Improving Your CEO Succession Odds

Surveys show that over 50% of major US companies have either an inadequate CEO succession strategy or no meaningful strategy whatsoever. The situation is similar, if not worse, in smaller organizations.

It’s hard to know which does more damage, having a bad leader or having no leader at all. Boards feel an urgency to fill the leadership vacuum. But appointing the wrong CEO leads to organizational instability, loss of key individuals, lowered morale and poor execution. Two or more failures in a row can send a company into an irreversible tailspin.

Complex emotional and political dynamics along with ever-present time constraints complicate and slow the selection process. Boards can shift the odds in their favor by increasing objectivity during senior leadership selection. Regardless whether an internal or external candidate is called for, using an unbiased, independent consultant as part of the selection process provides boards with a way to increase their chances for a better “fit.”

First - Determine What’s Needed

Before even initiating a search, the committee needs to ask, “What do we need now in a CEO and what are we likely to need in the future? What are the competencies that already exist in our senior leadership and where are the gaps?” “Do we need someone adept at furthering our leadership development program or do we need someone with a track record of successfully integrating differing cultures?” It goes without saying that the more precisely you can define your company’s current and projected needs for the next 5 years, the better.

While this seems obvious, it’s striking how many search committees look at candidates first, then go back and determine whose competencies best mesh with company needs. When directors determine criteria initially, they are in a position to drive the succession process. Otherwise they are likely to be led by others who have a vested interest.

A complete analysis of company needs considers the existing strengths of senior management, current operating environment and strategic framework for future growth. Boards today, pressured as they are with governance and compliance, report having less time to devote to succession preparation.

An independent consultant -- with no vested interest or preconceived formula -- helps board members compress the time required to conduct this analysis. The consultant then has firsthand knowledge of the nuances of the business and can assist with objectively evaluating the “fit” of candidates.

External Search Obstacles

The executive search industry is a relatively small field, and the nature of the business is to opt for known commodities. “Star players,” culled from highly visible senior positions, appear and reappear on recruiters’ short lists. Yet hiring a “star” is a poor predictor of success.

Leadership success is highly dependent on context. Without the right “fit” executives who thrive in one company may flounder in the next. Note the recent failure of several CEOs recruited from the top ranks of GE – a company lauded as a leadership incubator. These candidates not only offer no guarantee of success, but also frequently require large incentives and guarantees regardless of their performance.

Because of the nature of the search business, recruiters often have outside relationships with individual executives or board members and may feel subtle pressure to press the case of a favored candidate. A committee member may feel indebted to the recruiter for former placements, or be in a position to influence multiple hires, further confounding objectivity.

Psychological factors and personality traits tend to be emphasized in external searches. But a fundamental mistake in CEO selection is the tendency to overvalue certain characteristics and attributes. The key is not the candidate’s personality, but rather his or her past performance. The candidate’s ability to speak well at in public gatherings is far less important than his or her ability to inspire contribution and performance from workers on a daily basis.

Unfortunately there are no tests for the specific skills a company needs in a top leader. The only way to determine the actual performance history for a candidate is to dig.

There are cases where incomplete due diligence has led to an inferior hiring decision. In one case, a company seeking a new CEO was interested in someone with a track record in forming global alliances. Less than 18 months later the new CEO was out, after having botched critical relationships. As we found out in a historical review, the CEO had relied on a director of his previous company – a powerful former ambassador – to forge the international alliances that led that company into new markets. This specific information was not uncovered until after the hiring decision was made.

Obstacles to Internal Succession

When a company is performing well, there is a tendency to look to the incumbent for input in choosing a successor. But issues of loyalty and obligation to a second-in-command, and a natural tendency to push like-minded candidates, make the incumbent a less than objective analyst. The incumbent may also have some ambivalence about “passing the baton” and concerns about how his successor will represent him in the future.

There may also be a tendency to rely on senior management and HR for input. While it’s important that they not be cut out of the succession process, they tend to identify good workers and implementers. While these individuals benefit any organization, they don’t necessarily make the best leaders. In-house problem-solvers are also often considered for top posts, but good problem-solving ability does not necessarily go hand-in-hand with effective long-range strategic thinking.

Using Independent Insight for Better Decisions

An independent search consultant can spend the time necessary to objectively evaluate candidates’ strengths and performance records. An outsider can chart leadership development over decades, using exhaustive fact-finding and asking the kind of pointed questions about observed, measurable performance that insiders might find difficult to ask. The right consultant can also provide increased assurance of anonymity and thereby increase the likelihood of accurate assessments from superiors, subordinates and peers.

Regardless whether a company limits itself to internal candidates or “goes to search,” an objective assessment is necessary. An independent consultant can assess candidates to ensure that all possibilities are considered, regardless of the preferences of board members or the sitting CEO. The consultant serves as an unbiased, independent “voice” for the company, and has its interests as an exclusive priority.

Rather than attempting to fight the natural forces of human nature, board members need to be aware of their own biases, especially as they develop relationships with other stakeholders in the succession process. Using an independent consultant as an objective resource for identifying needs and analyzing candidate fit goes a long way toward demonstrating the fulfillment of directors’ fiduciary responsibility to make the best, impartial decisions in the shareholders interests.

© 2005 Dr. Robert Karlsberg & Dr. Jane Adler