CEO Succession Planning
David Larcker, Professor, Stanford University Graduate School of Business and Director of the Rock Center for Corporate Governance Stephen Miles, Vice Chairman, Heidrick & Struggles
CEO Succession Planning A Dose of Reality…
Overview ► Risk management has become an especially critical (perhaps new) focus for firms ► Succession planning and internal talent development is a fundamental component of risk management ► Investors, rating agencies and governmental entities are starting to request (proprietary) information about succession planning ► Succession planning and internal talent development translates directly into future shareholder/stakeholder value
Assessment of Succession Planning
Internal Talent Pool for CEO
Internal Talent Pool for C-Level Executives
Benchmarking the Internal Talent Pool
What Should the Next CEO Look Like?
Find another just like the one we have? OR Find someone that is completely different from what we have!
What Should the Next CEO Look Like?
CEO Succession Planning Compliance-Based versus Operational
Dangerous Myths Surrounding Succession Planning ►
External candidates are more exciting and promising ―
Boards prefer the devil they don’t know to the devil they do
Internal successors are often lower risk that outsiders
The successor has to be ready now ―
The only way to know if someone is “ready now” is after the fact
The board must evaluate the context of the leadership situation
CEO succession planning is a single-person event ―
Boards focus on the CEO role in succession planning to the exclusion of other positions
What worked in the past will work in the future ―
What a company needs in the future may be drastically different from what was needed in the past ― Examples: Jamie Dimon and Bill Harrison at JPMorgan Chase; Marius Kloppers and Charles Goodyear at BHP Billiton
“We have a great internal candidate – we don’t need to look outside” ―
A company cannot be myopically focused on its own people
What is Compliance-Based Succession Planning? “Names in a Box” ► The most rudimentary form of succession planning that meets the minimum criteria and creates a false sense of security (that ultimately leaves companies unprepared to deliver viable candidates when the company requires them) ► If you had to name someone immediately (not just on an interim or emergency basis), could you?
Core Components of Operational Succession Planning Evaluate candidates based on viability vs. “ready now”
Ensure that the new CEO has a robust on-boarding
Communicate with key candidates
Develop a robust pipeline of talent within the organization
Successful Internal Succession
Define what the future needs of the company are in terms of its next CEO
Assess internal candidates against a forwardlooking profile
Steps in an Operational Succession Plan ►
Add succession expertise to the board ― Make sure that the director chosen to chair the nominating and governance committee has previous succession experience (either as a candidate or someone who has run the process)
Think of succession planning as a multi-person event ― Remember that the executives that are not promoted to CEO are also crucial to success and the creation of shareholder value
Develop a robust succession architecture ― Must encompass everything from an emergency plan through a more gradual, 5-years out succession; revisit this architecture regularly
Develop a Skills & Experience Profile ― Must take into account the future needs of the company and be continually revisited
Engage the board in the development of candidates ― Use external advisors to assess and benchmark candidates, as well as provide ongoing coaching and support, providing updates to the board in the process to establish “viability”
Identify “blockers” ― Prepare to move people off of the senior team to further develop potential successors
Expose candidates to the board ― Fireside chats, attending executive’s offsite session, one-on-ones, etc.
Engage in a confidential external search ― Ensure that the board can compare internal candidates against the best-in-class talent in the marketplace
On-board the successor and provide senior team with ongoing support ― Prepare for what happens after the successor is named by providing crucial support (a good team, wise and accessible mentors, executive coaching and a feedback-rich environment)
The Succession Planning Process and its Constituents
Roles of Each Constituent in the Process Ensuring a smooth succession is the most critical responsibility for the Board of Directors and the CEO. Best practice succession planning gives the Board, management team, employees and shareholders confidence in the long-term future of the Company by reducing succession risk. Board
Owns the process and is responsible for the successful CEO appointment and transition, demystification of the succession process and allaying of apprehension. Charged with the development of a robust leadership pipeline (the number one sign of good governance). Best practice is for the Board to utilize a proven process and methodology for evaluating leadership talent.
Provides input into the process. His/her number one job is to have developed at least one potential successor inside the organization. He/she provides input into the current and future state of the business model and strategies. He/she also provides input to the team conducting the internal assessments in terms of his/her objectives and a dispassionate view of the internal candidates.
Senior Management Team
Must have a clear understanding of the internal process and the required CEO skills and competencies. Accommodate developmental roles on the senior team when necessary. A high-level developmental roadmap and detailed personal coaching plan will be developed for internal candidates (which can be refreshed every 6 months depending on the transition time frame).
Assurance that the Board is rigorously managing the succession process and performing active oversight of leadership development. Shareholders gain confidence that the best leadership is being identified, recruited, developed and retained based upon the ability to drive business performance and enhance long-term shareholder value.
What Can Go Wrong (or Right)? Outgoing CEO Behaviors The Aggressor
► Where the sitting CEO ‘plays nice’ for most of the process then steps in at a key decision moment and tries to steer the process to their handpicked candidate, undermining the other candidates in the process ► They will often take an aggressive, position-based approach with the board, trying to force and outcome to the candidate they favor
The Passive Aggressive
► Where the sitting CEO subtly undermines candidates (in the way they position them in front of the board, their description of how they are doing in their business, etc.) ► Can come across as advising the board on the candidates, yet once it is revealed it erodes trust between the sitting CEO and their Board, which can have even broader consequences
► Where the sitting CEO has advised and partnered well with their board, helping lead what could easily be seen as a best practice process but when it is very close to making the decision on a candidate, they capitulate and decide that they actually are enjoying their role and want to stay on for another few years
The Hopeful Savior
► These sitting CEOs do not want to leave the job and actively promote successors in their likeness (when the company often needs something very different to take it to the next place), or they promote someone less capable, secretly hoping they will fail so they can be swept back in to “save” the company
The Active Advisor
The Power Blocker
► These sitting CEOs are ready to leave the company and realize that it is time. They provide great input on the selection process, but do not overstep in their role. They provide thoughtful input when asked, but do not impose their “will” on the board. They serve more as an advisor, with full acceptance that the board will make the final decision
► These sitting CEOs cannot separate themselves from the firm. They define themselves in terms of their position and their career, and have no idea what they will do after leaving the job. As such, they will tend to block the process, throwing up obstacles (some subtle, some not-sosubtle) to slow things down, or even derail the process