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Strategy

How to avoid a CEO succession crisis

Published 30 March 2021 in Strategy • 7 min read

Picking the right CEO to succeed at your organization requires careful consideration – here are important considerations when you make the transition.

While CEO succession ostensibly focuses on one particular individual, the ramifications of change at the top can be widespread. In some cases, a change of CEO can signal an entirely new strategic shift, together with the extensive changes in personnel required to adapt and meet that new vision.

Sometimes identifying the right successor, along with the cultural and practical steps they will require to do their job effectively, is straightforward. On other occasions, picking out the right person and carving out the terrain required for them to succeed can be fraught with difficulty. Unfortunately, for most organizations a smooth transition is the exception to the rule – the evidence suggests that around one-third to one-half of new CEOs, regardless of whether they are internal or external hires, fail within the first 18 months in post. With such a high rate of CEO successions going south, what can organizations do to improve their chances?

Four experts on the topic outline their view on the elements of a successful transition, what organizations should think about when grooming insiders for CEO positions, and the pitfalls and common mistakes organizations make that can heighten the chances of failure.

’Review succession candidates once a year’

Jason Schloetzer

Associate Professor of Business Administration, McDonough School of Business, Georgetown University

Ideally, a full board would review succession candidates once a year. In addition, the directors would refer to a working document that outlines who the CEO of the future would be, along with the skills they would need for the organization to meet its medium and long-term goals.

Sometimes a CEO needs to be replaced at short notice, which means hiring an interim CEO or fast-tracking a planned hire. How swiftly a board reacts to this kind of stress test can often give a good window into the functioning of the CEO succession process. And a good succession process can also be a good indicator as to the overall quality within a boardroom. A board that takes talent development seriously is often also taking board advisement and strategy seriously as well.

Unfortunately, a lot of things are often overlooked when it comes to succession strategies.

        Organizations often fail to perceive corporate development and talent development as two tightly linked strands of a succession strategy. Too many see them as separate topics and fail to recognize how talent development helps to drive strategy.

        CEO succession is a management team succession process. When a new CEO is appointed, it can often trigger a change in board composition or a shuffling of responsibility across management team members. This underscores that succession is not simply about changing one individual, but often realigning the management team and, in some cases, the board.

        Another important dynamic is the relationship between the chair and the new CEO. This relationship can prove troublesome. Often the departing CEO stays on as the executive chair for a period of three months to a year. The incoming CEO may find they are unable to implement ideas without the executive chair getting in the way. In some cases, the chair may intervene directly to reverse the new CEO’s policies, or use a less direct approach to convince management to reject them.

        Lastly, CEO onboarding – it is absolutely vital to have a clear and formal set of procedures that ensure the new CEO is meeting key suppliers, institutional investors, capital providers, and executives running the business. Ensuring CEOs have an intimate awareness of the business is vital to success.

’Make sure the board meets the candidate often’

Patrick Wright, Thomas C. Vandiver Bicentennial Chair, Professor
Director, Center for Executive Succession
& Donald Schepker, Associate Professor
Research Director, Center for Executive Succession

University of South Carolina, Department of Management

Getting a CEO succession strategy right requires a thoughtful and systematic approach to talent and capabilities. Organizations need to be constantly identifying and grooming people for the top job, with the consideration of where the company would stand if the current CEO were to announce their imminent departure.

Our research indicates seven key stages to succession, broadly categorized within a set of passive and active phases:

        The first stage is to define the process, ensuring that everyone, including the current CEO and the board, is aware of how the process will work.

        This should be followed with an identification of the external environment the CEO will face.

        The competencies they will need must also be identified.

        Meanwhile, the organization should be working hard to identify and evaluate current CEO candidates, and nurturing their development if they are internal.

        The organization should then place candidates in certain conditions to evaluate their performance, providing further analysis of their specific competencies.

        The final two stages would then involve selecting a successor and kickstarting the transition process.

The pitfalls and mistakes we hear about are often routine.

        The organization discounting negative information, either because the board receives negative feedback too late in the process or because they choose to ignore that information due to decision bias. Staying away from discussing favorite candidates until a decision has to be made is a good way to avoid this problem.

        The board allowing management to run more of the process than they would like, resulting in the board meeting a candidate under scripted conditions. The board often doesn’t see the candidate often enough, in the right venue, or subjected to the kind of questions that would prompt them to think on their feet.

’The ideal candidate will take a bit of risk’

Jay Jamrog

Senior Vice President and Futurist, Institute for Corporate Productivity

        The CEO succession process is succession management rather than succession planning, and I think this is an important distinction. You need to manage the expectations of everyone involved in that pipeline, which often reaches deep into the organization. That can be easier when you are a smaller company. But if you are a bigger company with multiple brands, you need succession management strategies for all those brands.

        Business acumen, a strategic mindset, and a knowledge and understanding of the business and its customers are all a given when it comes to criteria for a new CEO.

        A good fit for the culture of the company is also a must. Is the organization replacing a personality? Or does it need something different?

One of the problems with an internal CEO succession strategy is that you are trying to groom managers to be leaders. Ideally, an organization will want a leader who will take a bit of risk, but often understandably wants consistency and predictability out of its managers. That often results in managers being nurtured to do things right, in contrast to leaders being called upon to do the right thing.  That change in approach can often make the leap into the C-suite challenging.

’Identify candidates’ skills in smaller contexts’

Peter Cappelli

Professor of Management and Director of the Center for Human Resources, Wharton School, University of Pennsylvania

There are tricky choices to be made when carrying out a CEO succession strategy.

Fundamentally, an organization needs to consider whether it will adopt an approach that involves picking the candidate at the last minute – essentially either a horse race where several candidates may be under consideration until the choice is made, or a relay process where a successor is appointed well in advance.

        The main advantage of the former is that the organization picks the person right when it requires their expertise. This means they are less likely to pick someone who no longer fits their needs when they have to take over. 

        The biggest downside of a horse race is that there is likely to be a battle between the frontrunners, which could result in an organization losing the candidates (and the surrounding team) who are not picked.  As a result, relay processes tend to represent a much smoother approach to succession.

Picking the right insider is essentially about finding someone who has the abilities and skills that an organization thinks it will need. The trick is to identify those skills in smaller contexts, such as managing the finances of a division within the company, or examples of where an individual has previously taken the lead on a change initiative. But it is difficult to know with any certainty whether a candidate will succeed or fail, and it is hard to know how much context matters.

Due diligence therefore plays an essential role in preventing problems, particularly when it comes to individual behavior. Above all, organizations should seek wherever possible to avoid joint-CEO arrangements. Not surprisingly, both individuals can often be at odds in terms of strategy and, ultimately, it is the organization that suffers.

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