It’s not a stretch to say that CEO succession is one of the most critical tasks of the board. Ask any investor, analyst, regulator or seasoned board member, and each will confirm that one of the most important and foundational duties of the board is to select and retain a highly competent CEO.
While research conducted by Corporate Board Member, PwC and The Conference Board affirms that board members are assigning great importance to CEO succession, the studies also reveal a significant lack of confidence among directors who often feel that they have not adequately addressed succession or met the expectations of their various constituencies.
Now just to be clear, there are both planned and unplanned CEO succession scenarios, and boards must be prepared for both. Most of us think of retirement as the primary reason that CEO succession is required, but CEO terminations could fall into both planned and unplanned buckets. Determining that a change is necessary due to retirement or performance can be discussed in advance, yet there are also circumstances where health or poor personal decisions outside the office might mandate an immediate replacement.
Year after year, why do so many directors continue to express a lack of confidence around CEO succession? While I’m not 100% sure, I do have some theories, which have been supported in many of my one-on-one conversations with directors.
First, the air around a good CEO is often one of immortality—no one accepts a CEO position thinking that they are going to fail at their assignment or get hit by a bus. This leads to the second reason: CEO succession is simply an awkward topic for boards to bring up with the CEO, especially if you’ve just brought on a new leader.
Most directors I’ve talked to say it’s not a typical meeting agenda item or topic at the planning retreat. Many feel that they’ll handle it when the time comes, particularly when the CEO is getting close to retirement. That’s a nice idea, but most of us recognize that it doesn’t always work that way. As a stock owner myself, I place great value on a board’s CEO succession preparedness, since an unexpected CEO termination can be very hard on a company and its operations.
One company that has always been the poster child for CEO succession planning is the global fast-food giant McDonald’s. In 2004, the company was faced with the sudden death of then-CEO Jim Cantalupo and immediately appointed insider and COO Charlie Bell as chief executive. Just 16 days after that appointment, Bell was diagnosed with cancer and within months was replaced by insider Jim Skinner. All this happened without a hitch, and the McDonalds’s board demonstrated how careful succession planning can transform an otherwise disruptive event into a seamless transition of leadership.
As I was doing my research for this article, I took the opportunity to talk with two sitting board members who served as chair of their board’s CEO search committees. One director chairs the nominating/governance committee of a large-cap company, while the other provided a mid-cap perspective. Both described CEO succession planning as highly process-oriented, requiring excellent project management skills.
Both directors also described to me the same foundational exercise, which entails looking at both the present and the future to create lists of performance and leadership priorities. This exercise has two components:
This foundational exercise allows board committees to visually map and evaluate whether an internal senior officer who has been groomed for the CEO position is still the right candidate—or whether an outside search is necessary to meet the company’s must-have performance and leadership skill sets. Small companies sometimes lack the management depth to select from the inside management team versus large companies, and both chairs said the entire process (including the executive search firm process) took six to seven months. When I asked the directors about other critical elements of a successful CEO succession process, they both emphasized communication. Communication among the committee, search firm, full board, existing management and even the candidates is often the difference between a smooth and rocky succession process.
An unexpected CEO termination can be very hard on a company and its operations.
When was the last time your board discussed CEO succession? It’s an uncomfortable and yet critical task for a company and its governing board. In my opinion, this is where a self-confident CEO can step in, provide leadership on this topic, and ensure the board considers both an emergency succession plan and a long-term plan.
Now, I’m hardly proposing that the CEO take ownership of selecting the next chief executive, as that is the board’s job. However, if a CEO has the company’s best interest at heart, he or she can let the board know early on that it needs to have a viable succession plan and that the CEO is ready to help however he or she can. I can assure that the emphasis and the open dialogue will be much appreciated by the board. Boards that plan for succession will not only find themselves able to make quick and sound succession decisions, but they’ll likely also find that they spend fewer dollars on CEO compensation packages when they aren’t required to conduct a harried search for a new leader.
My message to CEOs: Help the board feel less awkward and do what is good for the company and shareholders. Directors and boards: Follow what Nike has told us for years—Just do it!
TK Kerstetter is the CEO of Boardroom Resources LLC and is a second generation pioneer of governance thought leadership and board education. He can be reached at tkkerstetter@boardroomresources.com.