How to avoid pitfalls in CEO succession

Managing and mitigating leadership risk through the hiring of the right CEO is the board’s No. 1 job. A thorough process, alert to bias, fills the bill
By John Caldwell

Witnessing the 2016 U.S. election campaigns from north of the 49th parallel brings a whole new meaning to leadership risk. Bizarrely, 24 months of intense campaigning and billions of dollars later, the U.S. electorate will choose their leader from two of the least appealing candidates since the Declaration of Independence. Mercifully, corporations select their leaders in a more efficient and robust manner. And yet so many boards of directors get CEO succession wrong.

There are only two sources of CEO candidates—internal and external executives. Absent a transformative leadership need, the selection of an internal candidate universally is viewed as the lowest-risk alternative because of their experience with the enterprise and firsthand exposure to the board. But often this option fails because of either the inability to produce qualified candidates or the selection of an internal candidate who ultimately underperforms. Both of these outcomes are frequently the result of flawed CEO succession planning—with poor successor development, changing leadership requirements and incumbent CEO bias often to blame.

The common model for internal CEO successor development involves progressive increases in accountabilities and authority—often paired with position changes within the C-suite. While this approach has merit, other supplemental developmental processes are usually required. There may be only 50 feet between the chief operating officer’s and CEO’s offices, but it can be one the longest journeys in an executive’s career.

One of the more progressive succession developmental models is to determine the successor candidate’s skills and experience gaps compared with the selection criteria a board would use in undertaking external recruitment. These criteria should consider the future CEO’s capability requirements in light of the enterprise’s trajectory and strategy rather than the current leadership model. The development analysis would assess the backgrounds, relevant experience and track records as well as key capabilities and leadership skills. It should also consider scalability—the required scope for handling increase complexity. The key is to determine how large is the gap in each area, how to best to address each one, or whether the shortfall is in fact too wide to overcome.

Filling the experience gap customarily involves broadening responsibilities and exposures. But often this process neglects to test the candidate sufficiently, particularly in front of the board. One solution? Assign the candidate the typical CEO responsibility for leading the strategic plan development, presentation and execution. This provides an interesting way for the board to assess their strategic capability and vision for the future.

It’s also clear that a candidate’s capabilities and leadership skills can be enhanced through mentoring, coaching and forthright feedback. While the incumbent CEO should play an important role in this process, it should not end there. Utilizing external coaching expertise, transparent peer and subordinate feedback and board member mentorship is not only helpful, but also provides a broader assessment base.

Another succession planning concern is bias among board members against internal candidates. Directors simply may prefer an external candidate with proven CEO experience to an internal untried alternative. Secondly, there is a tendency to focus on internal candidates’ shortcomings whereas the inclination is to pay more attention to external candidates’ strengths. The risk here is that straight-up comparisons of an untried internal successor to an experienced CEO often neglect to consider that new CEOs can actually develop rapidly in the job.

A third common flaw has to do with the incumbent CEO’s personal plans. A CEO who plans for their exit within a few years is usually well aligned with the board for an orderly succession process that ideally would involve developing multiple internal candidates. A CEO who has no plans for an exit can be more inclined to play lip service to developing a replacement to maintain their entrenched position.

John Caldwell is a veteran CEO and board member experienced in distressed situations and is the author of CPA Canada’s A Framework for Board Oversight of Enterprise Risk. E-mail: johncaldwell@rogers.com.

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