This director recognized that the CEO wanted to leave the company in good hands, but also wanted to choose his own person for the job. The director, a very well-regarded CEO in his own right, no longer felt comfortable representing shareholders under these conditions. He took a stand on a basic principle: It is the board’s job — its most important job — to select the company’s CEO.
He’s not the only director who feels this way. Indeed, while regulators ponder corporate governance policy, many boards are quietly pursuing their own reforms. More directors recognize you can’t legislate the skill, intensity, and dedication required of the board in selecting and working with a CEO.
Some of the rise in CEO turnover around the world is the result of malfeasance and abuses of power that keep the regulators busy. But crooked CEOs make up only a small number of CEO failures. Increasing turnover is also a reflection of boards’ collective inability to select the right CEOs in the first place — and support them in their early years. When a board of directors has hired three CEOs in eight years and then asked each of them to leave, as happened at the U.S. retailer Kmart Corporation, you have to wonder what the board could have done differently to help these CEOs.
More than anything else, the boards I see now expect a robust, active CEO-succession planning process, one that may even begin many years ahead of the expected transition. This trend is becoming particularly prevalent in large companies. One of the two questions I hear most frequently from new directors of the giants is this: What is the succession process? (The other question: Is the strategic direction of the company clear?) Directors want to know whether the board is in control of succession. In the past, more often than not, CEOs handpicked their successors, and directors spent little time or effort on succession. Of course, CEO input in selecting successors is critical; nobody knows the business or the internal candidates better than the CEO. But boards are beginning to act more independently, especially when it comes to the final decision on CEO selection. And they’re working more closely with their new CEOs once they’re in.
A robust succession process, such as General Electric Company’s well-documented search for Jack Welch’s successor, involves a decade’s worth of work. At GE, all directors personally visited and assessed candidates during that period. Over time, the pool of candidates evolved as the directors drew their own conclusions. No one would argue with the subsequent selection of Jeffrey Immelt to succeed Jack Welch. GE executives, directors, employees, and outside analysts believe that Mr. Immelt is taking GE to the next level in a steady and resilient fashion, despite the challenging business environment. He has put the company on an accelerated path to profitable top-line growth, while maintaining the intensity of everyday productivity improvement. Such focused management has enabled the firm to maintain very respectable growth in earnings per share.
The Right Stuff
How can boards translate their increased engagement into improved CEO selection? First, directors should avoid searching for a renaissance leader. Versatility and range of skill should be expected, but they are not enough. Most failed CEOs are meticulous, ethical, hardworking executives with a broad base of knowledge, experience, and skills. But they weren’t right for their company, at that time.