If Only We Had Known

Avoiding Regrets in CEO Succession

To readers: CEO Succession will be a frequent topic of discussion here since it’s critically important but difficult to get right. Boards have been lectured to start the process early and consider both internal and external candidates. Still, according to an article in Newsweek this past week, CEOs are exiting companies from all sectors at record levels; 1,358 so far this year, the highest level since 2002. These departures can sometimes be embarrassing for all concerned. Clearly, we can do better.

We are cursed and blessed to live in interesting times. Changes fly at us with lightning speed, from every direction. This state of continued high unpredictability makes it extremely challenging to select a CEO who is bullet proof: ready to lead through everything might come. In truth, much of what is to come isn’t knowable. Still, there is much we can learn about our needs and about a candidate if we work hard enough and we can put that knowledge to good use in picking the best person for the job, recognizing that achieving perfection will never be possible. Our goal should be to do the best we can under the circumstances, accepting that we might still make a mistake. However, that stance shouldn’t provide an excuse for us to be sloppy in our approach, engaging in actions that compromise the quality of our decisions.

The recent departures of Nestle’s CEO Laurent Friexe and Astronomer’s Andy Byron (the kiss cam incident) for romantic involvement with their subordinates follows the departure of Kohl Corp’s CEO Ashley Buchanan for directing millions of dollars in contracts to a contractor with whom he was in a relationship. Some years ago, I was involved in a succession that resulted in the same outcome: after a year on the job, the new CEO was found to be having an affair with his head of HR. He resigned. Having an affair that is covered up might be fine for CEOs in some cultures but clearly not (yet) in ours.

What should we conclude from these examples? First, that CEOs are human and may be imperfect. Second, our succession processes aren’t telling us the whole story. In my case, we were never warned by the search firm who recommended the candidate and provided his assessment that anything like that could happen. We asked for and received an assessment that was strictly professional in its content and took it at face value to be representative of the person as a whole. In another case, a CEO was brought on board even though people on the executive team had knowledge that he might be unstable. He was out in a few months.

What does it take to expand what we know about candidates and use that knowledge optimally in the CEO succession process? The good news is that we can do better. What passes for rigor is too often a popularity contest based on likes and dislikes, politics, or a good sales job. There are several things we can stop and start doing to help avoid situations where we regret our choice. Let’s begin with the things that we absolutely should stop doing. These things almost always make matters worse.

Stop!

· Thinking you know what qualities you are looking for before you really do

· Relying on search firms alone to do assessments

· Relying on partial information (such as only the person’s professional track record)

· Falling for stereotypes

· Using your imagination to fill in the blanks

· Automatically privileging external candidates over internal candidates

Let’s address each of these briefly.

We can’t find the right candidate if we don’t know what we are looking for. It’s harder to assemble and prioritize the criteria for selection than most boards recognize. A list of generally desirable qualities may not highlight the things that really matter at this point in your organization’s evolution. Understanding the context the person will work in is as important as understanding the person himself or herself.

When developing criteria, challenge yourself to talk them through rather than stop at generalities. Every selection committee has “ethical behavior” in their list of must haves. But what exactly does that mean and how would you know if a candidate engages in unethical behavior? The candidate is unlikely to tell you, and even a thorough background check might not detect the kind of behavior that would lead to the CEO having an affair. To find out about that, you need to dig deeper; to go back into a person’s past and talk to people who know them well, inside and outside of work.

And here’s something really important: don’t look backwards in deciding the criteria for selection. The new CEO will be managing in the future, not the past. Take the time to do some thorough and realistic scenario planning about the future and let that tell you what kind of leader you will need.

Don’t rely on search firms alone to assess candidates. There’s a built-in conflict of interest here. You wouldn’t rely on a used car salesman to tell you how much you should pay for a car. There’s too much at stake to rely on a glowing report.

Stop relying on partial information. Quit thinking you can learn enough from interviews, a CV and a few personality tests to make the call. These things only scratch the surface and can be misleading. Candidates do everything they can to present themselves in the best light. Don’t let them fool you. There’s no substitute for deep, thorough and objective assessment. Remember, there are few decisions as important as this one. Have an objective third party dig into all aspects of the candidates, both professional and personal. People leave a trail of their tendencies that usually don’t change the moment they become CEO.

