Successful Succession

Successful succession With a robust plan in place to pick a CEO, a board can look ahead at generations of leaders

By Jane Stevenson and Peter Thies

June 2012 The foundation of a smooth transition to a new CEO is laid layers down in the leadership of a company. When CEO succession is approached as an ongoing process based on strategic longterm thinking, it can be a positive step in the natural growth and development of the company.

Change is traumatic, and there’s no way around that.

Everyone—small businesses, families, even governments—are at their most vulnerable when control is transferred from one leader to the next.

Corporations are no exception.

In fact, the months after a new CEO takes up the reins are almost always negative quarters, no matter how competent or experienced the new leadership is on paper. It’s no wonder that corporate boards have a tendency to put off thinking about CEO succession until illness, scandal, or investor discontent forces them to scramble to fill their top slot. Even worse, boards may keep an underperforming CEO simply because they’re afraid of disruption.

But boards should not look at CEO successions as catastrophic (if inevitable) events to be avoided and delayed. Rather, CEO succession is—or should be— an ongoing process based on strategic long-term thinking, the development of a strong executive talent pipeline, and an acceptance of change as a regular part of corporate culture. Approached this way, CEO succession can be a positive step in the natural growth and development of the companies.

Besides minimizing risk and insuring against catastrophe, there are other compelling reasons for boards to get their hierarchies in order. The SEC Division of Corporate Finance Bulletin 14e, updated in 2009, specifically directs corporate boards to create robust succession plans in order to mitigate risk. Even so with that potential liability hanging over them, a 2011 survey by the National Association of Corporate Directors found that

about a third of the largest publically traded companies do not have formal succession plans. And even those that do aren’t as robust as they should be: about 25 percent of those plans don’t even lay out how they would replace a CEO in the case of an emergency, according to the NACD. The result? When a corporation is thrown into crisis by the sudden loss of a chief executive, factional rivalry on the board, panic, and a lack of due diligence can delay the transition of power, or, even worse, can When a corporation suddenly loses of its CEO, result in the selection of a factional rivalry on the board, panic, and a lack candidate who isn’t the CEO at of due diligence can delay the transition of power. the right time. According to Nat Stoddard and Claire Wyckoff, authors of The Right Leader: Selecting Executives Who Fit, the net cost of losing a CEO after 18 months can be between $12 million to $50 million, depending on the size of the company.

Building a sustainable and reliable talent pipeline, however, is an undertaking that many boards don’t have the expertise, or frankly the time, to do on their own. And yet it is essential to achieving sustained growth for their companies.

What’s at stake?

Research undertaken by Korn/Ferry International on the pitfalls of CEO succession found that, indeed, a CEO transition is something to worry about.

We took a look at the 132 Fortune 500 companies that underwent CEO transitions between 2003 and 2005 and then tracked their performance over the next half-decade. Even controlling for the recession, the results were sobering. Almost half of the CEOs were gone by 2010—probably not the result the boards who hired them were after. Many of the companies were acquired or participated in mergers after changing CEOs. A large percentage underperformed the rest of the Fortune 500. Only 16 companies were identified as having consistent, strong growth after handing over the captain’s chair.

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Even more difficult to tease out, however, is why so many companies stumbled during and after their transitions. A statistical analysis showed that the education level of the incoming CEO didn’t matter much, previous experience as a CEO was negligible, the industry they worked in, their age and gender, and a concurrent appointment as chairman of the board made little difference in their profile for success. Candidates recruited from outside the firm did not outperform internal hires, and vice versa—though of the successful companies, a larger percentage chose internal CEO successors who had more than 10 years experience at that company.

What that means to us is that there’s no magic-bullet CEO profile that can turn a company around. Knowledge is not enough. Experience is not enough. It all comes down to due diligence on the part of the board in figuring out which potential CEO successor aligns with their goals and strategy, fits with the culture, and has a vision that resonates with the rest of the company. And that process cannot be ad hoc. It should be rooted in a firm framework so that it’s not undermined by random thoughts or feelings.

The CEO within (and without) Still, a board can spend decades grooming someone they believe is the perfect candidate to take over their organization, only to find when the day comes, that the entire market has changed and CEO Right is as outdated as a pager. Instead, a smart board develops options: a whole crop of potential C-level executives with a diversity of skills, experience, and outlook to face whatever challenges come next.

Investing in that kind of talent pipeline will produce generations of leadership. The best time to build that pipeline is now, before the unexpected happens. In fact, boards should be looking two or three CEOs ahead, starting by identifying internal candidates, then asking do they have the skills and leadership styles that mesh with future growth plans?

