August 18, 2021 – Chief executive officers are the mainstays of their companies – both externally and internally. They hold primary responsibility for developing and implementing forward-looking strategies and evolving corporate culture. And in our hyper-complex and fast-paced age, they are the voice of the company and architects of value creation that goes well beyond financial gain. Appointing the CEO is one of the most important decisions and extensive tasks of any board of directors.
The CEO succession process presents the board of directors with numerous challenges, says a new report released by Big Four accounting firm KPMG and authored by Egon Zehnder. The board has to juggle substantive decision-making criteria with procedural and formal requirements. What’s more, various stakeholders are directly or indirectly affected by succession planning. They need to be informed, updated and in agreement on the required CEO profile, yet at the same time the selection process demands the utmost confidentiality.
“On the one hand, rational selection criteria play a major role; on the other, the process of assessing and selecting the right candidate is also an emotional decision,” said Egon Zehnder. “Decision-makers have to focus on the company’s current challenges, while also keeping future needs in mind. They need to emphasize the right topics (technologization, disruption, sustainability, future market environment, structural and social changes, megatrends, etc.), but also maintain high revenues and profitability.”
This means that the board of directors, in particular, requires experienced, strategic thinkers, ideally visionaries, people who are highly self-reflective and know where they are heading with their company. The board needs people who engage in a courageous and constructive dialog with all stakeholders.
Overview and Challenge
“Identifying, approaching and selecting CEOs is part of a complex process encompassing a wide range of risks and opportunities,” said Egon Zehnder. “The right mix of technical and leadership skills, of personality, potential and mindset around the CEO role is essential in order to master the enormous current and future challenges.”
CEOs who see themselves as “superheroes” will quickly find themselves out of their depth in the face of societal shifts, technologization – including disruption of entire industries – and growing sustainability requirements, said the report. Today’s leaders need instead to inspire others to perform at their best, and they need to remain flexible themselves. “Successful CEOs need a diverse skill-set that equips them for the entrepreneurial challenges in the years ahead,” said Egon Zehnder.
The report cites a series of key challenges that CEOs and to some extent other C-suite roles will have to address: 1. Linking the business objective to a higher purpose (social value) and aligning all activities and communication accordingly. 2. Reducing and managing the complexity of various factors affecting business performance. 3. Strengthening employees’ emotional attachment to the company to achieve better intrinsic motivation. 4. Promoting innovation and orchestrating creativity. 5. Developing and motivating qualified leaders and successor generations.
“The board of directors should always keep these challenges in mind when searching for the right CEO,” said Egon Zehnder. “It makes sense to invest in a well-considered and carefully planned succession process: The right choice of CEO adds value for all the company’s stakeholders. Conversely, the wrong choice can have a negative impact on the company’s reputation, positioning, strategic orientation, corporate culture, and ability to attract talent. Ultimately, the company’s very value is at stake with the CEO selection.”
Considering the following criteria helps increase the likelihood of appointing a CEO that adds long-term value:
Practice shows that a proactive approach is advisable, i.e., one where action is taken from a position of strength and foresight. “Under no circumstances should an organization wait until succession is inevitable and a reactive solution needed,” said the report.
Whether or not to include the incumbent CEO in the decision-making process depends on the type of company as well as some regional factors. In the U.S. or even Switzerland, the CEO is sometimes part of the decision-making body but not the shareholders’ meeting following the proposal of the nomination committee. “One critical point is the role of the chair of the board of directors, who is responsible for the CEO selection,” said Egon Zehnder. “What requirements can the chairperson define? Does the chairperson always sit on the nomination committee? And what influence does he or she exert in designating the chair of the nomination committee? There is no one best answer to these questions, and the Swiss Code of Best Practice Governance does not provide clear recommendations either. However, any governance should be conducive to the open and creative dialog that is so important in the run-up to a successful appointment.”
A good succession process is built on well-defined strategic objectives for succession, said the report. These are also the basis for deriving the requirements for the CEO role. The succession process should not begin until all stakeholders on the board of directors, and ideally the incumbent CEO, have agreed on them unanimously.
Internal and External Candidates
In 80 percent of cases, the CEO succession decision falls in favor of an internal candidate. Internal search areas range from typical candidates such as the COO, CFO, or other members of the C-suite to outstanding division heads and regional leaders or even “dark horses” whose outstanding leadership qualities have already made them stand out despite limited experience. “To keep the onboarding effort in check, the search typically starts in the same or similar sectors for external candidates as well,” said Egon Zehnder. “However, it can be worth exploring other sectors, for example to find someone with experience in dealing with disruptive market changes.”
The ideal CEO candidate profile is no longer just about what someone has achieved in the past and how. “The most important thing is whether a CEO has the potential to respond appropriately to future challenges,” said the report. “Besides aspects such as the will to achieve goals, interpersonal skills and persuasiveness, and an ability to cut through complexity, it is curiosity that determines whether someone will be a successful leader.”
4 New Rules for CEO Succession Planning
Best-in-class CEO succession planning calls for boards and CEOs to start succession planning even earlier to increase the chances that the right person will be ready for whatever scenario the company faces. According to a new report from Spencer Stuart, boards that do this well will take a multidimensional view when scenario planning, increase succession options, evaluate, and accelerate potential, and think beyond CEO succession to CEO-plus.
“The nomination committee should draw on competency matrices and potential grids to assess candidates, although overly extensive and complex criteria catalogs are not recommended.”
Potential Risks and Risk Mitigation
Any CEO succession process poses certain risks. “It is neither realistic nor desirable to reach absolute consensus on what the new CEO should look like because consensus candidates are not usually strong ones,” said Egon Zehnder. “Nevertheless, it is important to hear the voice of everyone involved in the process. Developing the ideal profile means creating one that resonates with as many stakeholders as possible. After all, the success of the strategic renewal process – which goes hand in hand with every new CEO appointment – depends on it.”
Experience has shown that another risk can only be contained to a limited extent: covert or even outright competition between several internal candidates. “That candidates strive to position themselves in the race to the future top spot is unavoidable – and can be destructive,” said the report. “The final stage in the escalation can see those who fail to become CEO leaving the company. Right from the outset the board of directors should consider the threat of damage if one or more near-CEOs resigns.”
The Modern Board of Directors’ Active Role in CEO Succession
Diversity of perspectives is expressly desired in today’s “state-of-the-art” boards of directors. Presentations now serve, at best, to spark subsequent discussions, while ongoing exchange takes place for the good of the company. Succession planning, in particular, now follows a professional, robust process under the lead of the chair of the board of directors or the chair of the nomination committee.
Feedback and dialog: The role of the chair of the board
Active and transparent communication by the chair of the board of directors is essential at several points in the succession process. The chairperson, for example, should take a preventative approach to address the threat of damage caused by the departure of one or more near-CEOs. “As soon as the new CEO has taken up the post, the exchange with that individual also becomes of central importance,” said Egon Zehnder. “Every change of CEO forces the complex system of a company to adjust and adapt to the new leader. The reverse is also true, and the CEO has to adapt to the new environment. Open and periodic feedback is of crucial importance even beyond the onboarding phase.”
It is likely, however, that the CEO’s new employees will be limited as honest providers of feedback. “So, it is all the more important for the chairperson of the board of directors to take responsibility and support the new CEO as a capable sparring partner well beyond day one,” said the report. “This approach enables the chair not only to plan the CEO succession well in advance, but also to play an active and formative role during the winning candidate’s term of office.”
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media