Boardroom Guide to Succession

The Boardroom Guide

CEO SUCCESSION

Ensuring a Seamless Transition to CEO

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There are a couple of facts about CEO succession planning that by now should be carved on every boardroom table: CEO succession is an ongoing process that is crucial to the well-being of the enterprise, and one for which the full board has ultimate responsibility and accountability. Certainly, most directors are aware of this by now.

The rub is that understanding that the board is accountable for succession planning and knowing how best to follow through on the process are two

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different things. Even the best directors are “parttimers� at their companies, and with an average of eight meetings a year, they need to have a systematic process to stay on top of key areas of oversight.

Given their limited time and exposure, how can boards make sure they get succession planning right? After all, there is no room for error when selecting a CEO. The answer is increasingly to rely on a proven process that will not only produce the best succession candidates but also demonstrate

RICHARD SCHNEIDER/ILLUSTRATION SOURCE

By Jane Edison Stevenson, Kevin Cashman, and Dave Heine

that the board is performing its fiduciary duty according to the highest standard set by current best practices.

Boards that are proficient at succession planning make sure they have accurate and frequently updated information in a few fundamental areas.

Specifically: ■■ What will be the pivotal factors in driving the company’s success?

■■ How will those translate into the requirements for success in the next CEO? ■■ Who are the potential successors inside the company?

■■ How do those candidates measure up to the critical requirements for the next CEO as defined by the strategy and other best-in-class CEOs? ■■ If there are gaps, can they be filled in time, and if so, how?

■■ Are we continually developing a pipeline of CEO talent for the next several generations of CEOs? From the outside looking in, CEO succession may appear a simple process—one CEO leaves and a new one takes his or her place—but in reality, when boards and CEOs get succession right, it only looks simple. There has usually been a great deal of behind-the-scenes planning and effort over a significant period of time. The more seamless the transition and the less of an “event,” the better for all stakeholders.

In the past, CEOs themselves were more likely to manage the succession process, but boards are increasingly conscious of the need to take an active oversight role—as with strategy development and risk management—to make sure succession planning remains on track. Succession poorly handled can wreak havoc with the operation and the future of an enterprise, and can negatively impact customers, investors, and employees alike.

While accountability for candidate development rests operationally with the CEO, boards must maintain visibility and intimacy with the process, armed with the right questions and sufficiently knowledgeable about the right processes to deploy for the best results.

Given the work an effective succession planning

process entails, it’s wise to ensure plenty of time, a “long runway,” as it’s often referred to, with of course shorter-term emergency candidates identified as part of a plan intended to cover all the bases.

The ultimate long-term goal is to identify a CEO for the future—that is, a CEO who is a good match for the company’s strategic trajectory. The likelihood is that the successor is going to be someone quite different from the current CEO. Following are some of the essential questions— as well as some answers—boards can ask as a guide to make sure they are overseeing the CEO succession process at the right level of involvement, on an ongoing basis. A reliable process will both provide a comfort level that there will be few unpleasant surprises and demonstrate that the board systematically and diligently monitored the process, which is increasingly important information shared on proxies and included in good governance metrics.

Many boards, perhaps unwittingly, still seek a successor based on what they see in the rear-view mirror.

BOARD QUESTION What will be the requirements for success in the next CEO? SHORT ANSWER The requirements are dictated by the future business strategy, so look beyond the success formula of the current CEO. One of the biggest mistakes a board can make in planning for the next CEO is assuming a future that will look more or less like the present. With change a constant, and continuing to accelerate because of increasing globalization and technological advances, the requirements for what it takes to be a successful CEO are rapidly changing, too. Many boards, perhaps unwittingly, still seek a successor based on what they see in the rear-view mirror.

Be ready to toss the old success formula aside and start fresh with a careful analysis of the business strategy—an analysis in which all directors are involved and aligned. By definition, the strategy is forward-looking and will serve as the most reliable guide in determining what the organization requires in its next CEO. Considering new markets September/October 2014 NACDonline.org

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CEO SUCCESSION

Q&A Stephen Demeritt, Lead Director, Eastman Chemical

How Boards Can and Must Stay Tuned on Successors For any large organization, success is dependent on following the right strategy—understanding economic forces, markets, and customers. The strategy is forward-looking, based on the assumption that things will change. So it’s important not to look for a clone of the current CEO if things will be different down the road.

