Johnson: CEO Succession - Five Steps to Best Practice
In today’s complex and dynamic environment, investing time and attention to acquire and groom the right bench of talent at the top is a critical priority. Among the most compelling reasons for companies to more effectively manage executive succession is its impact on shareholder value.
According to a recent study by Strategy& of the world’s 2,500 largest public companies, companies that poorly execute CEO succession forgo on average US$1.8 billion in shareholder value, compared with those that implement leadership changes through a planned CEO succession process. The study also found that companies in the lowest quartile of performance, measured by total return to shareholders, had characteristics of poor succession processes.
The board owns and is ultimately responsible for managing the process, including defining the profile of the future CEO, collaborating with the incumbent CEO on developing internal candidates, overseeing an external search, making the final decision about the selected CEO, and managing the transition process. Best practice CEO succession management is designed to answer three fundamental questions, namely:
- What leadership does the organisation need to succeed?
- What leadership does the organisation have in place at present?
- What must happen to close the gap and keep it closed?
1. Building the CEO Profile
Boards should take the time to arrive collectively at the profile of the ideal future CEO. The criteria chosen should reflect the future aspirations of the company – not the past. The board should begin by examining company direction and strategy over a five year plus horizon.
2. Assessment of Candidates
Having agreed a set of core competencies in a future CEO, the board should then commit to a process by which potential internal candidates will be objectively and consistently assessed against those criteria. An assessment will be designed to meet the specific needs of the organisation; however the key elements typically include behavioural and competency based interviews, simulations, 360 degree feedback, written submissions and psychometric testing.
3. Accelerated Development of Internal Participants
All potential future CEOs will have capability gaps and some behavioural deficiencies. These ‘devil you know’ issues can be addressed successfully in many cases. High-potential future CEOs in our experience are strongly motivated to be the best they can be.
4. Board Decision
As the board nears its decision to appoint a new CEO, it will need to agree upon the final process for determining the successful candidate. A Nominations Committee is often authorised to agree and lead the process with a recommendation finally made to the full board.
5. On-Boarding the New CEO
A thoughtful, structured on-boarding process is critical in ensuring the most successful induction of the new CEO. Naturally, each executive and company will have different needs. However, there are a few consistent challenges for successful internal candidates, namely:
- They are generally unproven and consequently need to manage potential scepticism
- They will need to be more organisationally savvy and politically astute
- They will deal with greater internal and external complexity
- Stakeholder management will be key.
Critical to the long-term success of all companies is their ability to identify and develop a pipeline of exceptional future leadership. Consequently, the selection of the CEO is the single most important decision that a board can make. Yet, the daily headlines in the press suggest that many get it wrong, which questions the reliability of the processes being used to identify and develop future leaders.