A board’s No. 1 job is to hire and fire the CEO. Everything else is secondary. If a board gets CEO succession right, the company will prosper. If the board hires the wrong CEO, the company and the board will fail.
Many boards perform CEO succession poorly. According to one study, boards spend, on average, only two hours a year on CEO succession planning. When I ask directors what their No. 1 regret is, the answer that I receive most frequently is “not firing the CEO sooner.”
Why is CEO succession so difficult for boards? In my advisory work I have seen many companies that were caught flat-footed with CEO succession. Their boards, despite having some outstanding directors who should have had CEO succession right, still failed.
Why does CEO succession fail? Three reasons:
1. The incumbent CEO refuses to cooperate. No CEO ever really wants to replace him/herself. However, CEO succession is the board’s responsibility, not that of the incumbent CEO.
2. Boards do not proceed progressively and step-by-step. Boards skip steps or, worse yet, allow emotion, preference, capture, social relationships or bias to creep in.
3. There is no actual CEO succession plan. Every board should have an emergency CEO succession plan and a longer-term plan. The longer-term plan contains a line of sight for the board to monitor: the high-potential talent pipeline; what grooming and development is necessary to make this talent CEO-ready; and what the time frame and resources are for this readiness. Internal CEO talent costs less than external talent and is more successful.
There should be a CEO succession planning process, which may include:
• Regular discussions and reporting on CEO succession by the board;
• A dedicated board committee that reviews and recommends CEO succession planning;
• Board approval of the strategic plan;
• Prioritized attributes of the CEO who can achieve the plan;
• A recruitment strategy (internal or external candidates, or both);
• Matching profiles and résumés to attributes to create a long list;
• Background, social media, reference, criminal and credit checks;
• Information packages for prospective CEOs;
• Initial interviews and ranking to a short list;
• More due diligence on top candidates, second interviews;
• Salary, incentive and benefit pay established, and linked to the strategy;
• Creating terms sheet and a draft employment contract;
• Invitation for directors to meet top finalists;
• Final interviews, recommendation to full board;
• Board approves top two candidates;
• Finalize contract and pay with successful candidate;
• Onboarding and CEO performance review after six and 12 months.
The board should discuss the longer-term succession plan in the absence of the incumbent CEO. If the incumbent CEO, whose views on potential successors are relevant but should not be determinative, does not cooperate or blocks access, this is a warning sign. Make CEO succession worth a healthy percentage of the CEO’s pay. Then watch the CEO cooperate. CEOs behave the way CEOs are paid. CEO succession planning should start on day one of the new CEO’s hire. Do not wait. You know you have CEO planning right when you can fire the incumbent CEO at any time. Anything can happen and you want to be ready. CEO succession is all about leverage and the board having options.
If the CEO pushes back and says that you don’t have confidence in him or her, correct the CEO. You have confidence in the CEO (or you do not), but are doing your job. If the CEO does not cooperate, the CEO should be fired. Never be beholden to a CEO. CEOs are replaceable and it is the work of the board to do this.
Richard Leblanc is an associate professor, governance, law & ethics, at York University’s Faculty of Liberal Arts and Professional Studies and a member of the Ontario Bar. E-mail: email@example.com.