Start CEO succession early and seize these five opportunities
Dr. Rebecca Slan Jerusalim | 9 December 2022
Consider CEO succession as an investment that builds equity over time.
The long-term survival of organizations is a responsibility that falls on the shoulders of the board, and there is no greater stress test of that duty than during a changing of the guard.
With CEO tenures getting shorter, there has been an increasing number of succession events, the majority of which are initiated by the incumbent CEO. While all CEO tenures eventually come to an end, most boards are not prepared when leaders inevitably step down—more than half of boards do not have emergency or long-term succession plans in place.
This oversight is not due to directors’ lack of awareness. Boards understand the importance of CEO succession, but more pressing issues always take precedence—a psychological pitfall known as the importance-immediacy paradox. This issue, in addition to a well-performing CEO, makes for a conversation about replacing them rather untimely and awkward.
One additional factor that complicates this matter is that CEOs are often uncomfortable talking about their longevity and tenure. This insecurity can create a divide between well-intentioned boards trying to plan for the future and not wanting to upset or push back too heavily on a CEO who is not ready to discuss succession. In the extreme comparison, it can be like discussing one’s own mortality.
Consider the events that took place at an international transportation company, which illustrates the perils of an unprepared board. When the CEO made the decision to hang up their hat, the board’s reaction was one of uncertainty, and a number of questions began bubbling to the surface: How will the markets react to the announcement? How will our recent successes be impacted? Do we have candidates ready to take over?
The answer to that last question was no. When the reality of the succession event finally hit, it became clear to the board that they needed several years before they would have a strong slate of CEO candidates, a timeline that they did not have. The board ultimately had to select an unprepared successor, who faced criticism for his lack of readiness to take over. The alternative would have been to select an outside successor—but there are consequences in doing so too.
The antidote to such perils is to proactively manage CEO successions the moment a new successor takes over. Successions are complex on the best of days, and they are particularly traumatic when the transition occurs over a short stretch of time—imagine running a distance of a marathon at the pace of a 100-metre dash. Treating succession as an ongoing and future-focused process creates five opportunities for boards and CEO candidates, ultimately facilitating organizational and incumbent success.
Opportunity #1: Facilitate Board Alignment
Serving on a board is time-consuming, and all too often, many board members want to provide input on who the next successor should be but have limited time to focus their attention on succession. This is a breeding ground for tension, bad decisions, and frustration within the board, especially when directors often have different ideas about what good leadership looks like and the longer-term strategic leadership needs of the business.
Starting CEO succession early not only ensures that everyone has a voice, but most importantly, that the board is aligned on the type of person and background required for the next CEO—a leadership blueprint. This north star establishes the objective and context-dependent criteria against which CEO candidates are evaluated and is arguably the single most important element of a robust CEO succession program.
The process of constructing and debating this crucial criteria enables the board to think about key requirements for the organization’s future objectively and critically, without being swayed by the current CEO’s profile or potential successors’ attributes. It also allows the board to meaningfully dialogue and debate about the future of the organization and the leadership required to get there.
Opportunity #2: Increase Board Visibility To Successors
Investing time in CEO succession also adds value by increasing board members’ awareness of CEO candidates. A survey of directors led by Stanford University revealed that almost half of respondents do not understand the strengths and weaknesses of senior executives. Absent true insight into potential CEO candidates, boards draw on their implicit knowledge of candidates, which introduces noise to the evaluation process.
In such instances, it is natural for directors to anchor confidently on leaders who have style but no substance, and while these individuals do leave a memorable imprint, they do not actually have the goods to be an effective CEO. Critically, these biases hurt underrepresented leaders such as women and visible minorities because they are not typically psychologically-associated with positions of leadership.
One way to counteract such biases is to ensure that potential CEO successors have greater exposure to the board by way of regular presentations that are created for directors to see the candidates in action. In doing so, boards ultimately make more informed choices and decisions when selecting the next CEO.
