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Published: June 10, 2008

 
 

CEO Succession 2007: The Performance Paradox

The data also confirms our observations as practitioners: Some companies have simply not created the managerial infrastructure needed for evaluating and nurturing talent, and even well-managed companies often face a CEO succession event without having a viable candidate prepared to take over. Many discussions of succession planning revolve around the concept of developing a “leadership bench” wherein a few executives are identified as successors. A more comprehensive approach is to think of a multistep talent development process through which potential future leaders are identified, given wide-ranging experience, and moved up through the organization so that there is always a group of potential chief executives with a variety of capabilities that may be needed when a succession nears.

Based both on our research and on experience in advising corporations, we offer some guidance for improving CEO succession policies and procedures, and the talent development processes that support them.

  • Rethink organizational architecture. Management processes, in the context of the right organizational architecture, are key levers in developing future business leaders. The recruiting process should focus on long-term leadership needs. Traditional priorities in organizational design, such as a focus on structural lines and boxes, should be supplemented with the provision of developmental opportunities, such as general management experience. Lateral moves as well as upward moves should be used liberally, with both positioned as promotions. Potential leaders should be kept in jobs long enough to develop mastery and to be held accountable for their decisions. 
  • Combine the strengths of insiders and outsiders. The job of the CEO requires the ability both to work within the system and to challenge its underpinnings. Too often, insiders are immersed in the current culture and ideology, are obsessed with execution and operational excellence, and are afraid of change because they see the costs more clearly than the benefits. The most promising potential CEOs are those who can combine the insider’s deep knowledge of how the company works with an outsider’s ability to sense external change and understand the problems the company faces and the consequences of ignoring them. 
  • Build experience. A leadership role in a major corporate change campaign is an exceptional development opportunity for future leaders. These situations deliver the mix of experiences that prepare a candidate for the challenges typically faced by a chief executive, and provide leadership opportunities. The ideal assignments for leadership development are enterprise-wide initiatives that involve rethinking the business in a fundamental way, often triggered by an impending change in the market, such as the entry of a new competitor or a merger among competitors. Such campaigns require redefining the way the company competes and are focused on creating the new capabilities that will be required for success. 
  • Prepare for the changeover. The goal of succession planning is to create a bench of qualified candidates from which a successor can be selected, according to the needs of the company at the time. Some typical approaches are problematic. Identifying an heir apparent, for example, restricts your options. Creating a horse race can spur a competition with negative impacts on the organization. As the CEO succession event draws nearer, a cohort of final candidates must be tested for their ability to lead change.

Deciding when to replace a chief executive and choosing the successor are among the most important decisions a board of directors must make. The decision will be easiest when the company has a deep pool of potential successors who have been selected for their ability to both understand the company’s strengths and see its potential weaknesses, who have been given wide-ranging assignments to round out their experience and expertise, and who have proven their ability to lead an organization successfully.

 
 
 
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Resources

  1. Joseph L. Bower, The CEO Within: Why Inside-Outsiders Are the Key to Succession Planning (Harvard Business School Press, 2007): The Harvard Business School professor on how companies can groom “inside outsiders” to lead.
  2. Ram Charan, “Boardroom Supports,” s+b, Winter 2003: Describes how directors play a crucial role in selecting, training, and nurturing a new CEO.
  3. Rakesh Khurana and Katharina Pick, “The Social Nature of Boards,” Brooklyn Law Review, vol. 70, no. 4, Summer 2005: Unearths the relationship between board makeup and succession decisions.
  4. Chuck Lucier, Paul Kocourek, and Rolf Habbel, “CEO Succession 2005: The Crest of the Wave,” s+b, Summer 2006: The 2005 study heralded the end of the era of the imperial CEO.
  5. Chuck Lucier, Steven Wheeler, and Rolf Habbel, “CEO Succession 2006: The Era of the Inclusive Leader,” s+b, Summer 2007: As turnover leveled off, last year’s study revealed chief executives and their boards were adopting new survival strategies.
  6. Ira M. Millstein and Paul W. MacAvoy, The Recurrent Crisis in Corporate Governance (Palgrave Macmillan, 2004): Makes the case for an active board of directors led by an independent chair to take responsibility for corporate management.
  7. Michael Schrage, “Ira M. Millstein: The Thought Leader Interview,” s+b, Spring 2005: A warning from a corporate governance doyen to reform board structures or accept more value destruction.
  8. For more business thought leadership, sign up for s+b’s RSS feeds.
 
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