Over the last five years, boards have been under increasing pressure—by shareholder activists, regulators and shifting business conditions—to make chief executive officer (CEO) succession more of a priority. But with more organizations now focusing on succession planning, the question becomes not whether or not to follow such a plan but rather how to do it well so that it results in a smooth transition to a CEO who successfully can lead the firm over the long haul.
To accomplish this, boards must move past executing succession fundamentals (see Table 1) to addressing less tangible, more nuanced forces that the succession process can set in motion. For no matter how professionally the succession process is conducted, it also is deeply personal and will stir emotions that affect the behavior of all involved. Understanding potential issues before they arise allows boards to proactively work to demystify the process, making it both more effective and positive.
Take charge of the succession conversations
The roots of difficult successions often are found early in a new CEO’s tenure. Despite the adage that succession planning should begin anew on the incoming CEO’s first day, in practice, it usually (and understandably) takes a back seat to the implementation of the new vision for the company. Without a clear structure mandating a regular succession discussion between the chairman or lead director and the CEO, it is easy for one year to slip into the next until the CEO has been in office for half a decade before a meaningful succession discussion takes place. His or her successors, having no idea when or if their time might come, begin to entertain offers to lead other firms. The conversation that the chairman or lead director needs to have with the CEO regarding timing suddenly goes from premature to overdue—and all the more difficult to initiate.
The chairman or lead director can prevent this predicament by having a yearly conversation with the CEO, starting on the CEO’s first anniversary, to review possibilities regarding a succession timetable. The early conversations will be vague, but having the discussion on a regular annual basis minimizes the emotional baggage when the topic becomes more timely.
Those conversations presuppose that the CEO will have a good internal sense of when to start thinking about handing over the reins. However, boards cannot assume this will be the case and need to be prepared to proactively steer the discussion in that direction if need be. Younger CEOs, for example, often are reluctant to embrace the idea of preparing the company to be run without them. But the reality is that the board of such a company needs to be even more concerned about succession planning, given that a successful younger CEO may well receive an offer to head a larger company. In these cases, lead directors can appeal to the CEO’s instinct for planning and control; succession for the younger chief executive is less about some abstract retirement and more about preparation for unforeseen circumstances.
But there also are CEOs well into their 60s who show no desire to step aside, even when there are increasing signs that new leadership is desirable. For them, boards need to understand that the sticking point frequently is an inability to imagine a life beyond the C-suite even though the possibilities—establishing a foundation, joining a private equity fund, entering public service or sitting on multiple boards—may offer a very fulfilling second career. For others, the concerns may be economic. Leaving the CEO role, after all, means relinquishing the corporate jet, the club memberships and the trips to Davos. In these cases, the lead director and the head of human resources need to work together to get the CEO comfortable—if not excited—about the next chapter in his or her trajectory. And the CEO needs to be shown that the perks that will have to be relinquished are symbolic and easily replaced from his or her net worth.
A special economic case occurs when the outgoing CEO will, due to years of vested stock options, remain a sizable shareholder of the firm. Here, the CEO is right to expect the same level of involvement that a large shareholder would have. To address these concerns and establish appropriate access, the chairman or lead director can facilitate conversations with the general counsel, the head of human resources and/or the chief financial officer.
There is no set script for dealing with these scenarios; the critical point is for the chairman or lead director to be proactive in anticipating them early on so such issues do not undermine the firm’s succession planning process.
Keep the internal candidate pool fluid
Managing the internal candidate pool is another area that calls for particular attention. As Neville Isdell, former CEO of Coca-Cola, noted in the Russell Reynolds Associates video series, internal candidate pools often start strong but do not always remain so. As the company strategy changes with the business environment and as the organization grows in revenue, complexity and geographic reach, the requirements for the top job must evolve as well; the heir apparent today may not be the right executive when it actually is time to choose a successor. Boards, therefore, need to revisit the requirements for the next CEO detailed in the succession plan every six months and, with the help of the head of human resources, check that list against the competencies, experiences and gaps of the internal candidate pool.
