Three mistakes in CEO succession planning

Your board can spend a lot of time on CEO succession and still get it wrong. Here’s a look at three big pitfalls and how to avoid them
By Beverly Behan

CEO succession is an area where most boards feel they could raise their game. PwC’s 2015 study of nearly 800 U.S. public company directors, released in October, revealed that less than half feel their board spends sufficient time on CEO succession planning. And fewer than 30% believe the company they govern has adequate CEO bench strength in its talent pipeline.

Spending more time on CEO succession is only one factor. How the board spends that time is even more important. And there are three big mistakes many boards still make in this area:

Mistake No. 1: Meaningless CEO criteria, or none at all. The cornerstone of any good CEO succession plan is the board’s criteria for the company’s next leader. Once you establish that criteria—and the whole board agrees on it—you have an objective lens through which to view any candidates you might consider. Without criteria, you basically have a personality contest.

However, even boards that have developed CEO criteria can do a lousy job: “We want leadership, that’s our No. 1 priority,” the chair of an energy company recently told me, “And the person should have a good track record.” With this vague description, his board had no real criteria at all. Equally troubling was a list of 120 CEO criteria another board (in the hospitality industry) said it was using. The energy board had to get more specific, the hospitality board had to prioritize.

Here are some questions each board might have asked: Would we prefer a brilliant strategist or an all-star operations person? How important is P&L experience? What sort of expertise is necessary to execute the company’s strategy? M&A? Global expansion?
It can be illuminating to focus on leadership style: Is this a “command and control” environment that respects hierarchy? Or a collaborative culture where executives will alienate any CEO viewed as “dictatorial?” The answers to those questions will end up describing two very different leaders.

Mistake No. 2: Failure to engage all directors around the CEO criteria and succession planning process. Someone needs to drive the CEO succession process—the chair of the board or a board committee. But many boards fall into the trap of creating a two-tiered dynamic around CEO succession planning, with some board members highly engaged and others feeling “out of the loop” until decision time approaches.

Every board member should have the chance to weigh in on both the CEO criteria and the succession planning process right at the outset. This isn’t a 10-minute discussion in the hallway. The best boards interview every director individually on these topics for 30-60 minutes to really explore their views in depth.

Mistake No. 3: Inadequate candidate due diligence. The recent PwC study underscores directors’ concern about the quality of talent in the CEO pipeline. Only 27% of board members feel comfortable in that area. Executive assessments are one area where mistakes are frequently made. Some boards that would readily invest millions in due diligence on a mid-sized acquisition neglect to even use them—arguably failing in their due diligence on the single most important decision the board will make: The choice of chief executive officer. Others are overly reliant on them—essentially outsourcing the CEO decision to the evaluator. Some boards use dated assessments created for executive team development. Others use 360s from performance evaluations.

Boards should demand a scientifically valid process that actually links the assessment to the CEO criteria—and is readily understandable. Moreover, the assessment should be conducted by an independent third party—not someone on management’s payroll or (worse yet!) the executive coach of one or more of the internal candidates. When properly conducted, executive assessments nearly always yield important insights any board should have before making a CEO decision. Many of these tools can also be used effectively with both internal and external candidates.

Would Canadian boards stand up any better than their U.S. counterparts in a survey on CEO succession? Yes or no, CEO succession planning is such a critical aspect of the board’s job that directors should routinely review and re-evaluate their practices and approach. After all, the choice of CEO is a decision where the board simply can’t afford to make mistakes.

Beverly Behan is a New York-based board consultant who has worked with approximately 150 boards of directors in the U.S., Canada and internationally in the past 19 years. E-mail: beverly.behan@boardadvisor.net.

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