Succession planning should be an ongoing process for boards of directors, not a periodic activity.
by Clif Boutelle, SIOP Public Relations
When Bank of America CEO Kenneth Lewis unexpectedly announced in September he was stepping down at the end of the year, the BofA board had to accelerate its process in finding a successor.
Naming a replacement is not a simple scenario, said Constance Dierickx, a senior consultant in the Atlanta office of RHR International, who works with companies on CEO succession issues. “The BofA board has changed considerably in the past year, and it may not have had time to review the existing succession plan, or perhaps it did and did not think it was adequate,” she said.
In an RHR study, 95% of board directors agreed that CEO succession planning is an important business continuity issue but fewer than half felt they were prepared for it. In fact, 40% said the company was unprepared for a CEO’s sudden departure. In addition, 57% said they did not know when the CEO planned to leave, and half said they had not seen the company’s succession plan in the past year.
The BofA board is not alone. With CEOs exiting their jobs at a rapid pace (834 CEOs left their jobs between January and August of this year, according to global outplacement research firm Challenger, Gray, and Christmas), numerous boards are faced with succession decisions.
Some boards are prepared but many are not, said Randall Cheloha of the Cheloha Consulting Group in Wynnewood, PA, who has been working with organizations on succession planning for more than 20 years.
“Not too many years ago, imperial CEOs were fairly common. The CEO told the board who the successor would be, not the other way around. He or she ran the succession process with an iron hand, and the board usually went along,”
But all that has changed over the past 10 years. “Corporate scandals and executive indictments have led to new levels of board engagement. The Sarbanes-Oxley Act of 2002 resulted in a sea change of increased expectations, accountability, and transparency from boards,” said Cheloha.
Sarbanes-Oxley has led many companies to burden their corporate secretaries, chief financial officers, and others with a major increase in their workloads to insure the company was in compliance and their boards were kept fully apprised, according to Cheloha.
Also, changes in the makeup of boards directly affect new CEO selections, he added. “There are more constituencies to satisfy. In addition to major shareholders, financial analysts, employees, and former executives, some companies, particularly those that received large government bailouts, have directly or indirectly been asked to change directors and add new players to their boards to represent the new constituencies, including the federal government and unions.”
According to a July Associated Press report, the federal government owns 61% of General Motors with the United Auto Workers holding a 17.5% share.
These new shareholders have a large say in how companies like General Motors, BofA, Chrysler, Citi, and American International Group (AIG) operate and will play an important role in naming a CEO successor.
In BofA’s case, government officials will have veto power over the board’s choice of a new CEO as well as the power to approve his or her compensation package.
One of the most important functions of a board is developing a succession plan, said Cheloha, “I am surprised at how many companies are still not fully prepared to replace their CEOs,” he said, pointing to a Mercer Delta study that found nearly 50% of major companies did not have a realistic succession plan.
“That’s not to say they do not have a plan,” said Dierickx. “Too often plans are written and then filed away to gather dust. Succession needs to be frequently revisited and should be a board priority, the same as finances and other business issues boards face.”
Dierickx calls succession a planned process that begins with the board being fully aligned in the direction it wants the company to go and the strategy needed to get there. “It is important to focus leadership requirements around those expectations. The best results (in selecting a new CEO) come when the board has clear knowledge of the leadership traits the company needs to achieve its goals,” she said.
Once that has been determined, the board can then concentrate on selecting the person to be the next CEO. “The selection process goes much smoother when the board is aligned about the leadership qualities needed to achieve the organization’s goals,” she said.
Both Dierickx and Cheloha say that organizations need to devote more time to developing their own candidates and that boards need to have much greater awareness about who is in the talent pipeline.
Companies should be recruiting top talent to assume key leadership positions, and board members should be monitoring their development, said Dierickx.
And, she adds, a company should be grooming a cadre of potential leaders. “Situations can change rapidly and organizations should not be putting all their eggs into one basket. If a company is relying on one person to be the future CEO, that person could leave for another job or become sick or something else could happen and the board no longer has a top candidate,” she said.
Although there are many well-developed tools to assess potential leaders, Dierickx has found “deep interviews” to be effective. “To a trained person, nuances and comments during an extended conversation can reveal a lot about an individual,” she said.
Cheloha said traditionally boards heard only a report from the CEO about internal senior executives and their succession readiness without actually looking deeper into the organization. “It is critical for boards to get first-hand information about prospective CEO successors and top executives and get to know and work with them.”
It can make a difference. Dierickx has a client who the board did not know 5 years ago. He was given developmental attention more as courtesy because of his position within the company but was not considered a serious candidate for a top job. However, he excelled in his assignments, and as the board got to know him, his stock rose and eventually was selected as the CEO and is doing quite well, she said.
Dierickx and Cheloha say that companies should look inside for their CEOs because studies show that leaders selected from outside the organization have a high failure rate.
Yet, boards often feel they have to look at outside candidates because they think the company needs to go in a different strategic direction, and outsiders are not connected to any of the company’s current problems. So, they turn to someone who has had success at another company.
But past success is not predictive of the future, said Dierickx. Too often boards do not take into consideration corporate culture, which can disable a CEO from outside the organization.
Another danger is cronyism on the part of some board members. When faced with a CEO decision, board members often begin thinking immediately of “who?” rather than address the entire succession process. They will push for a former colleague, someone they know from another board, or someone they’ve met who they think is good and don’t always look at what the job will demand or consider the company’s current operating situation, noted Cheloha. Boards need to carefully look at the needs of the company and then match candidates to what’s best for the company.
Cheloha recalls a situation where a board brought in someone they thought to be capable. He immediately replaced the top management team with colleagues from his former company, upsetting the company culture, hurting morale, and causing a number of high-potential insiders to leave.
At the same time, an internal successor can lead to problems as well, especially affecting the morale of senior team members who were not selected. Also, there is always the risk that top executives may leave taking other key personnel with them.
But that doesn’t have to be an outcome of selecting an internal candidate, said Dierickx. “A thoughtful and methodical process will prevent an exodus of talent in most succession scenarios. It is often a lack of care that leads to the loss of talent, usually talent in which there has been a substantial investment,” she said.
So, for boards of directors, selecting a new CEO is never a sure thing and is almost always a tricky proposition.
However, creating a carefully planned succession process that matches talent with the organization’s strategic goals will make the extremely important task of selecting a new CEO more likely to be successful.
The time and investment in creating and applying a solid CEO succession plan is an investment that will pay dividends to the company for years to come, said Dierickx. “Selecting a CEO is not a one-time event. It’s a process that boards and top management must take seriously and treat as an ongoing situation.”
Not doing this can expose a company to significant risk.