A board’s number one job is to hire and fire the CEO. Everything else is secondary. If a board gets CEO succession right, the company will prosper. If the board hires the wrong CEO, the company and the board will fail.
Many boards perform CEO succession poorly. According to one study, boards spend, on average, only two hours a year on CEO succession planning. When I ask directors what their number one regret is, the answer that I receive most frequently is “not firing the CEO sooner.”
Why is CEO succession so difficult for boards? I have a good idea of why boards perform poorly on this important task, and how to get it right.
Here are three recent case studies that have been heavily disguised. I will then discuss what boards should do to improve CEO succession.
First board: I was in a board meeting of a global company, where I saw the CEO in action. Then it hit me: This is the wrong CEO, and the problems that the company has been having are due to this under-performing CEO. I asked the CEO to leave the room. I advised the Board to administer an employee survey, with results directly reported to the Board. When the results were a failure, I recommended firing the CEO. The internal CEO successor bench was weak, so an existing Director was tapped to be Interim CEO, and the Board is now hiring a permanent CEO. This Board should have acted much sooner. This was a CEO hire fail because two Directors pressed for this CEO, whom the Directors knew, and the Board agreed.
Second board: I was in a board meeting of a large public company. The CEO was pushing back, interrupting directors, and interrupting me. I asked the Board Chair to instruct the CEO to leave the room in order that I may have an in-camera session with the Independent Directors. After the CEO left, I found out that a CEO-ready internal successor was still three or four years out. The incumbent CEO was resisting coaching. I told the entire Board that they have failed in CEO succession planning. Poor CEO succession planning was why the incumbent CEO was dominating the board. The Board had no options.
Third board: I was in a board meeting after a high profile risk management failure at the company. The current CEO was weak and I predicted would buckle under a crisis. Except this time, the CEO had been blocking Board access by a potential CEO successor for over a year. And another potential successor was not being given resources by the incumbent CEO to prove himself. I worked with the Board Chair to construct a “horse race” CEO succession model, like GE and CIBC did, for the top three officers. I made sure that the first officer was regularly exposed to the Board, and the second officer received responsibilities for profit and loss. I also advised the Board to do a global external search at the same time. All three officers were told that they were also competing against global talent, as well as each other. Each internal CEO candidate had six months to prove themselves to the Board. The former CEO was replaced by the highest performing officer, and the company prospered significantly.
These three companies were caught flat-footed with CEO succession. These boards should have had CEO succession right, but failed. If these companies failed, with some outstanding directors on them, other companies can fail on CEO succession.
Why does CEO succession fail? Three reasons.
- The incumbent CEO refuses to cooperate. No CEO ever really wants to replace him- or herself. However, CEO succession is the board’s responsibility, not that of the incumbent CEO.
- Boards do not proceed pregressively and step-by-step. Boards skip steps or, worse yet, allow emotion, preference, capture, social relationships, or bias to creep in.
- There is no actual CEO succession plan. Every board should have an emergency CEO succession plan and a longer-term plan. The longer-term plan contains a line of sight for the Board to: the high potential talent pipeline; what grooming and development is necessary to make this talent CEO-ready; and what the time frame and resources are for this readiness. Internal CEO talent costs less than external talent and is more successful.
There should be a CEO succession planning process, which may include:
- Regular discussions and reporting on CEO succession by the Board;
- A dedicated Board Committee who reviews and recommends CEO succession planning;
- Board approval of the strategic plan;
- Prioritized attributes of the CEO who can achieve the plan;
- A recruitment strategy (internal candidates, external candidates, or both);
- Matching profiles and resumes to attributes to create the long list;
- Background, social media, reference, criminal and credit checks;
- Information packages for prospective CEOs;
- Initial interviews and ranking to a short list;
- More due diligence on top candidates, second interviews;
- Salary, incentive, and benefit pay established, and linked to the strategy;
- Terms sheet and draft employment contract;
- Invitation for Directors to meet top finalists;
- Final interviews, recommendation to full Board;
- Board approves top two candidates;
- Finalize employment contract and pay with successful candidate;
- Onboarding, CEO performance review after 6 and 12 months; and
- Updates to full Board on all of the above.
The board should discuss the longer-term succession plan in the absence of the incumbent CEO. If the incumbent CEO, whose views on potential successor are relevant but should not be determinative, does not cooperate, or blocks access, this is a warning sign. Make CEO succession worth a healthy percentage of the CEO’s pay. Then watch the CEO cooperate. CEOs behave the way CEOs are paid.
CEO succession planning should start day one of the new CEO’s hire. Do not wait. You know you have CEO planning right when you can fire the incumbent CEO at any time. Anything can happen and you want to be ready. Ethical transgressions, non-performance, accidents, or illness are regular occurrences. CEO succession is all about leverage and the board having options.
If the CEO pushes back and says that you don’t have confidence in him or her, correct the CEO. You have confidence in the CEO (or you do not), but are doing your job. If the CEO does not cooperate, the CEO should be fired. Never be beholden to a CEO. CEOs are replaceable and it is the work of the Board to do this.