Beware the “Smooth” CEO Succession
By Reshmi Paul
CEO succession is an inherently bumpy process. Even when the outgoing leader has performed well and seems ready to retire, the transfer of power is fraught with sensitivities. It’s hard for anyone who thrives in the all-consuming job of a CEO to hand over the reins.
So it’s no surprise that many boards work hard to make succession as painless as possible. They adopt processes that have them anticipating the change far in advance, treat the retiring CEO with full respect, and make him or her feel comfortable throughout.
This emphasis on having the transition go as smoothly as possible is a mistake. Consider the trouble it caused for one global company. When its long-tenured and highly successful CEO was nearing retirement, the company’s board readily agreed to his designated successor. But while this candidate had risen up the ranks and performed superbly at every level, he had a serious weakness in his lack of experience dealing with the board and other key external stakeholders.
Some directors saw this as a worrisome risk, but kept quiet given the current CEO’s confidence and their own hesitation to ruffle feathers. Further assuaging their concerns was the outgoing CEO’s request to stay on as chairman, an arrangement to which they readily acceded.
Instead of focusing on addressing the weakness, however, the chairman continued to have a blind spot about it. Making matters worse, he never encouraged his protégé to develop independent relationships with the other directors. As a result, the new leader launched into his CEO role never having gained an understanding of key stakeholders’ perspectives or a way of staying abreast of them. Less than two years after he took over, progress had slowed so much that the board had to go through the highly disruptive process of removing both him and his mentor.
It’s only natural for board members to respect the view of the successful sitting CEO who has the most intimate knowledge of the company, its leaders, and the environment. After all, many of the board members are current or former CEOs themselves and can’t help but identify with the CEO’s perspective. They easily fall into agreement with the leader’s strongly held perspective on the future, and they slip into assuming his or her continuing involvement in the company after a transition.
But even today’s best-performing companies need a hard, fresh look at their prospects for tomorrow. With a successful leader in place, the board inevitably focuses on the glorious past, not the uncertain future. The current strategy, as well as the currently available talent, becomes the default option.
There is a way for directors to ask the tough questions without undermining the sitting CEO or the company. But that means giving up on smooth succession as the overriding goal. It’s time for boards to accept and prepare for the bumps and bruises that come with successions geared to serve the company’s long-term interests — rather than the current CEO’s comfort.
Ideally the work starts as soon as a new CEO arrives. The board emphasizes their interest in ongoing succession planning. While the CEO should own the process for most of his or her tenure – focused on developing a strong bench and informing the board of progress – the board should gradually take on ownership of the process as the timing of the transition nears, usually a couple of years or more before the CEO’s likely retirement. The board has to be ready and willing to dive into potentially challenging conversations with the outgoing CEO about future strategy, the timing of the transition, internal and external candidates, and his or her role in the transition and the future board.
This expectation-setting is key, so the CEO doesn’t see the uptick in board involvement as a sign of disapproval. But the board needs to back up its intentions by doing its own homework. After all, a big reason CEOs tend to dominate the succession process is that they doubt the board’s ability to make a good decision.
An engaged board can manage succession even with a less-than-cooperative CEO. The founder of an industrial company had performed admirably in building his operation into a major industry player. But the board saw that different talents were needed to reach the next level. Three long-time directors that the CEO trusted went to him and strongly encouraged him to set a retirement date. They also insisted on an objective comparison of his favored candidate with other possibilities. When the leader of a growing business unit emerged as better equipped for the company’s future needs, the board went a step further and assessed that leader against some external talent before ratifying the choice.
As the transition date neared, the board reluctantly allowed the outgoing CEO to stay as non-executive chairman. But they rejected a variety of requested retirement perks, such as access to the corporate jet. To top it all off, they closely watched how he interacted with the new CEO. After seeing behaviors that undermined the new leader, they had the chairman removed after only a year. While not all of this was smooth, the board had done the hard work of vetting the succession and supporting the new CEO. And the company continued to thrive.
Corporate directors are facing growing regulatory and investor pressures to exert more oversight over succession planning. It’s only natural for them to relax when their companies are thriving. But that’s no excuse for quick agreement to even the best leader’s plans for succession.
The truly great CEOs recognize their limits. They have the humility to expect their boards to challenge them usefully in their thinking on future strategy and succession – and to keep their boards informed enough to do so. Great boards in turn know that their best contribution to the long-term health of their companies is to keep challenging their CEOs in these areas. This can make for a sometimes bumpy road to succession, but a better outcome for the company and its shareholders.