Or can those skills be developed? A robust program of assessment, focused development, executive coaching will, over time, give directors a broad bench of executives ready to lead, no matter the situation.

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But not all CEO material comes from the inside. Part of succession planning is also mapping the larger talent constellation: identifying and tracking the stars outside the company who also have the potential to lead it in the next decade. Not only does keeping an eye on the Who’s Who of the entire industry give the board a benchmark for assessing their own internal candidates, it gives them the option to reach outside the hierarchy if they decide the company needs external talent.

Building the pipeline For the succession planning process to work, however, corporate boards need to strive for their own gold standard in other areas of governance.

Directors need to be aligned enough to do some long-term thinking— without a short-, mid-, and long-term business strategy, there’s no way to identify short, mid, and long-term CEO candidates.

Roadmap to succession

A CEO succession plan that can serve your business for years should begin with these six critical steps. > Align the board around the business

strategy. It’s no use identifying new CEOs to lead the company into the future if the future is not clear. Mapping out short-term, mid-range, and long-term goals for the business will help the board decide the right types of candidates to groom for succession. > Build leadership profiles. Identify the

attributes needed to lead the company to its goals. Ask what skills your ideal CEO today would possess. What would the ultimate CEO look like five or ten years into the future?

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> Identify high-potential talent. Find the

people inside and outside the company who have leadership potential and compare them to the your CEO leadership profiles. Ask what each candidate needs to develop, and create a roster of talent that the board can analyze to determine the depth of talent in the organization. > Develop the talent. Once each candidate’s

areas of weakness or inexperience have been identified, create a training or development plan for each. This might mean putting them in a management position they’ve never dealt with, giving them overseas assignments, or improving their technical or business skills.

> Coach the candidates. CEO succession

candidates should receive one-on-one time with high-level executives to learn more about C-Suite functions and to troubleshoot any problems they may face. Internal mentoring is incredibly valuable, but so are external executive coaching programs that might shore-up vital skill sets in less time. > Transfer knowledge. Long-term planning

is often the first thing abandoned in the chaos of daily business. Keeping a strong talent pipeline flowing means establishing mechanisms that maintain succession planning despite board or management turnover. That may mean requiring presentations to the board periodically, or letting an outside consulting firm manage your succession planning to maintain the momentum.

And the board has to make CEO succession planning a priority. Not only should there be investment in training, coaching, and actively managing the work experience of future candidates, the board needs to maintain an open and ongoing dialogue about succession and the progress of their candidates. We believe a best practice is for boards to commit A CEO is not a spreadsheet; data may help at least a half-day each year to determine the right person for the job, but focus on the succession process, there’s no substitute for knowing a candidate’s and individual board members personality and management style firsthand. also should commit to interacting with internal candidates in various settings. After all, a CEO is not a spreadsheet; data may help determine the right person for the job, but there’s no substitute for knowing a candidate’s personality and management style first-hand.

The benefits to building a deep CEO bench go beyond avoiding transitional crises or complying with the SEC. Having an entire pipeline of CEO-caliber executives working throughout a business, and having a system that identifies and develops leaders, adds value to a company, no matter who eventually inherits the corner office.

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Jane Stevenson is a Vice Chairman, Board & CEO Services Practice located in Korn/Ferry International’s Atlanta office. She co-leads Korn/Ferry’s CEO Succession offering and is the co-author of Breaking Away: How Great Leaders Create Innovation That Drives Sustainable Growth—And Why Others Fail.

Peter Thies is a Senior Partner for Korn/Ferry Leadership and Talent Consulting, located in the Firm’s New York office. He also serves as the Industry Leader, Financial Services and co-leads Korn/Ferry’s CEO Succession offering.

About The Korn/Ferry Institute The Korn/Ferry Institute generates forward-thinking research and viewpoints that illuminate how talent advances business strategy.

Since its founding in 2008, the institute has published scores of articles, studies, and books that explore global best practices in organizational leadership and human capital development.

About Korn/Ferry International Korn/Ferry International, with a presence throughout the Americas, Asia Pacific, Europe, the Middle East and Africa, is a premier global provider of talent management solutions. Based in Los Angeles, the firm delivers an array of solutions that help clients to attract, engage, develop, and retain their talent.

Visit www.kornferry.com for more information on the Korn/Ferry International family of companies, and www.kornferryinstitute.com for thought leadership, intellectual property and research.

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© 2012 The Korn/Ferry Institute