How to Get CEO Succession Right
February 5, 2024 – CEO succession is a critical process for companies, ensuring that they have the right leadership in place to drive success and growth. Selecting a talented successor to a CEO is perhaps the most important accountability of a director. The continuity of talented, enlightened leadership by the CEO is highly correlated with value creation and social impact, according to a recent report from Caldwell’s Rich Perkey and Dave Winston. And yet, Caldwell says that so many companies get CEO succession wrong. The firm believes that the vast majority of CEOs and directors of companies want to do the right thing for the broader array of stakeholders they serve – i.e., shareholders, customers, employees, community, and the future generations. So why is it so hard for companies to get CEO succession right?
Most CEOs don’t have the experience of being succeeded, nor do board members gain experience in the nuanced, multiyear, multi-faceted process of CEO succession, according to the Caldwell report. The average tenure of a director of an S&P 500 company is 9.7 years and the average tenure of a S&P 500 CEO is 4.9 years. Mathematically speaking, Caldwell explains that a director of an S&P 500 company will go through the CEO succession process at most twice in a decade.
Lack of Role Clarity
Caldwell sees many boards who view CEO succession as a responsibility of the incumbent CEO, which is not correct. “The board of directors has responsibility for the CEO succession process and CEO selection,” the report said. “The CEO has the responsibility for attracting, retaining, and developing their successor. The key role of the CEO in their own succession is talent development.”
Caldwell saw one company that repeatedly tasked the incumbent CEO with hiring his own successor. He got so good at hiring his successor that he did it four times over the course of six years. “Each time the CEO succession candidate would gain traction and a following in the company, the incumbent CEO would fire them,” the Caldwell report said. “Realizing the incumbent CEO did not want to be succeeded and was incapable of hiring and developing his successor, the board of directors took over the responsibility of finding the next CEO, replacing the truculent incumbent. The market capitalization of the company quadrupled by over $10 billion under the new CEO’s leadership over the ensuing decade.”
Looking in the Wrong Direction
CEO succession is all about the future of an organization. But even with the most powerful computers and AI modeling, there is not one of us who can say with 100 percent certainty what the future will hold, the Caldwell report explains. “CEO succession can be especially tough for a company whose CEO is iconic or beloved,” the study said. “Organizations will look back wistfully on the departing CEO’s tenure, but CEO succession is about the future, not the past. It’s about the art and science of looking out three to five years, projecting the needs, wants, desires and aspirations of future customers, and then working backwards to what is needed today.”
Rich Perkey is a managing partner in Caldwell’s board & CEO practice. With over 400 search engagements across the globe, Mr. Perkey specializes in leadership succession. The hallmark of his work is the industry breadth and the tenure of his CEO placements. His C-suite and board client list includes The American Cancer Society, Blue Cross Blue Shield of Florida, Butterball LLC, Discover Financial, Equifax, the Federal Home Loan Bank System, Forward Air, Grady Healthcare, LendingTree, Primerica, Sonoco Products, and Visa USA.
Caldwell notes that organizations that get CEO succession right do so because they are working today to develop the skills, experiences, and personal attributes needed in tomorrow’s leadership. Because we live in an ever-changing world – what is needed in the future is not the same as what was needed in the past, the firm says.
Ways Companies Get CEO Succession Right
Succession planning can take on different forms depending on the situation, but it’s important for all companies to consider both deliberate, longer-term planning and rapid emergency planning, according to Caldwell. The firm explores a five key tenets of getting CEO succession planning, right.
1. Stakeholder Roles: CEO succession planning requires the involvement of several stakeholders, primarily the board and the current CEO. “The board has the responsibility to oversee the process, develop a timeline, and select a search partner,” the Caldwell report said. “The current CEO plays a crucial role in identifying and developing internal candidates, providing input on the job target and the behavioral profile of the next CEO, and ensuring a smooth transition.”
2. Key Tenets: Caldwell notes that CEO succession planning should be tied to the company’s strategy and culture, as well as the competitive landscape and economics. The process should be focused on people, both internal and external, and consider the development of talent within the company as well as options outside of it.
Related: Seven Steps to Successful CEO Succession
3. Execution: Internal development is a key component of CEO succession planning, providing opportunities for employees to develop their skills and knowledge to potentially step into leadership roles. External optionality should also be considered to ensure that the company has a broad pool of candidates to select from, according to the Caldwell report. The firm says that personal and board networks can be used to identify potential candidates, and talent mapping with a search partner can provide additional options.
4. Timing and Process: Developing a timeline and selecting a search partner are important components of the CEO succession planning process. “Defining the need for a new CEO involves considering the company’s industry, the current executive team, and the challenges facing the company,” the Caldwell report said. “Passive research should be conducted before active outreach to potential candidates, and individual and panel interviews, site visits, and information sharing should be utilized to evaluate potential candidates. A board presentation and dinner can also provide an opportunity for the board to get to know the candidates better.”
As the head of Caldwell’s industrial practice and Dallas office, Dave Winston brings a diverse background and a wealth of expertise, having placed nearly 500 C-suite, finance and P&L executives, with a focus on PE-backed manufacturing companies. He enjoys recruiting transformational executives with his team who have been together for over 15 years.
5. Decision, Communication, and Onboarding/Transition: The decision making process should involve input from multiple stakeholders, including the board, current CEO, and other executives. Caldwell notes that communication with employees and stakeholders should be transparent and frequent. “For internal candidates, a development plan should be put in place to ensure their success in the new role,” the firm says. “For external candidates, onboarding should be a key priority to ensure a smooth transition.:
Picking the Right Search Partner
Another important step for getting succession planning right is selecting the right search firm. There are a lot of elements that go into choosing the right recruitment partner. Caldwell offers some things the board should consider before selecting an executive search partner to do a CEO search:
Look beyond the number of executive searches done: The number of searches a firm has done in your industry is not an indicator of their ability to deliver on your behalf. In fact, the reality is that the more work a firm has done in a given space, the more companies they are prevented from going into to extract talent. Instead, Caldwell says to look for a firm with a strong reputation and proven success in identifying and placing top executive talent.
Related: CHRO’s Impact on CEO Succession Planning
Chemistry with the search consultant: The board should assess whether the search consultant has the necessary chemistry to represent the company and engage with potential candidates. The report explains that it’s important to have a search partner who understands your organization’s culture and values and who you are comfortable with representing your company in the marketplace.
Evaluate the track record: The board should examine the track record of the search partner’s placements, including how long the placements have been in place, whether company performance improved during the placement’s tenure, and whether there was a successful end game for the company.
Look for diversity of experience: A search firm with experience across geographies, industries, and business models is more likely to have a broader network and be better equipped to identify potential candidates with the right mix of skills and experience.
Consider the search process: Caldwell also notes that the board should also evaluate the search partner’s process for identifying and assessing candidates, including how they screen candidates, the tools and methodologies they use, and their approach to reference checks and background verification. “By considering these factors, the board can select a search partner who is best equipped to deliver on the CEO succession project and help identify the right candidate to lead the organization into the future,” the report said.
To Read the Full Report Click Here!
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Executive Editor; Lily Fauver, Senior Editor – Hunt Scanlon Media
