Succession
What could possibly go wrong?
Given the amount of time and money that goes into the average CEO succession, it’s disappointing to say the least when the person selected flames out in a short time after taking the position. It’s estimated that as many as 10-15% of new public company CEOs will exit in less than a year after their appointment. What are the most common causes of succession failures and what can be done to avoid them?
New CEOs are watched closely in their first few months on the job. As a former colleague of mine at Mercer Delta Consulting said, new CEOs are doing a lot of things for the first time, in public, and are not allowed to fail. Often, the first decisions they make about membership on the executive team and what goals to prioritize may not sit well with members of the board, who are increasingly concerned about any actions on the part of a new CEO that could trigger responses from activist investors. Of course, the board is also on the lookout for any behavior not becoming a CEO and unfortunately, they sometimes find it. Some people, when promoted to the top job, mistakenly assume the rules no longer apply to them, or are willing to take risks that they would not have taken previously. In general, beginning one’s tenure as CEO by engaging in a power struggle with the board to see who is in charge isn’t a great idea, no matter how illustrious one’s reputation.
Quick exits are painful to all concerned, so some effort should be made to avoid them. Like a driver who doesn’t buckle their seat belt believing that they won’t be involved in an accident, boards and CEOs who don’t anticipate potential early difficulties may find themselves in a world of hurt. What’s the equivalent of a seat belt for CEO succession?
The key thing is communication – among board members and between the board and CEO. Because everyone wants the succession to work, there may be a reluctance on the part of board members to share misgivings or state openly what missteps concern different members of the board. A little time studying the history of failed successions as a board will expose threats and provide opportunities for members to align on the threshold for a dismissal if necessary. Ethical violations are clear and shouldn’t necessitate much debate, but performance issues are worthy of discussion.
Depending on the context, the urgency to make significant changes in direction can be high or more moderate. An overly ambitious CEO will try to do more than the board expects, invoking unease among some board members about recklessness. Without strong board support, the natural dip that follows a major shakeup may be enough to trigger second thoughts unless the context demands a makeover. Boards should have enough internal discussion to know what is desired before the new CEO takes over and that expectation should be shared with the new leader so the person isn’t left to figure it out by trial and error.
On the other hand, a conservative CEO may wait too long to take action, allowing the window for radical change created by their arrival to close. It’s expected that new CEOs may want to surround themselves with a team of their own choosing rather than keep the team they inherited. It’s relatively easy for team members to accept this and to explain their departure to potential new employers without losing face. A year in, it’s a different story; the new CEO carefully assessed the people leaving and found them wanting. The board may wonder why the new CEO needed so much time to figure things out and may not appreciate the delayed start to putting things on the right path.
In the case of either an overly ambitious or conservative successor, the important thing from the board’s perspective is to know what the CEO is thinking. CEOs who share their plans with the board and invite input are less likely to exit quickly than CEOs who think the board has no right to question their decisions about internal company matters. Later in their careers, CEOs may have earned enough trust with the board to inform the board after key decisions have been made but new CEOs need to be more circumspect.
Meanwhile, as personnel moves, strategic acquisitions or divestitures take place, the board will be keeping its eye on performance trends. To avoid internal board dissention that could result in a surprise CEO removal, the board should agree on the timeframe within which performance should improve. Is it a short-term crisis after which performance should bounce back quickly, or is it a long-term remodeling project that could take years to complete?
It might be surprising to learn that the most frequent reason for an early exit by a new CEO is neither an ethics violation nor a failure to meet performance expectations. It is a lack of cultural fit. What a lack of cultural fit means is not always clear, and it is likely used as a convenient cover for a variety of issues that the board would prefer not to air in public. If we take it at face value, a lack of cultural fit usually shows up as a rejection of the CEO by employees or key customers who find ways to let the board know that they are not happy with the choice that was made. A few departures of highly valued executives sets off alarms and can lead to an investigation by the board of exactly what is going on. If what they hear reflects poorly on the new CEO, the old guard may wind up winning over the new regime.
Rather than risk this, new CEOs should be sharing their plans with the board before they put them in motion and creating multiple opportunities for board members to provide formal and informal feedback concerning their cultural fit. CEOs who don’t do this are sometimes worried that if they share their plans or ask for feedback, they won’t like what they hear or will be handcuffed in the actions they are allowed to take. While they might be right, allowing the board to assert a modicum of control could prevent a painful dismissal.
It’s not easy being a new CEO. Candidates should take solace in knowing that the majority of new CEOs do make it beyond the first year. Still, it’s not without effort and both the board and the new CEO have a role to play in making the relationship work.