WhiteWave Consulting, LLC |
How CEOs Effectively Manage Their Succession |
By Jennifer A. White, Ph.D |
ABSTRACTCEO succession is a critical and difficult task for company leadership. Fortunately, it can be managed for productive results and strong shareholder value. CEOs need to plan the process carefully; be objective in their assessment of the company’s leadership needs; pay attention to the rational, political, and emotional elements of the process; craft a plan carefully for their transition; and be aware of the power of communication. INTRODUCTIONOne of the most important responsibilities of any CEO is to manage a successful succession process—to leave the company “in good shape and in good hands.” However, CEOs are often unprepared for the difficulties of succession: they only get to do it once, there are huge consequences, and everyone is watching (Lucier, Spiegel, Schuyt, 2002; Challenger, Gray, and Christmas, 2002). Furthermore, managing the succession process isn’t like anything CEOs have done previously. It’s personal. Given a choice, most CEOs would prefer to influence the timing of their succession and the selection of their replacement. How it is handled will determine how much influence the CEO has in the process and, ultimately, how others view the CEO’s legacy long after he or she is gone. Working with CEOs on succession issues reveals some important insights:
Conducted properly, the succession process creates a smooth transition from one CEO to the next with positive outcomes for both CEOs, the company, and all other stakeholders. On the other hand, when succession processes run aground, they can destroy the CEO’s legacy by creating dissension within the Board, initiating destructive political behavior among candidates, disrupting the continuity of strategic efforts, and leaving the organization crippled for years (Charan and Useem, 2002). Although successions unfold quite differently depending on the roles played by the Board, the existing CEO, and other stakeholders involved in the process (Cheloha, 2000), lessons consultants have uncovered can help CEOs direct the course of their own successions. First, we’ll explore the phases of the succession process; then, we’ll look at the rational, emotional, and political dynamics involved. Phases of the CEO Succession ProcessFew CEOs are well prepared to begin their succession processes, but at a minimum, they should understand the steps in the process and the choices associated with them. There are four general phases in CEO-led succession processes: background assessment, engagement, search and selection, and transition. Background Assessment PhaseThe first issue to address is timing, which is influenced by factors such as the CEO’s age, the stability of the company, and the availability of a qualified successor. Consideration of potential candiates may begin years before the formal process starts, giving the CEO a better chance to shape the dynamics of the process. Next, the CEO needs to think about the criteria for choosing a successor. Rather than strictly looking backwards at the candidates’ performances in current positions, the company’s future strategy and related leadership needs should be considered (Khurana, 2002; Wiersema, 1997). A rigorous process to evaluate candidates helps CEOs to think more objectively about each person’s potential and to prepare for later communications with the candidates and the Board (Sorcher and Brant, 2002). The CEO should also think about the best way to engage the senior team and the Board in the succession process (Cheloha, 2000). The CEO needs to share information with the Board regarding the candidates, the company’s status, and the most important selection criteria. Engagement PhaseThe engagement phase begins when the CEO indicates to the Board that the succession process has begun and that the search for a successor is formally under way. Communications should take the form of discussions and dialogues rather than public announcements. The CEO and Board should discuss how the process will unfold, which entails:
Formally, the Board “owns” the succession decision, while the CEO manages the succession process. In the most favorable situations, the process of engaging with the Board only requires the CEO to perform appropriate planning and due diligence. The Board and CEO act as equal partners before, during, and after the transition process. When the situation is unfavorable, no amount of effort on the part of the CEO may be enough to overcome the political dynamics of the Board. Search and Selection PhaseThe search for candidates can range from a rubber stamp of an acknowledged successor to an extensive search for external candidates. Decisions need to be made about how public or private the search is, its scope, intensity, duration, and whether or not to use search firms. If the successor isn’t known in advance, it’s important to define the criteria that will be used to identify one. It’s important to avoid two things: searching for a “corporate savior” and ignoring evidence that a significant change in leadership direction is required (Khurana, 2002). Even with careful attention early on to defining the process, selection can easily take on a life of its own, revealing the deeper concerns of the CEO and Board as candidates are put forth and evaluated (Ocasio, 1994). CEOs tend to be harsher on internal candidates because they have had the opportunity to see them perform. In contrast, because external candidates present themselves in the best possible light, CEOs need to beware of the halo that often envelops them (Khurana, 2002). Especially when their companies are not doing as well as they would hope, Boards and CEOs are likely to seek “a corporate savior” rather than turning to more qualified internal candidates (Dearlove and Crainer, 2002). If an external search is required, it should involve the same rigorous assessment process as the one used for internal candidates. By using the same objective process for assessing internal and external candidates, the CEO is in a good position to recommend the best choice to the Board, other members of the senior team, and other important stakeholders (Shen and Cannella, 2002). During this stage, communications between the CEO and directors become more frequent. Transition PhaseThe period between the selection of the new CEO and the official transfer of authority can be especially tricky. Individuals jockey for position with the new CEO, the exiting CEO can experience the “lame duck” syndrome, and needed organizational changes are often put on hold. There are four requirements for a successful transition:
