Director: Corporate-911
In mid-February, Turnaround Talk published an article which pointed out that some of the biggest and most successful companies in the world are often led by an iconic CEO. Successful companies are also good at succession planning.
I am sure that these successful companies would love to retain the services of these CEOs indefinitely, the reality is that these CEOs will not last forever. Succession planning is important in any business.
It is important to note that there is natural succession planning and there is forced succession planning. Most of the time, turnaround professionals have to deal with forced succession planning as it is often necessary to completely replace the board of a company that is in financial distress.
Companies need to be deliberate about their succession planning. In a recent HBR article there was extensive discussion around succession planning.
Timing is everything
The article points out that the basic math of CEO succession is as simple as it is unforgiving. If we assume a 10-year CEO tenure (which is roughly in line with the historic, pre-pandemic averages), starting CEO succession planning in earnest five years into a CEO’s tenure gives the board and management team five years to identify and cultivate succession candidates.
Given the turmoil in our SOEs and Sate departments, succession planning does not receive sufficient attention in some our most important organisations.
Most large companies prefer to transition to an internal candidate. The unique demands of the CEO’s role mean that internal candidates require significant development in the form of new roles and job assignments to get them ready, for example giving a strong business unit leader an opportunity to cut their teeth in corporate strategy. It takes at least two years to prove oneself in a role. Therefore, five years is just enough time for two job rotations — the bare minimum to prepare an internal candidate.
The article adds that this five-year timeline also provides a valuable window to add external talent to the executive ranks and/or consider “skip-level” employees to expand the pipeline of potential successors beyond the current C-suite ranks.
Yet, for a typical CEO only five years into their own tenure, succession feels like a distant eventuality — unavoidable, but not a daily focus. This is where a proactive board must step in to establish a regular cadence of structured succession discussions and activities.
Image By: Tumisu from Pixabay
Scorecard the future instead of cloning the past
The article adds that, when asked what they’re looking for in the next CEO, many boards are quick to admit that they wish they could “clone” the incumbent. Selection criteria quickly devolves into a long laundry list of generic leadership attributes, and potential candidates pale in comparison with the one who’s currently excelling in the role.
Instead, boards should start the succession process with an unemotional business conversation about the biggest changes the company faces in the future, what success looks like in that context in terms of concrete business outcomes, and the leadership skills required to deliver on this vision of success.
The article adds that this forms the foundation of a future CEO scorecard, which is used as a lens for assessment and development of candidates. The scorecard should be updated regularly, and ultimately used to help the board make decisions based on rational tradeoffs, rather than relying on nostalgia and bias.
Cast a wide net
To ensure the most diverse and robust candidate slate, boards need to regularly get an objective assessment of key leaders one to two levels below the C-suite.
While the majority of CEOs are promoted from the C-suite ranks, recent research by Spencer Stuart shows that “leapfrog” CEOs, who were uncovered and moved up from roles deeper in the organization, often outperformed the more traditional choices. GM’s Mary Barra and Microsoft’s Satya Nadella are two examples of this phenomenon.
The article points out that to uncover the most promising talent, the best boards go far beyond the casual familiarity of meeting high potentials at dinners and curated events to demand in-depth, objective analysis to thoroughly understand executives’ capabilities. As an example of how bias can infect the succession-planning process, HBR research found that absent an objective assessment, individuals with a strong accent were 12 times less likely to be chosen for the CEO role — while a strong accent had no impact on CEO performance.
Make bold bets to accelerate development
The article adds that the best way to prepare and test internal CEO candidates is by placing them in challenging roles. Their research shows that 75% of executives who got to the CEO role on an accelerated timeline took on one or more of three distinct challenges that flex their ability to make decisions, adapt, and perform in testy waters.
- Big mess: Examples of these projects include turnarounds or hairy and messy problems like merger integration or a large-scale technology implementation. They test an executive’s decisiveness and resilience under intense pressure.
- Big leap: These are opportunities (roles or projects) that challenge an executive at a much greater scale than their prior roles — for example, stepping up from leading a $500 million business unit to heading up a $5 billion global business with multiple products.
- Go small to go big: In this case, an executive is given a role or project that is a microcosm of the company, such as a large country manager or business-unit leadership role that requires the person to step out of the CEO’s shadow and lead autonomously.
The challenge with bold bets is that CEOs, CHROs, and even the candidates themselves can be uncomfortable with taking on these moves that have a high payoff — and a high degree of risk. This is where a proactive board can make a huge difference. For example, at the urging of the board, a Fortune 500 CEO we advise reluctantly agreed to put the lead succession candidate in charge of the largest acquisition in the company’s history – the role that she later regarded as the single most challenging and valuable experience in preparing her for the CEO role.
Image By: Image by Werner Heiber from Pixabay
Proactively seek and offer divergent views
The article points out that in analyzing failed CEO successions, we typically find that at least one or more board members were uneasy about the chosen candidate but were reluctant to contradict the prevailing consensus or didn’t feel heard. This is especially true with transitions from longstanding, revered CEOs who have a disproportionate influence on the succession process.
To counteract this dangerous pattern, the best boards actively encourage diversity of perspectives and seek out divergent views from board members and outside experts. For example, a new board member recently requested a full background screening for the final two internal candidates for the CEO seat. Despite initial resistance from the sitting CEO, CHRO, and lead director, who had known both candidates for decades, they went ahead with the review, which uncovered important data that impacted the final board vote.
The article adds that the lead independent director has an especially important role in institutionalizing open debate. The best lead directors assume there are divergent views and proactively seek them out, rather than quickly settling for a comfortable consensus.
Let the next one in
When overseeing the transition from a longstanding, successful CEO to an unproven newcomer, boards often seek to preserve continuity, assuming that more of the same people will lead to more of the same great performance.
This often translates into holding on to the outgoing CEO in some capacity or tasking the incoming CEO with retaining the previous management team, including runner up(s) for the CEO job. Unfortunately, this often backfires, as the new CEO is handcuffed from fully making the role theirs and building a team that complements their own skills, rather than those of their predecessor
One of the more successful strategies is to give the outgoing CEO a sabbatical and then an non-executive role on the Board.
In well-executed successions, the incoming CEO is empowered to own the role from day one with support and partnership of the board.
The local landscape
In South Africa, our labour laws mitigate against long term career planning and successful strategies insisting that appointments should follow an open and fair process. This is further compounded by deployments in SOEs and Government without any real science or apparent thought behind them.
If we are going to deal with transformation and the skills deficit, we need to get real about succession planning at every level of business. This should start with the first time a candidate is bought into the organization.
We need serious and thoughtful answers to that famous question: where do you see yourself in 5 years.
Robin Nicholson is the Director of Corporate-911 and is a Senior Business Rescue Practitioner.
