managemnet company strategy managemanet Beware the Transition from an Iconic CEO

Beware the Transition from an Iconic CEO

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As 2023 gets under way, newly reinstalled Disney CEO Bob Iger is navigating his proverbial “first 100 days” for the second time — although this time he’s limited to a two-year term. Starbucks will soon welcome a new CEO taking the reins from founder Howard Schultz, who’s on his fourth attempt at succession. These are the most recent vivid reminders that not only are succession setbacks common, but also that transitions from “iconic” CEOs are often the riskiest.

The companies that have experienced these painful predicaments read like the “who’s who” of business. Disney, Starbucks, P&G, Microsoft, GE, Ford, Twitter, Dell, Nike, and scores of other marquee companies in their prime have stumbled painfully in CEO transitions.

And we may see more stumbles to come: Our research shows that almost a quarter of Fortune 200 companies are led by CEOs who’ve been in place for a decade or longer. Ten of these companies are headed by founders, adding further complexity and risks to succession.

What makes succession failures especially unfortunate is that they are largely self-imposed wounds. Unlike a war, a surprising regulatory change, or a sudden shift in consumer demand, succession events can be anticipated years in advance. A successful outcome is largely within a company’s control.

To understand what makes the difference between a successful and a failed CEO transition, we drew upon ghSMART’s CEO Genome research across our database of more than 26,000 assessments of C-suite executives, including more than 2,000 CEOs. We also drew upon our combined experience of nearly three decades advising more than 1,000 companies on CEO succession.

The Dark Side of Iconic CEO Transitions

Often, longstanding CEOs are visionaries who have delivered superior performance and have steered their companies through ambitious transformations. Recently, companies including Target, Caterpillar, and Boeing have raised their CEO retirement age to keep iconic CEOs in place.

However, the great paradox of iconic CEO transitions is this: The longer an incumbent CEO’s tenure, the more challenging and riskier the transition. Successors of longstanding CEOs typically have shorter tenures and worse financial performance, and they’re often forced out. With all of the investments in time and money and with experienced boards and CEOs at the helm, why are companies unprepared or why do they make the wrong choice when it comes to succession?

In reality, the root causes of succession failures can be traced back to seemingly innocuous habits that over time add up to a dangerous and painful crisis:

Deferring to the Incumbent CEO Too Much

Over their many years at the helm, longstanding CEOs hand-pick their board and develop credibility by achieving strong results and deep relationships. As a result, boards become accustomed to following the CEO’s lead and don’t challenge them sufficiently when it comes to succession. They either wait too long to start a formal process or leave the process in the hands of the incumbent CEO without asking enough of the uncomfortable questions. Even with the best of intentions, having the incumbent CEO driving the succession process is akin to having the best surgeon performing surgery on themself — a risky proposition.

One board member confided in us that she’s tried to raise the topic of succession with the independent lead director on numerous occasions, only to be told to “tread lightly,” lest the uncomfortable discussion becomes a distraction or a source of conflict with the revered CEO. Our research indicates that 69% of boards are less ready for succession than they believe.

Assuming the Anointed Successor is the Right Choice

The necessary counterbalance to a visionary CEO is often a reliable executor who makes the CEO’s big vision come to life. But this trusted lieutenant may lack their own vision, strategic muscle, or ability to inspire internal followership and influence external stakeholders. When they step up to CEO role, they often fall short.

Meanwhile, stronger potential successors may end up leaving the company, because their decisive style ruffles feathers with the incumbent or they’re poached by another company after delivering strong results.

As a result, the handpicked successor might be the last (rather than the best) person standing. Stanford professor David Larcker’s study of the largest companies run by handpicked successors found that most underperformed the S&P 500, including GE after Jeff Immelt took over and Microsoft after Steve Ballmer followed Bill Gates. (Tim Cook at Apple is the exception.) Our research shows that 53% of the time, the “heir apparent” proves to be the wrong choice.

Holding onto the Iconic CEO Too Long

Iconic CEOs often stay around as board chair or director after a successor is appointed, making it harder for the next CEO to succeed. Nearly 48% of long-serving CEOs either remained as board chair or assumed the role at the time of succession, compared with 28% of shorter-serving CEOs.

Researchers from Peking and Rice Universities found that a new CEO’s early dismissal is 2.42 times more likely when the outgoing CEO remains as board chair. As The Wall Street Journal noted, “Imagine if the former president moved out of the Oval Office but still lived in the White House.”

Being Lulled into a False Sense of Security

Boards of successful companies that haven’t experienced painful setbacks with CEO succession are more likely to be lulled into a false sense of security. These boards likely discuss succession but lack the rigor and objectivity required to ensure a successful outcome.

Five years ago, a lead director of a major industrial company shared that he had a great degree of comfort with the incumbent CEO’s choice of successor. “We have known [the successor] for 17 years. I feel very comfortable that we are in great shape. We’ve always done it well before — it’s not our first CEO succession.” Unfortunately, two years later this company was back to the drawing board, replacing the chosen “heir apparent” after extremely disappointing performance.

Seven Habits for a Healthy Succession Pipeline

In today’s dynamic and fast-changing environment, companies need a disciplined succession process that produces multiple viable options and optionality.  The following practices can help boards ensure the succession from an iconic CEO is set up for success.

1. Timing is everything.

The basic math of CEO succession is as simple as it is unforgiving. If we assume a 10-year CEO tenure (which is roughly in line with the historic, pre-pandemic averages), starting CEO succession planning in earnest five years into a CEO’s tenure gives the board and management team five years to identify and cultivate succession candidates.

