According to a study released by executive-pay tracker Equilar, CEOs recruited from outside a company earn significantly more in their first year than those promoted from within. The study of nearly 1,300 companies across three major S&P indexes looked at CEOs hired during fiscal years ended between April 30, 2007 and March 31, 2008. The analysis revealed that external hires received median compensation of $6.6 million, 65% more than the median $4 million for internally promoted CEOs.(The Wall Street Journal, July 28, 2008.
Warren Buffet publicly announced a search for his replacement as chief investment officer “when the need for someone to do that arises.” Berkshire Hathaway will look for someone “genetically programmed to avoid serious risks, including those never before encountered.” (Fortune)
According to a recent survey conducted by RHR International, 43 percent of corporate board members say that their company does not have a clear plan for CEO succession and another third report that any CEO transition would not be smooth.
The 10th Annual Corporate Board Effectiveness Study, conducted by the Center for Effective Organizations at the University of Southern California’s Marshall School of Business and Heidrick & Struggles, found that 38 percent of directors feel that improvements should be made in CEO succession planning.
While most CEOs entering their new positions are confident about the impact they want to make, a report by McKinsey & Company demonstrates that many are wholly unprepared for what to expect in their new roles. Through interviews with 15 current and former CEOs of US companies, the report points out CEOs should take full advantage of the period – however long or short – before they are formally in office to learn as much as possible about the company and develop a plan or vision of their own. Furthermore, it is critical that CEOs perform a pointed self-evaluation of their own skills and address any gaps in knowledge or capability before actually being on the job. As one CEO puts it, “I thought I had figured it out. Man, was I wrong. I had no idea what I was in for.” Another key area is the board of directors – it is imperative that the CEO gets to know each member as early as possible and understand the dynamics of the members. In the end, preparation is key – and can help improve the chance of success.
In another McKinsey & Company report, titled Managing CEO Transitions, authors Tsun-yan Hsieh and Steve Bear outline six key principles to keep in mind when navigating the chaotic yet exciting time when a new CEO begins. Both recognize that “CEO transitions offer a natural, albeit brief, opportunity to shake up the status quo and change it fundamentally.” A CEO changeover is a real opportunity to identify the strengths and weaknesses of a given company to build on the former and correct the latter. Based on their conversations with CEOs and other leaders, Hsieh and Bear recommend the following:
As Ram Charan in the Harvard Business Review points out, “CEOs’ performance determines the fates of corporations, which collectively influence whole economies. Our standard of living depends upon excellence at the very top.” Though the selection of a CEO has such lasting consequences, the process by which CEOs are picked is not well managed and therefore results in less than optimal selections, according to Charan. What’s the solution? There are three ways companies can improve CEO succession plans to improve the caliber of candidates:
Put another way, “CEO succession is all boards’ paramount responsibility; nothing else so profoundly affects their company’s future.” Of critical importance is having a reasonable succession plan in place and investing the time and effort needed to be prepared if a replacement is needed.
What is the most appropriate role for an outgoing CEO when the new CEO officially begins? Steve Hamm in BusinessWeek says that it is best for the former CEO to remove him or herself entirely so that it is clear the boss is really. In cases where the former CEO remains at the company, it is the board’s responsibility to delineate the role – which should be more consultative rather than “official.” The goal should be to let the new CEO be just that – the new CEO. However tempting it may be to retain the experience and advice of the outgoing CEO, it must be managed very carefully.
Former Quest Diagnostics CEO Kenneth Freeman explained to BusinessWeek another take on the concept of CEO succession. As Freeman states, “[p]art of our job [as CEOs] is to make sure we’re thinking about what succession would look like and, if the unexpected were to happen, what might be done…being CEO is not a birthright, not an entitlement, it’s a privilege.” In other words, succession planning needs to be on the mind of a current CEO – and a plan that involves a true transfer of power, not one that appears as such.
In the Wharton Leadership Digest, Dennis C. Carey discuss his experience running the CEO Academy seminar. The leaders of the seminars are generally among the most experienced CEOs with the attendees comprised of CEOs who have only been in their position for a short time (less than 3 years). The point of the seminar is to provide education, mentoring and support. As part of these sessions, one key take away is that newly minted CEOs approach their new position with little in the way of advance training or preparation for this job. The idea that CEOs bring to their new situation much uncertainty and unfamiliarity speaks to a broader issue that regardless of the media attention towards CEOs in general, there has been little coverage of what a CEO does exactly and what the role entails. Carey explains that previous or experienced CEOs are a wealth of knowledge that should be utilized more fully.
In an article on succession strategies, the Economist takes the position – that “[i]t is rarely a good idea to appoint an outsider as the company’s new boss.” This finding is based on research that has shown that an insider who is provided with the right training and direction (i.e. grooming), results in a higher financial performance for the company. Based on research by Nandini Rajagopalan and Yan Zhang, this approach is far better than looking to an outside candidate or choosing between competing insiders.
William Pasmore and Roselinde Torres, in the Mercer Management Journal, argue for having a strong CEO succession plan in place – without one, the overall of success of the selected CEO as well as the legacy they leave behind are at risk. Pasmore and Torres offer some important caveats to keep in mind when developing a succession program:
As the authors outline, there are four key stages of the CEO succession process:
Sheila Ann Feeney of Workforce Management, in Irreplaceable You, points out several examples of succession planning marked by the chief’s reluctance in assisting with identifying a replacement – such as Don Hewitt, Sandy Weill and Sumner Redstone among others. The common thread in these situations is the chief’s strong identification of themselves in the role which makes it difficult for them to envision anyone else possibly filling their shoes. But the problem is when current chiefs fail to address succession planning, the company’s future is at risk. Waiting for the "right" time, or after something unexpected has occurred is not when these decisions should be made – often these rushed decisions end up with a successor who may not be the best fit for the company. Put another way “companies lacking succession plans are ‘fragile enterprises. They lose intellectual capital. It goes with the people who have left. The company loses traction, momentum, productivity, morale and customer service.”
Harvard Business School's Working Knowledge interviewed Harvard Business School professor Joseph L. Bower, an expert on corporate strategy, organization and leadership, on the CEO succession at Ford Motor Company. When asked how common it is for companies to choose outsiders such as Alan Mulally, Bower said that it is fairly common. He remarked that about one-third of S&P 500 companies choose outsiders and this figure rises to 40 percent when companies need turnarounds. Bower also noted that it appears that Bill Ford was very involved with finding his successor since there was no media mention of hiring an executive recruiter for the search. To prevent hiring outsider CEOs who have to learn about the business very quickly and usually under tough conditions, Bower recommends starting twenty years earlier to develop leaders who can do the job. "You can't develop great CEOs overnight."