Ignoring company specifics for a moment, what are the perennial must-haves for a CEO? A good CEO must have a vision of the future as other than an extension of the present—where the company might go versus a straight trajectory of where it has been. If a CEO candidate doesn’t have that to begin with, he or she won’t get it after a few years in the corner office. Then there’s character—there simply can’t be any question about that. Communication skills are another must-have. The effective CEO needs to be able to share his vision in a clear, consistent manner, and, to listen carefully to feedback from inside and outside the company. A “nice-to-have” experience is board exposure. Candidates can benefit greatly from participating in board meetings and having the chance to watch and learn from the “sidelines.”

You mention that you have a thorough, thoughtful, ongoing succession process. What are a few top-level takeaways?

The headline, which transcends everything, is that CEO succession planning at Eastman Chemical is a continuous, full-board process. The subject is discussed at virtually every board meeting, and is an integral part of annual objectives/compensation plans for the current CEO. All board members are expected to participate in and contribute to the planning and selection process.

This ensures that we get diverse opinions and the benefit of bestpractice experiences from all directors’ backgrounds.

In the end, the measure of any process is the result, and we have been pleased with transitions at our company.

Let’s start with the strategy, how does that guide the board on succession planning?

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What is the board’s process for getting to know internal succession candidates?

At virtually every meeting we’re talking about CEO candidates—the skills we’ll need and how we’re doing developing not just immediate candidates, but second and third generation as well. We like to have a smaller group of board members meet with top candidates for breakfast before a board meeting or for a break-out during lunch. It’s important to get people out of a rehearsed presentation format so each board member has the opportunity to get an up-close and personal look at candidates.

What is the board’s role in ensuring succession candidates have the needed skills and experience to serve as CEO? The board should work with the current CEO to ensure there is a detailed, regular review of candidates and plans for their development. At Eastman, this happens through ongoing discussions in executive sessions, and more formal annual reviews that cover all senior managers. These reviews examine multiple layers of the organization, with particular focus on near- and long-term CEO candidates and their development. Information shared with the

board includes external evaluations of CEO potential, 360-degree reviews, and coaching of potential successors, including Korn Ferry programs. We also discuss specific development objectives and plans for successor candidates, and integrate these into the compensation plans for their superiors.

Eastman serves many different markets and customers. One of the benefits of this diverse business model is the opportunity it presents to create exciting development jobs for high-potential mangers. The board’s role includes encouraging the current CEO to take full advantage of that potential, including creating job assignments specifically tailored to help develop succession candidates.

When the time comes to make a transition to a new CEO, what has your board done that has been helpful to the successor?

Eastman established a lead director position several years ago, and this has been useful in CEO transition. For the incoming CEO, the lead director can serve as a sounding board—providing feedback and advice in an informal way. For the board, the lead director provides a consolidating point to synthesize multiple director views for the new CEO. We believe it builds a level of trust and communication so you can say the hard things with a smile.

There are behind-the-scenes discussions: “What’s your sense of this?” “How much selling do we need here?” “Should we take this to the full board?” It’s an informal way of getting advice and feedback on how things are going and a way for the CEO to share progress since the last board meeting.

Any final observations on the board and succession planning?

Succession planning absolutely needs to be a continuous process, one that involves the full board and considers both planned and unplanned possible transitions. Working with the CEO, the board can participate in formal reviews, informal oneto-one sessions, and oversight of compensation plans that form the basis of successful transition. The day a new CEO is announced is the day the board should be meeting to discuss the next transition.

Succession planning is such a crucial process, frankly, I don’t know how boards can not talk about it. It is arguably the single most important responsibility of the board. Nobody can predict the future, but an effective board can do much to prepare for it.

or products? Anticipating a merger? Starting fresh after an organizational setback? All of these, and many other factors that are unique to the organization, are strategic considerations and will help to identify the CEO with the right skills and experience to effectively lead the enterprise.

When it comes to CEO selection, it’s not a question of an abstract set of general qualifications, but rather a set of capabilities that equip the future CEO to deliver on the right strategic priorities for that company, at that time. A great CEO for one organization may prove a disastrous choice for another. The critical factor is matching the individual’s competencies, experience, and personal leadership skills with what the organization requires in a leader at a given time and looking ahead to the future.

BOARD QUESTION Who’s in the running to become CEO? SHORT ANSWER You probably have multiple future CEOs in your organization if you think three generations out. Ensure plenty of time to identify the leading contenders—they may not be who you think they are.