Stop falling for stereotypes. Tall, dark and handsome may be good for the movies but look around. How many CEOs look like movie stars? There’s a reason that orchestras make people audition behind a curtain. Your eyes can deceive you. The person you need may not look or act like anything you expect.

Lacking better information, don’t use your imagination to fill in the blanks. If there are things you don’t know but need to know about a candidate, don’t move forward until you do.

Finally, don’t be taken in by how unblemished the track records of external candidates appear to be compared to the flaws you see in internal candidates; remember, the bad parts have been edited out. Again, use an objective party to assess both internal and external candidates and put them on equal footing.

So what should we do instead?

Start

· Conducting a comprehensive assessment of your organization’s current and future needs

· Creating a rigorous, broad and deep picture of the candidates based on objective, independent information

· Looking at what the board and organization need from the candidate to support them in good times and bad

· Preparing people for their time in the C-suite

Successful succession begins with a comprehensive look at the capabilities an organization needs to address its current and future challenges. Rather than using the same generic criteria for selection as every other company’s search, it’s important to develop unique criteria that take into account the demands your CEO will actually face. This isn’t easy or quick work. It’s more than an hour-long discussion around the board table.

Most organizations today do a pretty good job of risk analysis, which provides valuable information. That analysis may need to be complemented by a broader strategic analysis of the future of the industry, economy and world. Today, with the help of tools based on AI, there is no excuse for failing to keep up to date with the hugely complex and rapidly evolving ecosystem in which an organization exists. The more an organization employs these tools, the smarter the tools get and the greater their predictive power. The idea is to employ human-assisted intelligence to do detailed scenario planning of the most likely alternative futures, covering the economic, social, political and technological forces at play. From these scenarios, the board and management can extract information that feeds into a current versus future organization capability gap analysis. This analysis, in turn, will produce criteria the next CEO needs to meet to be ahead of the curve instead of behind it.

Practically, this work involves understanding future challenges through a review of future forecasts, industry publications that capture trends, strategy documents prepared by the organization and competitive benchmarking. These things can be reviewed manually but AI makes the process faster, cheaper and more robust.

While it may be easier to search for someone who has demonstrated a broad capability to solve problems, overlooking the specifics of the situation is a mistake. Too many organizations commit the error of hiring a CEO from a “brand name” company who lacks the situation-specific knowledge needed to lead the organization forward. Ideally, you want a person who has a vision that fits the needs of your company but also understands how to turn the vision into reality.

The CEO’s job is to respond to the expectations of a variety of external stakeholder groups, often with conflicting goals for the organization. Inexperience in dealing with the most critical expectations from key groups has led to CEO failure in a number of instances. Relationships with the board are particularly sensitive. The board has its own set of preferences regarding how the CEO interfaces with members inside and outside board meetings, even if these have never been codified. CEOs vary in terms of their experience, comfort and transparency in dealing with boards. Some feel that boards are too intrusive and need to be held at arms length. Other CEOs try to establish a close relationship with the board by sharing too much information or being too dependent on the board to approve decisions. Boards that are unclear concerning their expectations for the CEO sometimes end up in broken marriages, just as in real life.

An in-depth analysis of all these factors yields a unique set of criteria that should be prioritized and weighted for selection based on what the organization needs at a given point in time. Once these criteria are formulated, the board should seek a rigorous, broad-based and objective assessment of both internal and external candidates to see how they stack up against what is needed.

Every board would like to have a wealth of candidates to choose from who meet the selection criteria they have developed. The best way to improve the quality and quantity of candidates available is to build them yourself. To do this, the board needs to share the latest criteria and then have the organization invest ahead of time in preparing candidates for the role. Even if a leading candidate already exists, don’t be surprised when they drop out for a host of reasons: health, better offers, or wanting to focus on more time with their family. Better to have multiple strong options. More on how to develop a strong bench of internal candidates in a future post.

No one wants to see a new CEO fail after a short time on the job. The best way to avoid regrets is to put in the work required to be confident in your choice.