership needed, the succession process can fall apart.
The report said that boards can reduce this risk by conducting a strategic alignment exercise before embarking on a search or leadership development process for the next CEO.
“Searching for a CEO without first settling the strategic direction of the company will affect every part of the process: writing the job description; nominating a long list of potential CEOs; interviewing candidates; and selecting the successor,” said the report, The Risky Business of CEO Succession.
It also revealed that many chairmen keep two lists of names; one with potential CEO successors and the second of people who could be an interim CEO or a ‘safe pair of hands’.
However, being identified as the ‘safe pair of hands’ is not necessarily a passport to the top job, as that person may be someone who can maintain the status quo but no more.
When boards want a change agent, they are just as likely to look outside the company for their next CEO.
“This was an interesting development which those who are in the CEO succession pipeline need to consider. Are they contenders for the top job, or seat warmers for the next CEO?” said Korn Ferry’s executive chairman, Australasia, Katie Lahey.
“Quite often, one of these people will leave if they aren’t named CEO”
The relationship between the chairman and the CEO was identified as both the strongest or weakest link in CEO succession planning.
“It is a highly nuanced undertaking where the personalities of two key individuals – the chairman and the incumbent CEO – may determine whether this risky business has a smooth path to transition,” said Lahey.
Starting the process too late was the second highest risk in CEO succession, according to the research report, which highlighted the importance of the appropriate time for the chairman to start succession conversations with the incumbent CEO.
“An experienced board will identify risks in CEO succession early, and use their risk assessment to guide and anchor the process,” said Lahey.
“Risk can derail a succession. However, CEO succession viewed and managed through a risk framework will be stronger.”
A third risk was CEO involvement in choosing a successor, and that the feelings of the incumbent CEO may be detrimental to the process.
“Many companies have a structured leadership development program, of which CEO succession is a part,” the report said.
“However this doesn’t always accurately communicate how involved the board actually wants or expects the CEO to be in his or her own succession.”
“CEO succession viewed and managed through a risk framework will be stronger”
A fourth risk related to when unsuccessful internal candidates leave the organisation.
An ideal CEO succession process will have identified two or more internal candidates who have already served in executive roles integral to the company’s success, according to the report.
“Quite often, one of these people will leave if they aren’t named CEO.
“Boards want all candidates to have a positive experience with the process and the chairman must be prepared to have timely, constructive, and above all, honest conversations with those who don’t ascend to CEO.
“Retaining the executive may involve providing a different career path with new stimuli and experiences.
“If he or she isn’t persuaded to stay, manage the exit generously and respectfully. Just in case, successors for such internal candidates should be identified so someone is ready to step into the role,” said the report.
The gold standard in CEO succession
Six tenets represent the best practices for succession planning for the board:
- Create a success profile that reflects the competencies, traits, drivers and experiences a future CEO would need to deliver on the business strategy, and get the board to agree on it first.
- Don’t just think about who will replace the incumbent. Think two to three CEOs ahead.
- Assess all internal candidates against industry benchmarks, research-validated indicators of leadership potential, and the success profile developed by the board.
- Cross-train generations of potential CEO successor with a mix of job assignments, intensive coaching, mentoring, and formal education.
- The board should get to know the whole bench intimately and personally. After all, these are the next generations of CEOs for the company.
- Keep CEO succession as a standing board agenda item to ensure it stays a ongoing, multi-layered and multi-generational process.
Source: The Risky Business of CEO Succession. Image source: iStock