During this period when all eyes are on the new leader, each decision and communication takes on heightened importance. In stable environments, the demand to set a new course will not be as great as in situations where a turnaround is expected, or new company ownership is involved. People will continue to watch the behavior of the outgoing CEO as well, if he or she remains in the role of chairman. Especially in cases where the successor comes from the outside, there is a real possibility that the candidate will not live up to expectations and the succession process will have to be repeated (Dearlove and Crainer, 2002). One of the most important discussions CEOs can have with their Boards during succession concerns their future role in the company. Many CEOs transition to chairman before retiring completely in an effort to provide stability and help the new CEO “find his or her feet” before they leave (Sussman, 2002). In reality, the presence of the ex-CEO as chairman adds a dimension of political complexity and challenge to the new CEO’s job that may outweigh the benefits of continuity. In any event, the new CEO should be aware of the exiting CEO’s plans before taking the job. For a successful transition, the departing and new CEO need to agree on a plan to manage the process (Vancil, 1987). This includes when key events will occur, how conversations will take place with different stakeholders, what criteria the departing CEO will use to decide when to step aside, and what each expects from the other. The timing and content of public announcements to employees, the media, industry groups, community groups, and other stakeholders should be carefully planned. Managing RationalityCEOs must be able to present a solid rationale for their choices of successors to internal and external stakeholders, including the Board. Demonstrated rationality in the selection process helps to achieve this. First, a rational succession process is one that begins a few years prior to succession. Candidates should be assessed regularly and given feedback on what they need to do to become better positioned (Cheloha, 1999). In some cases, the Board can be engaged early on in discussing the criteria for the job, and stakeholders can be consulted long before the issue becomes emotionally charged. In this way, succession becomes less an event and more of a process that can be managed professionally and rationally. Next, identify the broadest pool of qualified candidates, both internal and external. Even when there seems to be an obvious choice, it’s important to perform due diligence. Once candidates are identified, they should be assessed using a process that provides multiple perspectives on their performance. Managing PoliticsAlmost by definition, succession is a highly political, zero-sum game; there can only be one winner. Various groups and individuals have vested interests in the outcomes, and their interests are real: jobs, money, influence, power (Ocasio, 1994). The goal should be to shape politics to be constructive and supportive of outcomes that are most beneficial to the future of the company. Processes that engage groups, build widespread support for a vision of the future, create positive coalitions where none existed before, and/or allow open expression of important competing views can be immensely helpful. Several tactics can minimize the impact of negative politics on the succession process: § The CEO should have one-on-one conversations with Board members and candidates to assess their interests and concerns and put all issues on the table for discussion. § The CEO should make the selection criteria explicit to reduce speculation by candidates about how the decision will be made. § By moving through the process quickly and keeping the actual timing of the transition confidential, the CEO can keep the senior team focused on performance. § Finally, avoid a traditional horse race because it poisons working relationships within the senior team. Rationality and politics can create an explosive mix. Boards can become fractured as different criteria are used to support individual preferences and positions. Building a consensus among the Board requires time and effort. CEOs should never assume that choices are obvious, no matter how clear the data. Managing Emotions Succession is often an emotional experience for both the departing CEO and the candidates. CEOs need to manage their feelings and be sensitive to those of others. Depending on why they are leaving, departing CEOs may feel joy, anger, fear, pride, remorse, envy, impatience, rejection, affirmation, or a sense of loss. So the first step in managing these emotions, and their influence on the process, is to acknowledge that they exist, are natural, and will affect the succession process in unpredictable ways unless they are addressed (Sonnenfeld, 1988) Emotions can cloud judgments, introduce bias, or evoke stereotypes. They can be driven underground but only for so long and often with negative consequences. As a CEO builds a viable transition plan, the shift in energy from hanging on to moving on is very noticeable. Minor concerns about the process that have been roadblocks to progress fall away and are replaced by the desire to move ahead quickly. Once CEOs stop focusing on internal issues, they are more able to turn their energy to the concerns of others, including the Board, the candidates, and the senior team. The CEO needs to keep the ship on course throughout the succession process. This means letting everyone know that it’s best to stay focused on delivering results. Failing to manage the company during succession will harm the CEO’s influence in the process and reduce the attractiveness of internal candidates. Emotions continue after the transition process and can make the beginning of the new CEO’s term difficult if a transition plan is not agreed on in advance. Part of the transition plan should include a process for the departing CEO to introduce the new CEO to the Board and other constituencies. Summary Succession is one of the most important and most difficult tasks a company's leadership will ever undertake. CEOs need to plan the process carefully; be objective in their assessment of the company’s leadership needs; pay attention to the rational, political, and emotional elements of the process; and carefully craft a plan for their transition. Succession is a process that is fraught with risks. However, CEOs who devote the same effort to managing it as they do to managing their companies’ other top strategic priorities, help ensure that they leave a positive—and lasting—legacy. REFERENCESChallenger, Gray, and Christmas, Inc. CEO Departures Increase. American City Business Journal, Inc., September 30, 2002. Charan, R. and Useem, J. The Five Pitfalls of CEO Succession. Fortune, November 18, 2002. Cheloha, R. Hallmarks of Effective Succession Planning. Viewpoint, Number 2: 1999. Cheloha, R. The Board and Effective Succession Planning. The Corporate Board, September/October, 2000. Dearlove, D. and Crainer, S. Help Wanted: Superhero. Chief Executive, October, 2002. Harris, D. and Helfat, C. 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