Most large companies prefer to transition to an internal candidate. The unique demands of the CEO’s role mean that internal candidates require significant development in the form of new roles and job assignments to get them ready, for example giving a strong business unit leader an opportunity to cut their teeth in corporate strategy. It takes at least two years to prove oneself in a role. Therefore, five years is just enough time for two job rotations — the bare minimum to prepare an internal candidate.

This five-year timeline also provides a valuable window to add external talent to the executive ranks and/or consider “skip-level” employees to expand the pipeline of potential successors beyond the current C-suite ranks.

Yet, for a typical CEO only five years into their own tenure, succession feels like a distant eventuality — unavoidable, but not a daily focus. This is where a proactive board must step in to establish a regular cadence of structured succession discussions and activities.

2. Establish clear roles.

It’s important to be explicit about the roles and responsibilities of the board and the CEO throughout the succession-planning process. In the early stages, the board prompts and supports the CEO to ensure a robust process is established, with the majority of activities led by the CEO and CHRO. As the company approaches around 18 months from the target CEO transition timeline, the board steps in to run the process, with the CEO participating but no longer leading it.

This role evolution can be uncomfortable unless established well in advance. As one CEO confided, “I am used to seeing ‘decide’ next to my name on a RACI chart. Now, I am engaged, but ultimately, it is the board’s decision.”

3. Scorecard the future instead of cloning the past.

When asked what they’re looking for in the next CEO, many boards are quick to admit that they wish they could “clone” the incumbent. Selection criteria quickly devolve into a long laundry list of generic leadership attributes, and potential candidates pale in comparison with the one who’s currently excelling in the role.

Instead, boards should start the succession process with an unemotional business conversation about the biggest changes the company faces in the future, what success looks like in that context in terms of concrete business outcomes, and the leadership skills required to deliver on this vision of success.

This forms the foundation of a future CEO scorecard, which is used as a lens for assessment and development of candidates. The scorecard should be updated regularly, and ultimately used to help the board make decisions based on rational tradeoffs, rather than relying on nostalgia and bias.

4. Cast a wide net.

To ensure the most diverse and robust candidate slate, boards need to regularly get an objective assessment of key leaders one to two levels below the C-suite. While the majority of CEOs are promoted from the C-suite ranks, recent research by Spencer Stuart shows that “leapfrog” CEOs, who were uncovered and moved up from roles deeper in the organization, often outperformed the more traditional choices. GM’s Mary Barra and Microsoft’s Satya Nadella are two examples of this phenomenon.

To uncover the most promising talent, the best boards go far beyond the casual familiarity of meeting high potentials at dinners and curated events to demand in-depth, objective analysis to thoroughly understand executives’ capabilities. As an example of how bias can infect the succession-planning process, our research found that absent an objective assessment, individuals with a strong accent were 12 times less likely to be chosen for the CEO role — while a strong accent had no impact on CEO performance.

5. Make bold bets to accelerate development.

The best way to prepare and test internal CEO candidates is by placing them in challenging roles. Our research shows that 75% of executives who got to the CEO role on an accelerated timeline took on one or more of three distinct challenges that flex their ability to make decisions, adapt, and perform in testy waters.

  • Big mess: Examples of these projects include turnarounds or hairy and messy problems like merger integration or a large-scale technology implementation. They test an executive’s decisiveness and resilience under intense pressure.
  • Big leap: These are opportunities (roles or projects) that challenge an executive at a much greater scale than their prior roles — for example, stepping up from leading a $500 million business unit to heading up a $5 billion global business with multiple products.
  • Go small to go big: In this case, an executive is given a role or project that is a microcosm of the company, such as a large country manager or business-unit leadership role that requires the person to step out of the CEO’s shadow and lead autonomously.

The challenge with bold bets is that CEOs, CHROs, and even the candidates themselves can be uncomfortable with taking on these moves that have a high payoff — and a high degree of risk. This is where a proactive board can make a huge difference. For example, at the urging of the board, a Fortune 500 CEO we advise reluctantly agreed to put the lead succession candidate in charge of the largest acquisition in the company’s history – the role that she later regarded as the single most challenging and valuable experience in preparing her for the CEO role.

6. Proactively seek and offer divergent views.

In analyzing failed CEO successions, we typically find that at least one or more board members were uneasy about the chosen candidate but were reluctant to contradict the prevailing consensus or didn’t feel heard. This is especially true with transitions from longstanding, revered CEOs who have a disproportionate influence on the succession process.

To counteract this dangerous pattern, the best boards actively encourage diversity of perspectives and seek out divergent views from board members and outside experts. For example, a new board member recently requested a full background screening for the final two internal candidates for the CEO seat. Despite initial resistance from the sitting CEO, CHRO, and lead director, who had known both candidates for decades, they went ahead with the review, which uncovered important data that impacted the final board vote.

The lead independent director has an especially important role in institutionalizing open debate. The best lead directors assume there are divergent views and proactively seek them out, rather than quickly settling for a comfortable consensus.

7. Let the next one in.

When overseeing the transition from a longstanding, successful CEO to an unproven newcomer, boards often seek to preserve continuity, assuming that more of the same people will lead to more of the same great performance. This often translates into holding on to the outgoing CEO in some capacity or tasking the incoming CEO with retaining the previous management team, including runner up(s) for the CEO job.

Unfortunately, this often backfires, as the new CEO is handcuffed from fully making the role theirs and building a team that complements their own skills, rather than those of their predecessor. In well-executed successions, the incoming CEO is empowered to own the role from day one with support and partnership of the board.

. . .

Boards that apply these practices proactively and consistently are in the best position to excel on their most important job — selecting the right CEO. Many companies slowed down or deprioritized succession efforts during Covid, and as a result must be especially thoughtful and proactive to make up lost ground in developing a strong succession pipeline. The time to act is now.

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