An excellent process that produces desired results—like most worthwhile pursuits—takes plenty of time, probably more than most boards anticipate. It’s not uncommon for boards to wait until it’s too late to implement a sound process, which might include choosing a successor who needs more seasoning, opting instead for the more obvious candidate who may or may not be the best strategic choice given future needs of the business.

There is a good deal of evidence to suggest that CEOs developed from the inside, rather than hired from the outside, stay in the job longer and are more successful, and employees, customers, and shareholders all stand to benefit. If identifying and promoting internal candidates is the goal, we recommend starting five years ahead of a planned transition, which isn’t really that much time if you consider what it takes to make even the best candidates CEO-ready.

If there are no strong internal successors, a long runway is equally important. In that case, the board can significantly reduce the risk of new CEO failure by bringing a successful external candidate in early—years prior to a planned succession—to learn the ropes and allow the organization to gain a level of comfort and confidence before he or she takes the helm.

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The Boardroom Guide

CEO SUCCESSION

When the focus is on internal successors, it is likely that the board has already had some, or perhaps a good deal of, exposure to those who may be in the running for CEO, from presentations at board meetings to board gatherings, such as dinner prior to a board meeting. But how can directors assess, with precision, who is really suited to become CEO from such relatively infrequent, surface exposures? There may not be many surprises about who is

on the short list of candidates, but getting beneath the surface to properly address the specific aspects of potential is a taller order.

How can directors best quantify candidates’ potential, not in the abstract but relative to what they will require in the next CEO, and then be able to compare them with consistency, one candidate to another? Potential successors are usually close to the CEO, probably among his or her direct reports, and while the CEO will

Q&A Paul Laudicina, Former CEO, A.T. Kearney

CEO Succession: Taking the Process Personally The awareness regarding various options for leadership is always on the agenda, but I began planning in earnest for my actual transition 18 months before the end of my tenure—that was during the second of two three-year terms. I wanted to make sure I was as prepared as possible to deal with the remaining agenda. I also wanted to ensure both my wife and I were prepared for a possible post–CEO letdown, so that it was a process I could embrace.

So you had both personal and organizational objectives?

Definitely. As the succession process related to me personally, I wanted to be able to look back on my six years leading the firm knowing I had done as much as I could have, that I had accomplished everything I set out to achieve. And on an organizational level, I wanted to make sure I had left my successor in the best possible position to move the firm forward.

It seems you consciously decided not to coast at the end of your tenure as managing partner and chairman at A.T. Kearney.

For me the key to succession planning was ensuring that I addressed as comprehensively as possible all the different, difficult issues likely to be on my successor’s agenda so he or she would have a clear field to take his or her tenure further. We have an unusual succession process at A.T. Kearney—the CEO is elected by the partners—so in many ways it’s more difficult for the incumbent CEO to start the succession process.

When did you really begin planning for your transition and that of your successor?

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Can you share some of your thinking as you embarked on your own succession?

A.T. Kearney had never really gone through a succession process before, so I was conscious of the fact that this needed to be a model of how succession should be done—as a smooth, seamless process that would ensure shareholders that the firm was on terra firma and that we would be able to implement our shareholder agreement.

There was no precedent. We had to make sure that the candidates were aware of what was important to the firm’s future, and that the right people had the right visibility. We have a board with partners who are elected. Both board members and my senior leadership team—where my successor ultimately came from—were highly visible. I chaired the election committee, and we had position papers as well as in-person and online debates, so it was a thorough process.

On the personal front, I knew I wanted some sort of coaching, and while I didn’t know exactly what sort, I knew I needed someone

undoubtedly have a good read on them, it is always advisable to establish a robust and objective, validated assessment process managed by a third party. Even the best CEOs, like everyone else, have unconscious and conscious biases that may skew the assessment and ranking of successors; sometimes close means too close to evaluate both assets and flaws. In any case, the best internal assessment process should be enhanced and validated by external checks.

from outside the firm who would provide objective advice. I wanted to optimize my ability to be successful as a lame duck— for the firm, for me, and for my successor.

How did participating in the Chief Executive Institute (CEI) as an incumbent help prepare you for a successful succession?

The issues I had the temerity to take on during the last 18 months of my tenure were a direct function of CEI. Through CEI I had spent time doing intensive assessments and went through a series of experiences designed to illuminate my core purpose.

I realized my core purpose was all about how I use my intellect to inspire others to have impact. It was the most basic, important stuff that CEI helped me focus on. When I started to focus on the transition I began asking myself, “How can I be fundamentally transformative in my last 18 months?”

