CEO succession: Strategic succession inside out

Ten years on from the financial crisis of 2008, far from getting back to business as usual, Boards have come to expect that uncertainty is the ‘new normal’. The need for the CEO and the top team to steady the company through choppy waters of Brexit, climate change, cyber threats, #Metoo and geo-political turmoil has never been greater.

We are seeing frequent and often unexpected examples of CEO uncertainty. No-one seems safe when even GE can lose a CEO after just a year. Sacha Romanovitch, Grant Thornton’s CEO and the first woman to lead a big 6 accountancy firm also resigned in October amid media speculation as to reasons for her departure with no named successor.

I have studied the career profiles of Chief Executives for 20 years and it seems that well-executed CEO succession planning is more pressing than ever. The reputational and operational turmoil when a CEO crashes out of the picture with no clear successor can take a big commercial toll, with lasting repercussions.

Contrast this with strong succession planning that creates a competitive advantage as it ensures organisational continuity and also attracts better leadership talent across the company. Good succession planning is part of good governance.

CEO Success Factors

Statistics show that there is a preference for internal CEO succession as opposed to hiring from the outside, as it circumvents the lack of cultural fit – one of the main reasons CEO appointments fail.

A CEO’s success is probably determined 30 percent by technical skills, 30 percent by personal attributes and 40 percent by the fit with the organizational culture.

Research into 300 CEO transitions at S&P companies suggests that insiders are best in terms of long- term company performance when the company is doing well, whereas external candidates do better when the company is in trouble. The best performing CEOs in the same study were those who were board members and stepped in as CEO. The worst performing CEOs were those who were recruited as outsiders into other roles, like COO, before their appointment as CEO. Interestingly, this is a strategy that companies still pursue if they have not groomed a successor.

Successful CEO Succession

Succession planning is a structured rather than a reactive process and one that is inextricably linked to strong leadership development. Many companies only develop an interest in the idea following a recruitment failure at the top. To reduce this leadership risk and as part of their governance responsibility, the best boards and CEOs prepare and develop internal candidates to take over. Building a talent pipeline of executives with the ability to step into the CEO role takes time. There’s no ‘quick fix’ when it comes to experience gaps, such as time spent overseas, heading up different branches of the business, or growing a new market.

What does a good CEO look like?

Even when a Board and CEO start the process of succession planning, are they clear and united on the criteria they are looking for in a future CEO? Finding an exact replica of what has worked in the past almost certainly won’t provide the best chances of future success. For example, a CEO’s global competence seems even more important now, given the current protectionist wind that is blowing across the international business landscape.
In my practical work, alongside technical capabilities, I encourage Boards to consider leadership style and cultural impact and to probe exactly how a CEO will create value? Will they be able to get the buy-in from the top team? Are they single operators or are they able to create team work at the top and thereby achieve better performance for the company? What effect will they have on organisational culture longer-term? These factors point to the need to look at the psychology of the CEO – the softer, less tangible characteristics that are harder to assess and their team leading ability: what drives them? How have they created value in the past? What is their leadership philosophy?

Culture starts at the top

Succession planning underscores the need for a well-developed internal pipeline of potential CEO candidates and a well-executed programme of preparation. It needs to provide the right opportunities to develop leadership and international skills and includes a much sharper external perspective than ten years ago. Moreover, CEO candidates need to develop high self-awareness to understand how their behaviour impacts the culture of the company and the dynamics of the top team.

Ideally, CEOs are appointed for their personality traits, their values and their ethics as much as for their technical expertise. It would be useful for boards to focus on the 70% of CEO success factors of personality and fit with culture and strategy. Following a CEO like Paul Polman at Unilever or Larry Fink at Blackrock will require a certain type of agent provocateur to keep the enthusiasm for change high.

Hypothesis for the future

Succession planning needs to be more strategic, with more time given over to forward planning, focussing not just on the what have candidates achieved in the past but also how they have created value for shareholders. As a behavioural scientist, I am aware that my conclusion is a hypothesis at this stage, but it is one built on 20 years of practise: Impact and psychology are areas where boards are less confident, particularly where directors are typically from a finance or accounting background. If boards can be persuaded to pay more attention to the soft skills, however, we will see a better fit and higher company performance, whether candidates are developed from inside the business or brought in from the outside.