If that internal pool is found to require expansion, the default response frequently is to hire from outside. While that is one solution, it also is possible that the right successor still is within the company but merely beyond the board’s view. For while the board often has firsthand experience with the CEO’s direct reports, it typically relies on the CEO’s assessment of executives a level or two further down. But this is not enough; as part of its succession due diligence, the board needs to make a point of interacting with these executives as well. Many times, the board can see possibilities and potential here that the CEO, who naturally is focused on his or her direct reports, cannot.
It is a pillar of good succession planning that the assignments of internal candidates be integrated with the succession plan to continually sharpen their competencies and address gaps. But it also should be made clear to potential successors that the position they hold when it is time for the board to make a decision doesn’t necessarily determine who will become the new CEO; instead, overall performance and fit with the requirements will be the benchmarks.
Plan for a smooth transition
While it is important for the chairman or lead director and the CEO to have frank conversations regarding succession planning, the discussion regarding the issue of timing cannot be so specific that it constitutes a disclosable event. If the succession plan and preparation of internal candidates already is well under way, the CEO may appoint a president who is a clear successor a year or so before the CEO wishes to step down and make that appointment with the explicit approval of the board. By involving the board, the CEO signals intent without becoming a premature lame duck. A public announcement then can be made a month or two before the changeover date.
During the transition period, it will be important to define the future role of the outgoing CEO—an issue for which there are more options than once was the case. Some companies, by keeping the outgoing CEO on for a time as executive chairman, may use the transition as an opportunity to separate the chairman and CEO roles if they have not been divided. But this can cause its own problems, depending on how closely the incoming CEO’s vision is in line with that of his or her predecessor, the extent to which the incoming CEO can benefit from a final round of mentoring and the outgoing CEO’s expectations. Whatever structure is decided upon, the end result needs to be clearly delineated and have explicit boundaries. CEOs have a shorter honeymoon window than ever; inadvertently building in a structural conflict with the new chairman adds an unnecessary burden to an already challenging time.
Manage the unsuccessful candidates
When the successor finally is named, the decision will be heralded as the beginning of a new chapter for the company. But for those passed over, the moment will be defined in terms of what did not happen—and that the non-event will loom as large for them as the elevation of the successful candidate does for him or her. But remember that the unsuccessful candidates are no less important to the company merely because they did not become CEO; indeed, some may be even more essential than before, particularly if their abilities provide a needed complement to those of the incoming chief.
It is standard best practice to have the unsuccessful candidates informed of the decision of the board by the chairman or lead director, in private and before the public announcement. But sensitive delivery of the news is not sufficient. Being passed over can and should be an opportunity for professional growth. After all, the question of “Do I have what it takes to become CEO?” no longer is hypothetical. But if the answer is “Not here, not now,” it should be followed by a frank discussion of why not. Unsuccessful internal candidates rarely are given the unvarnished constructive criticism they deserve and from which they can benefit. Often, the entire exchange is so lacquered with diplomacy that the executive doesn’t even bother asking why he or she actually lost out.
This is a wasted opportunity for both sides, and the board, whether directly, through the chairman/lead director, or indirectly, through the head of human resources or third-party consultants, should encourage an honest dialogue that leads to a revised, recharged professional development plan—even if the end game is for the executive eventually to lead another company. The fact is the board should consider every passed-over contender to be on the radar of other organizations; to some extent, each one remains at the company on borrowed time. The goal thus should be to maximize the value, for both sides, of whatever that time may be by continuing to invest in the executive’s development. That commitment can be a powerful force in retaining people who can make sizable contributions to the new CEO’s success.
In CEO succession, the things not said frequently determine the tenor of the process. By taking charge of these undercurrents (see Table 2), boards can make succession a source of strength and continuity rather than disruption.
Charles A. Tribbett, III, is a managing director at executive search and assessment firm Russell Reynolds Associates, where he co-leads the firm’s CEO and Board Advisory Services Practice in the Americas.
Russell Reynolds Associates is a global leader in assessment, recruitment and succession planning for Chief Executive Officers, boards of directors, and key roles within the C-suite. With more than 300 consultants in 42 offices around the world, we work closely with both public and private organizations across all industries and regions. We help our clients build boards and executive teams that can meet the challenges and opportunities presented by the digital, economic, environmental and political trends that are reshaping the global business environment. www.russellreynolds.com. Follow us on Twitter: @RRAonLeadership