And you decided to take on the toughest challenges possible?

My peers kept telling me, “You only have 18 months left. Those are the most nettlesome issues in the world. Why take them on when you have little time or authority? Let your successor take care of them.”

But I decided that approach wouldn’t be consistent with my core purpose and what I hoped to accomplish. Also, it wouldn’t be good for my successor to turn over a rock and find a lot of unresolved issues I could have dealt with. So I decided to address some big issues, like organic growth, overhauling the partner development and compensation system, amendments to our governance process, and a new branding strategy. Those were all launched during my last 18 months. We engaged all those partners who could be potential successors, so we had unanimous board engagement, and those who were potential successors to me were all on the same page on those issues with no contentious differences.

One pitfall boards should avoid is working under the assumption that anyone being considered as a candidate would love to have the job. In reality, being CEO is not an aspiration everyone shares, and not everyone is comfortable saying, “Thanks, but no thanks.” The answer is to get an independent assessment of each candidate’s motivations and goals to confirm that they are in sync with the realities and challenges of CEO-ship.

How much of an event was the actual succession?

By the time we got to the process of electing a successor, everything was in place for a fairly uneventful succession. We knew what our agenda was and we were already aligned around all the important aspects. In some ways, though, it was more complex, and we had to be even more careful than in situations where there are a board and a nominating committee to take on succession. We had to not only enable the firm to select its next leader but to prepare a whole group of partners to align around the strategy and operational issues.

You take succession seriously. Since you transitioned to a new role at A.T. Kearney you are working to develop a new generation of CEOs. Thanks largely to the work I did at CEI, I now mentor a small group of CEOs. I’m currently working with an incumbent CEO in Asia, advising him on how purpose drives business performance and understanding what core purpose is all about. I also lead a senior development program at our firm and chair our Global Business Policy Council, a consortium of CEOs, thought leaders, and policy figures.

Did you share any of the wisdom you’ve gained with your successor before handing over the baton?

I took a page from the U.S. presidential succession planning book. I left my successor a long letter suggesting some things to think about based on what I’d learned over the course of six years. And what I’ve learned, primarily, is that you can’t inspire others without a clear and authentic core purpose, and you can’t deliver on the needs of shareholders if you’re not aligned with the broad needs of all stakeholders. It’s a case of the perfect intersection of doing well by doing good.

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CEO SUCCESSION

BOARD QUESTION How do I know if these candidates have the right stuff to be CEO and what the gaps are?

SHORT ANSWER You’ll need input beyond the current CEO and chief human resources officer.

For the increasing number of companies that are serious about succession and development, there are proven, state-of-the-art assessment and development methodologies to assist in establishing a rigorous process.

A couple of things to remember when considering CEO succession candidates: there is no such thing as an ideal candidate, and people can be developed. But lead time is everything, and the more time and support for development, the better prepared the new CEO will be.

Those boards that allow themselves a cushion of two to five years prior to a planned transition—we recommend five to six— will be in the best position to develop internal candidates.

It’s important to distinguish between the hard-wired dispositions, motivations, and interests that make people who they are versus the learned competencies and experiences that describe what they do. While the former are more “set,” they can be correlated with best-in-class CEOs, and self-awareness can be enhanced to apply them more effectively. The latter can be augmented and shaped. As a result, if given sufficient time, deficits may not necessarily mean the kibosh on a given candidate, but may represent an opportunity to bolster skills and experience that will be needed to tackle a CEO agenda.

An assessment process should be objective, research-based, and multifaceted, using a variety of tools to capture an in-depth picture of each candidate’s strengths and weaknesses. When getting a read on potential internal successors, context is everything.

The key is to have the relevant analytics, based on CEO-levelspecific research that measures what is unique about the role and outlines requirements for success.

Once the timeline shortens to a year or two before a transition, the question changes from who has long-term potential to serve as CEO to who is now ready to take on the job.

That’s where a readiness assessment of candidates kicks in, as well as board due diligence on potential successors. The board has to make sure it has the most robust, objective, and multi­dimensional view of those in the running, so directors are aware not only of what each candidate can bring to the job but can also define the risks attached to each choice and how best to mitigate them.

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BOARD QUESTION Once we’ve identified gaps in essential skills and experience, what can be done to remedy deficits in time for succession?

SHORT ANSWER Accelerated opportunities to use skills on the job will be essential, and don’t neglect the harder-to-assess leadership skills crucial to success.