Opportunity #3: Enhance Candidate Grooming
A major contributing factor to CEO failure is improper grooming, a process that cannot be rushed. Ahead of the CEO role, the prevailing wisdom is that candidates should be in the hot seat for at least two major enterprise positions, for a minimum of three years in each role, to ensure adequate learning and testing of their skillsets in these top-of-the-house, on-the-job experiences. With recent average CEO tenures ranging anywhere from five to seven years, candidate grooming needs to begin soon after a new successor is chosen.
One study assessing over 1,300 CEO transitions found that the highest-performing, freshly minted CEOs are most likely to originate from leaders just below the executive team, such as heads of large business units, and divisional CEOs or presidents, such as those with oversight of the P&L for entire product and service lines. In practice, the development experiences that CEO candidates need are entirely person- and context-specific.
Staying close to your potential CEO successors not only ensures that you have an initial assessment of their suitability for the top job, but it also allows you to revise their fit over time. Armed with insight into their skills and capabilities, and importantly, who they are and how they are wired, you can create and/or maneuver candidates into the critical development opportunities necessary to increase their readiness to become CEO.
Ultimately, organizations are better positioned for successful CEO transitions if they have tested their top talent and developed a strong bench of multiple individuals who are ready to take over. When boards are thoughtful and focused on grooming long-term talent, they maximize optionality of internal CEO candidates before an actual decision is required and are well-positioned to select an internal candidate.
Opportunity #4: Ensure Sense of Fairness and Reflection
While the reality is that most candidates will not be the next CEO, it is still disappointing for those who have been considered for the position. Being vetted for the top job is a stressful and arduous process, and if done in a short amount of time, can make unsuccessful candidates feel like what was rightfully their job was stolen from them. However, a rigorous succession process that unfolds gradually mitigates such perceptions in two ways.
First, evaluating all candidates against the leadership blueprint highlights important gaps between the unsuccessful candidates’ profiles and those of the ideal CEO. Utilizing such objective criteria demonstrates to unsuccessful candidates that the CEO role was not theirs to lose and ensures that all candidates have a fair and equal shot.
Second, unsuccessful candidates also require time to process all that has passed and forecast what is to come. If done in haste and alone, such cognitive work can lead to sentiments of mistreatment. This processing period is a fruitful opportunity for boards to support unsuccessful candidates and demonstrate their commitment to them despite not being chosen as the next CEO.
Opportunity #5: Strengthen Candidate Retention
When CEO successions are initiated and completed abruptly, unsuccessful internal candidates can feel sidelined and that their momentary involvement in the selection process was hastily evaluated. More often than not, candidates with such opinions eventually resign with the expectation to find better opportunities elsewhere. If exits materialize, this top talent will leave with some critical components that threaten a smooth transition—their expertise, institutional knowledge, clients, and possibly their direct reports.
A succession process that adopts a long-term focus provides opportunities for organizations to offer developmental insight and coaching to unsuccessful candidates. This emphasis on development ensures that internal candidates feel valued during the succession process and demonstrates the organization’s commitment to both these individuals’ growth and to retain them.
Beyond minimizing negative attrition, this strategy also supports positive change and momentum for the incoming CEO. Ingrained top team dynamics can be an obstacle and will inevitably have to shift with the presence of the new boss. For the new CEO, insight into the strengths and developmental gaps of the top team can better facilitate team effectiveness post-transition.
The Bottom Line
Starting the succession process early confers benefits that extend beyond a key-person risk management exercise when the CEO decides to hand over the keys. Consider CEO succession as an investment that builds equity over time by:
- Facilitating board alignment, which gives all board members a voice, and encourages diversity of thought and debate about the future needs of the organization and the leadership required to get there.
- Increasing board visibility to successors, which gives directors greater awareness of the strengths and weaknesses of candidates and counteracts implicit biases in the absence of true insight.
- Enhancing candidate grooming by continually assessing their suitability for the top job, providing development opportunities necessary to increase their readiness, and ensuring multiple individuals are ready to take over.
- Ensuring a sense of fairness by establishing and assessing candidates against objective criteria and providing adequate time for unsuccessful candidates to reflect on the process and outcomes of succession.
- Strengthening candidate retention by adopting a long-term, developmental focus which helps internal candidates feel valued during the succession process and facilitates productive top team dynamics with the new CEO at the helm.
Consider CEO succession as an investment that builds equity over time.