PITFALLS IN CEO SUCCESSION
By Professor Paul Strebel - November 2012
What do you get when you have four different CEOs within a year? You get a company that is schizophrenic, like Yahoo that doesn't know whether it is a media or a technology company. But Yahoo is not alone. Many new CEOs don't last more than two years. Clearly there's something wrong with the succession process at numerous companies.
It is widely accepted that appointing the right CEO is one of the board's most important tasks. If CEO succession is that important, why is it that global surveys by executive search firms suggest that even in 2010 only a third of the respondents believed their boards were prepared for the possible departure of their CEO? Based on personal experience with CEO succession, as a board director, consultant and discussions with participants on programs for high performance boards, there are six key points in the process where boards often are not prepared and can bungle CEO succession.
1. The board is out-of-touch
When the board doesn't understand the company's DNA, its business model and/or the dynamics of the industry, it cannot lead a meaningful search and may become redundant itself, like Yahoo's board. When Yahoo with founder Jerry Yang as CEO bungled an attractive takeover offer from Microsoft, thinking they could do better, Yang was forced to resign. New CEO Carol Bartz and chairman Roy Bostock looked for investment partners to make media acquisitions, but the market was not impressed. Then activist investor Daniel Loeb bought into the company, fired Bartz and Bostock, hired Marissa Mayer as CEO and declared Yahoo to be a technology company. Yahoo's future now depends on whether an activist investor and his associates made the right call.
When the board is out of touch, it even cannot be sure whether an internal, or external candidate is called for. In some cases I have experienced, the board was too removed to understand the corporate culture and hired an external CEO with a leadership style completely at odds with what the organization needed, or alternatively, didn't appreciate that a bottom-line improvement in efficiency was needed to stabilize the company, rather than another attempt to grow the top line. Under these conditions, the success of CEO succession becomes a matter of chance.
2. Too much ego interference
Board members may know what is needed, but egos on the board can distort the selection process. The question is who ultimately will be making the succession decision? Is it the board as a whole? Or is there a dominant figure on the board, who at the end will make the decision, the chair, an owner, or the outgoing CEO?
When boards are divided about the profile of the CEO's successor, because of conflicting egos, or owners' interests, the board becomes dysfunctional and may settle on a second-rate choice to keep everyone happy. A powerful board member at a client of mine wanted more influence and preferred a weak CEO. Not surprisingly, a divided board and a weak CEO is a recipe for failure.
When the retiring CEO is a successful personality, like the classic case of Percy Barnevik at ABB, he may have an overly supportive board and disproportionate say in the choice of his successor. In such cases, the successor often turns out to have a more self-effacing personality, especially if he has to fit in with the outgoing CEO as the chair. Barnevik, who remained down the corridor as chairman, twice got his board to select successors who were unable to step into his shoes. Only when ABB approached an existential crisis and Barnevik was forced to step down, did its reconstituted board get control of the succession process and make the CEO choices that have led to ABB's highly successful turnaround and profitable growth.
3. The board is unaware of top internal talent
CEOs can have an indirect compensation incentive not to bring executives on to their team who are better than they are. The CEO's compensation requests cannot easily be turned down, if the board faces a difficult succession process. This will be so, when none of the internal executives apparently can replace the CEO, because there is no proper succession planning for the top team.
To avoid being held to ransom by a CEO who has kept potential internal competitors out of sight, the board needs periodic access to the top team. That access must help ensure that every member of the CEO's team is top notch. In my experience, this can lead to a rejuvenated top team, not only with several internal CEO candidates, but also provide the current CEO with a team that can deliver superior performance.
Once the board has future CEO candidates, it can structure a "horse race" between them, well before the agreed end of the current CEO's mandate. In some companies, like GE where the management culture accepts it, the candidates in the horse race can become quite widely known even in the business press. If none of the internal candidates is up to par, the board had better to give itself enough time to recruit and groom a potential successor. Otherwise, one of the board directors themselves may have to step in as an interim CEO while the search process proceeds. Be aware, this process can become subject to the hidden ambitions of competing directors and lead to CEO succession failure.
4. The search process is superficial
When Scott Thompson, Carol Bartz's immediate successor as CEO at Yahoo, claimed on his curriculum vitae to have a particular university degree he didn't have, he was forced to resign. It was the final nail in the board's coffin, which opened the way for Daniel Loeb to take over leadership of the board.
Even when the most reputable of search consultants is hired to conduct the CEO search, the search process can still end up being superficial. The first question is who is hiring the consultants? If ego interference is avoided, several critical issues remain. Does the search firm have enough experience in the industry, fully understand what the company needs and have the reach to get access to the best available candidates? What is the quality of the partner conducting the search? If a second string partner is involved from a firm without real industry experience, I have seen a firm bowing to a candidate's wishes for confidentiality and conducting a superficial due diligence, with predictable chances for the success of the new CEO.
5. The CEO is not properly on-board
The best selected external CEOs need time, roughly from three to nine months, to build their personal networks and discover the unwritten rules in the company and its industry. Some boards use an explicit on-boarding process to familiarize the new CEO with his new environment. A new CEO who doesn't appreciate how things work may move too soon in the wrong direction. When Leo Apotheker from SAP took over as CEO of Hewlett Packard, there was no on-boarding. Instead, he changed the composition of the board and soon acquired a large British software house in the middle of a severe business downturn. The shareholders didn't buy in, the share price declined and he was dismissed.
Even if the new CEO is promoted from inside, she and her team need time to adjust to their new responsibilities and reporting arrangements. If not, she may not see which of her former colleagues, now a direct report with a chip on his shoulder, is trying to undermine her. On the other hand, if the company is in crisis, the old team and rules of the game may be part of the problem. To get the turnaround, the new CEO will have to move fast to change both top management and the internal rules of the game.
6. The CEO cannot get on with the Chair and the Board
Once effectively installed in the company and industry, one of the biggest remaining dangers to the new CEO is her relationship with the chair and the board. There are three classic traps that new CEOs can get into with their boards.
The first is the support trap: the board and the chair are too supportive, do not provide strong enough sparring to prevent the new CEO from going off track. This often follows a weak on-boarding process. The board is not giving the new CEO enough feedback, or may be too divided between competing director interests to do so. In a second generation family business client, two sons jockeying for control, each held back from giving the new non-family CEO the corrective guidance he needed. The CEO lasted six months.
The second is the control trap: the new CEO of a large technology company found that the chair, a software engineer himself, was continually visiting the development frontline, to the point where the CEO was unable to get his strategy across. Because the rest of the board was beholden to the chair, gentle attempts to correct the situation failed. A more muscular attempt led to the resignation of the CEO.
Too much control is quite common when owner-founders try to step back from running the company and become the chair. In one case, I was asked to facilitate the first presentation by the new CEO and his team of their strategy to the board. The owner-founder assured me ahead of time he was delighted with the new CEO and his ideas. But thirty minutes into the presentation, the founder began to question and contradict the very basis of the new strategy. The founder was not ready emotionally to let go. The meeting had to be aborted. The CEO left the next week.
The third is the trap of fraying and then broken relations especially between the new CEO and the chair. If this relationship starts to go sour, one or the other will have to go. To be effective, both the CEO and the chair need healthy egos, which easily can lead to personality clashes. In a classic British example, an aristocratic chair despite enthusiastically supporting the appointment of the new CEO, as well as the on-boarding process, found after six months that he just couldn't get on with the hard-driving, self-made-man style of the new CEO. Since the chair represented a large shareholder, the CEO had to go. The seeds of later broken relations are often planted at the beginning of the succession process, by boards that don't understand themselves well enough to know what kind of CEO they really need and want.