Armed with data from a thorough assessment process, and given enough time, organizations can build a developmental road map to ensure the most capable successor fills the CEO role.

Companies that are best at growing their own talent understand that senior executives who have been identified as future leaders require individually tailored programs that will provide the growth and broadening experiences they will need to round out their development and prepare them as potential CEOs. Depending on a company’s strategy and the future CEO profile, that may mean experience in specific markets or product areas, cycling through other functions, or a coach to work on personal leadership skills.

When succession is within sight, accelerated development support can help close any remaining gaps that may exist.

In addition to company-designed and -run internal development programs, a leadership acceleration program specifically geared to CEO development is often advisable to prepare senior leaders for the top role. Even given the most enlightened chief human resources officer and a team of internal development professionals, there is no substitute for a program run by specialists whose sole purpose is assessing, coaching, and customizing development plans for potential CEOs. In reality, companies that wish to enhance the likelihood of a successful succession marshal all possible resources—internal and external—to aid in this crucial effort.

CEO contenders may have impressive résumés, but it’s often the more subtle, difficult-to-measure skills that spell the difference between success and failure. Financial acumen? Check. Strategic expertise? Check? Operational experience? Check. But what about a personal leadership style that will either inspire or alienate?

Managing the wide range of relationships inherent in performing well as CEO? Motivating employees across an entire enterprise?

Navigating agendas with the board? Leveraging self-awareness and learning agility? All can be make-or-break attributes to performing as an effective CEO, and are not necessarily skills you learn on your way up the corporate ladder. It’s also advisable to acquire them before, if possible, rather than learning them on the job. The

CEO role is a role apart, and while nothing can totally prepare you for it, there are resources that can certainly help.

The Chief Executive Institute (CEI), run by Korn Ferry, specifically addresses this step change from senior leader to CEO, usually either just before or soon after becoming the leader of the entire enterprise. The program is geared to CEOs who want to up their game and accelerate their CEO capabilities. The approach entails a laser-like focus on four critical components of CEO development—­Personal Leadership, Team/Interpersonal Leadership, Enterprise/Operational Leadership, and CEO Leadership. The program is custom-tailored for each participant, with

a dedicated consultant for each development area who works one-on-one with a potential successor. CEO coaches have a minimum of 15 years of coaching and leadership development experience, and those who guide potential successors through the CEO Leadership segment are successful former CEOs. There will always be a learning curve for a new CEO, regardless of the extent of preparation, but boards can ensure a far shorter adjustment period—particularly for internal successors who may never have served previously in the role—if they have the right support. This is especially important initially, when someone is new to the role and taking

Four Dimensions of Leadership and Talent

WHAT YOU DO COMPETENCIES Skills and behaviors required for success in the CEO role that can be observed

WHO YOU ARE HARD-WIRED DISPOSITIONS

MOTIVATIONS AND INTERESTS

Inclinations, aptitudes, and natural tendencies a person leans toward, including personality traits and intellectual capacity

Drivers and interests that influence a person’s career path and engagement including the desire, or not, to become CEO

EXPERIENCES Assignments or roles that prepare a person specifically for the CEO role Source: Korn Ferry

on different challenges, including developing strategic relationships with his or her senior team and learning how to work effectively with the board and external shareholders.

For the best results, the current CEO and the board should seek a program that takes a holistic, integrated approach that evaluates the needs of the entire person and integrates all of the dimensions of leadership that are critical to performing effectively as CEO. It’s a case where more is more, and a specialized team of consultants, each with his or her own area of expertise, is likely better than one. The approach might be thought of as a “leadership development advisory board” to accelerate CEO potential.

With CEO succession, the “buck” stops with the board, so directors have ultimate responsibility for ensuring they are considering and have visibility into the right candidates. In order for the transition to a new CEO to be as seamless as possible, the board should also ensure those candidates’ development gaps have been clearly identified and that they are on track to closing those gaps with rigorous, evidence-based, individually tailored programs.

That doesn’t mean directors have to be management development gurus, but it does mean they have to know the right questions to ask, and have an objective, rigorous process in which they become intimately involved with key talent as they oversee the succession process. D Jane Edison Stevenson, global leader for CEO succession, is vice chair of Board and CEO Services; Kevin Cashman is senior partner, CEO & Executive Development, and global leader of the Chief Executive Institute; and Dave Heine is executive vice president, Board and C-Suite Assessment Practice at Korn Ferry.

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