Although the tenure of a chief executive may last anywhere from one to 20 years in large global corporations, the first few years, Joseph L. Bower suggests, are crucial in setting a new direction. In his new book, The CEO Within: Why Inside Outsiders Are the Key to Succession Planning (Harvard Business School Press, 2007), he says that to drive strategic change, a CEO needs to understand the company’s capabilities and the major forces affecting it. There aren’t years to figure out where the world is headed. (This sense of urgency fits with Booz Allen Hamilton’s annual study of CEO succession, which finds the average CEO tenure is just under eight years.)
How can companies best ensure that they will put the most qualified person in the top job to hit the ground running? Based on more than 40 years of experience and study of boardroom and executive suite dynamics, Bower, the Donald Kirk David Professor of Business Administration at Harvard Business School, shows that insiders often miss the need for fundamental change whereas outside candidates — although they may bring fresh perspective — lack the knowledge of the company’s people, technology, competitiveness, and culture that are crucial for success. The answer lies in cultivating Inside Outsiders — individuals with a deep understanding of the company who aren’t afraid to question the status quo.
Bower sat down with Booz Allen Hamilton Senior Vice President Steven Wheeler in the firm’s New York offices in November to discuss his recommendations for effective succession management.
S+B: How does CEO succession reflect a company’s culture and the discipline with which it is managed?
BOWER: For a departing CEO, the natural tendency when you’re thinking about your successor is to look inside. These are the people you know. They know the business, the organization, and its people. You want to reward them because they’ve helped you. These are all good criteria for judging an individual, but they don’t add up to an appropriate way for a company to manage succession. Instead, the incumbent CEO and the board have to consider several key questions: Where is the business headed? What challenges does it face? Has the company developed a cohort of potential leaders — so that when it comes to decide which insider wins the race, it is clear that the winner is talented enough to lead in the future, not just better than the other candidates?
Managing a succession well means managing your company so that people who are moving up in the organization are constantly learning to lead, and are consistently being groomed. This is a central theme of my book: Succession is a process rather than an event. The ingredients of a succession process involve thoughtful recruiting and assignments that test managers, build strengths, and expose weaknesses. There must be very careful, regular evaluation and feedback that is fair and transparent. And all that takes a lot of discipline.
We know of some giant “people factories” like GE that do this kind of executive development well, but all companies can manage for talent development if they are willing to invest. One US$2 billion company on whose board I sit has a “talent war room,” with the management organization of each of the company’s businesses arrayed around the walls. Each manager’s potential and performance is written on a card, which is attached to the wall with magnets so it can be moved. They color code the rankings, so that it is easy to see by division who is ready to advance, and who is not performing. This room enables comprehensive reviews of the talent that is available, and the talent that is still needed. It demonstrates that the leaders of this company are willing to invest the time and effort to think practically about the company’s future.