CEO Succession: Maintaining a State of Readiness

When it is time to choose a new CEO, why do so many boards of directors look outside of their own organizations?

There are times when it’s advantageous to hire an outsider. Companies looking for dramatic change, for instance, find that outsiders often provide positive early results. Boards may also try to placate investors by looking to a celebrity CEO to give their stock an instant uptick.

Research indicates, however, that newcomers are regularly outperformed by those appointed from within and are fired for poor performance more often, too. They also cost more money and usually don’t last as long as their internal counterparts.

But with CEO turnover as high as it is — as high today for CEOs as for any other position in the organization — it’s clear there is no guarantee of success whether the candidate comes from the inside or not.

When boards or selection committees do choose from within, they often rely on the current CEO to make the recommendation. This can have disappointing results. A departing CEO typically looks to someone who will continue his or her legacy — a clone who will perform in exactly the same way even when the changing needs of the organization may not be served by status quo thinking.

To avoid more of the same, the selection committee often feels compelled to search outside for a candidate, even though the risk of succession failure is greater.

Uninformed Means Unprepared
Too often, companies find themselves choosing CEOs in these ways because they have no formal system of succession in place to identify and cultivate the high potentials within their organization.

Without a plan, what’s the board asking itself to do? Make a complex and momentous decision within an acceptable time frame without sufficient information to do so.

If the board acts expeditiously, its choice is likely to reflect the traumatic and hurried atmosphere in which the decision was made. Delaying the decision, however, breeds disruptive rumor and uncertainty that can affect stock value or bottom-line performance.

When they need to replace their CEO, directors can react confidently, in an appropriate and timely fashion, only when they are armed with current, objective data regarding the available candidates. Companies need a process to provide information that is intelligently gathered, well organized, and readily accessible. Otherwise, their boards will face the unwelcome task of making important decisions about people they barely know whose influence may be felt for years to come.

In the end, having a long-term succession process in place allows an organization to deliberate from a position of strength. A company can anticipate leadership transitions by supporting an ongoing system to maintain a wide variety of useful, objective information about potential candidates.

Once high-potentials are identified, individualized developmental plans can be created to provide the appropriate management and leadership experience necessary to keep the talent pool supplied with prospective leaders who can be tapped to fill the CEO position.

Building the Road to Readiness
Effective succession planning is based upon solid, fact-based decision making. So, what are the barriers that prevent boards from having a fully developed plan in place?

Meaningful work in this area requires time and energy. Since board members are typically active people whose time is precious, relinquishing this responsibility to the current CEO or to an outside recruiting firm may seem the expedient choice.

Also, when inundated by more immediate issues, boards customarily relegate succession to the bottom of the agenda. One study reports that directors spend less time preparing potential CEO successors than on any other activity.

The first order of business, then, is to devise a system that occupies a minimum of director time and still delivers enough useful information to make good decisions possible. The data must be comprehensive but also manageable and convenient.

Furthermore, it must be well organized. Search committees or directors can feel overwhelmed by a barrage of scores, indicators, matrixes and reports, some of which may not match up from candidate to candidate for useful comparisons. Too much information can seem as bad as not enough for busy directors.

Finally, the information must be reliable. That means it should be independent, objective, specific, and accurate. CEO-managed information tends to convey self-interest. It often shows favoritism and is more anecdotal than accurate.

The qualifications of a candidate recommended by a recruiting firm are usually very generic (e.g., effective leader, visionary thinker, etc.).

The characteristics of the CEO position should be aligned to the specific needs of the business. For instance, if the lifeblood of an organization relies on good affiliate relations, then the candidate should have demonstrated skills in this area.

Streamlining the Process
When conducting a CEO succession, we use a tool called the Executive Profile Report (EPR). It is a data-centered instrument that presents objective and comprehensive information. It helps boards and selection committees digest a large amount of data about CEO candidates, but in a succinct and efficient manner.

The idea is not to shortchange the process. It actually provides a wider range of insightful information than is usually gathered about candidates. Then, however, the material is quantified and delivered in a convenient one-sheet summary of each candidate.

Gathering data. We gather the standard background information, including demographics, career history, performance reviews, functional experience, 360° feedback, and so forth. However, we also provide a customized list of preferred CEO characteristics — mission-critical competencies that the organization has determined are necessary for CEO success. Each candidate is measured against those competencies. The EPR also provides a cognitive assessment and measures candidates’ leadership effectiveness and strengths. This is all accomplished with the board’s guidance but without requiring their direct involvement until the results are gathered and processed.

Organizing data. The information obtained through these activities is organized so that all relevant information is quantified and standardized among all the candidates. Each factor appears on each candidates EPR in exactly the same space of the report. That means the strengths and weaknesses for any one candidate in any particular area can be compared easily and directly to other candidates.

This is in sharp contrast to reliance on a hodgepodge of anecdotal reports and hearsay, or trying to compare mismatched performance scales from a variety of sources.

The EPR’s organization of information promotes objectivity and fairness. It creates a level playing field for all players to be evaluated with integrity and impartiality. This data also serves as a valuable resource to aid understanding and to verify information that comes directly from the candidate or other sources.

Making data accessible. While the EPR is comprehensive, it is delivered in an uncomplicated format for ease of review. Although backed by volumes of data that can be accessed at any time, each candidates report is contained on one side of a single sheet of paper, making straightforward, side-by-side comparisons simple. As high-potentials progress toward readiness, and as the organization’s needs and goals change, the EPR profile information can be updated quickly and easily.

Are You Ready?
Because of their efficiency in the presentation of information, EPRs make CEO succession a practical agenda item for a board of directors. Periodic talent pool reviews are possible and can be conducted easily to keep board members up to date and prepared to face one of their most vital responsibilities. A triumph in CEO succession can be a board’s greatest accomplishment. A triumph is more likely to occur when both the candidates and the board are kept in a state of readiness.