CEO Succession: Risk or Opportunity?
Well planned CEO transitions produce confidence in the new leader and the organization stability rather than skepticism and uncertainty about the organization’s future.
Change in executive leadership is predictable, and when planned for and managed well, the transition can reinvigorate and renew a company’s mission, culture, values, and productivity. When mismanaged, however, a leadership transition can destabilize financial performance, erode competitive market advantage, shake employee and investor confidence, and damage company culture.
The risks are clear, yet the record of mismanaged leadership transitions is long and well documented. Most companies fail to take advantage of available tools and techniques to reduce the risks inherent in finding, preparing, and installing new CEOs. The related research also finds that using a mix of practices focused on leadership development, practical preparation, and rigorous assessment improves the chances that a leadership transition creates value, rather than destroying it.
There is a stark contrast between a carefully planned transition and one made amid corporate distress. A company’s readiness for and approach to CEO succession planning is most noticeably put to the test in times of crises and abrupt CEO departures. Some companies are better prepared with stronger CEO contingency plans than others. Whether a company is naming a new CEO in a long-planned transfer of power or quickly installing new leadership during a corporate crisis, the process is demonstrably strengthened by focusing on preparation and assessment. There is no single path to smooth leadership transitions, though several elements can be combined to craft the best approach for each company.
Not all companies have equal resources to devote to CEO succession planning or developing high-potential leadership candidates. However, the research reveals that even when companies underinvest and underprepare for such leadership transitions, lofty expectations persist in terms of how quickly a successor can be identified and placed in a role – a strong disconnect between practice and expectations. A company’s approach to CEO successors is definedmore by what is not being doneto develop them, than what is.Some of the most popular ways to prepare CEO successors include on-the-job experiences, executive coaching, and formal assessments of leaders’ strengths and weaknesses.
Many organizations provide no formal preparation or training at all for CEO successors.
Successful CEO transitions are more likely to occur when companies have diligently developed a deep bench of leadership talent. Consider Sundar Pichai, named in August 2015 as CEO of Google Inc. News reports commented on his “meteoric rise,” but Google recognized Pichai’s potential as early as 2004 as a key product manager with an ability to build and lead effective teams, while also mentoring and retaining top talent in a highly competitive landscape.His stretch assignments included several role rotations, offering opportunities to gain product knowledge while learning and demonstrating his ability for strategic execution. He developed broader leadership experience overseeing the development of Gmail, Google Maps, the Chrome operating system, and the mobile-friendly Android operating system. His “meteoric rise” required years of careful planning and preparation on the part of others.
Boards may be underestimating the quantum leap in abilities and skills required for the role of CEO. Many key CEO responsibilities simply do not exist at lower levels, making it difficult even for experienced executives to prepare for their first CEO appointment without a specific strategic development plan. Industry wisdom suggests that a period of three years is required to effectively prepare a new CEO.
At the same time, management expert Noel Tichy says corporate boards typically kick off succession planning only in the last year or two of the sitting CEO’s tenure. This timing disconnect may explain the lack of ongoing formal preparation for top leaders. There is considerable room for improvement as companies realize last-minute, haphazard succession planning approaches are inadequate and create unacceptable levels of organizational risk.
Given the lack of rigorous leadership training and preparation, one might expect that organizations are investing heavily in assessment procedures to ensure that the right person is selected for the top role. Regrettably, this is not the case. According to the research, nearly half the leaders surveyed use only one additional assessment method beyond their standard internal interviews with CEO candidates. Additional methods favored by respondents include interviews by external consultants, and personality assessments. These provide some unique information in terms of external benchmarking and insights into how a candidate may behave in the future but are used by only half of the companies. Indeed, integrating data from multiple sources –panel interviews and specific work simulations — is widely regarded as scientific best practice. A multidimensional assessment approach to CEO selection creates a better-informed, datadriven understanding of a candidate’s relevant skills, attitudes, and overall fit with the organizational culture. Organizations that rely entirely on internal interviews to assess candidates are wholly dependent on the skills and impartiality of the interviewers, a very risky approach if you believe the scientific literature on interview validity. Additional datapoints from formal assessments not only provide greater objectivity and richer understanding of the candidate but also help depoliticize the process. In highly politicized and emotionally charged situations such as CEO selection, the value of sound and objective assessments cannot be underestimated. When hiring externally and endeavoring to separate fact from reputation, the argument for a multi-tool approach to assessment is even stronger. The high-stakes selection for a CEO should allow little tolerance for underpowered or incompetent assessment processes that miss critical evidence to inform a candidate’s selection. Companies that pick their CEOs with a robust mix of selection tools have an informed view of how effectively a new leader will respond to both anticipated demands and unforeseen crises. They experience leadership transitions with a clearer understanding of the new CEO’s strategic thinking style, vision for the company, what motivates their decision-making, and where they still need to develop. External benchmarking, panel interviews, simulation exercises, and case studies can improve the selection process and outcome, yet they are too rarely used to maximum effectiveness.
Not every company has unlimited resources for its leadership succession process, but every company must still determine how to grow their talent pool and identify and retain future company leaders. Postponing succession planning prevents a vital alignment between talent and business strategy. Proper planning will culminate in a self-renewing succession culture that ensures capable and motivated leaders are continually prepared internally, preventing ill-informed, reactive and expensive hiring decisions. Build talent from within whenever possible, and plan for the inevitable leadership change.
All organizations can use some basic practices to improve their succession planning, preparation, and leader selection.
1. Commit to ongoing, effective leadership development.
2. Assess and develop prospective leaders’ business and people skills.
3. Use scenario-based strategic planning to craft future CEO profiles.
4. Assess candidates against objective criteria using multiple assessment tools.
5. Create a highly tailored approach to leadership development and review it regularly.
6. Adhere to a strong assimilation and integration plan, even if the candidate is an organization veteran.
When leadership changes are well planned, expected and unexpected transitions proceed more efficiently and productively. Internally, this benefits the incoming CEO and the workforce, and reinforces the organization’s “culture”; externally, this helps bolster the company’s brand image, its market valuation, and shareholder perceptions. This reinforces the importance of CEO succession planning and preparation as a critical risk mitigation strategy. Well planned CEO transitions produce confidence in the new leader and the organization stability rather than skepticism and uncertainty about the organization’s future – a task no organization can afford to postpone.