Beware the Transition from an Iconic CEO

As 2023 will get beneath approach, newly reinstalled Disney CEO Bob Iger is navigating his proverbial “first 100 days” for the second time — though this time he’s restricted to a two-year time period. Starbucks will quickly welcome a brand new CEO taking the reins from founder Howard Schultz, who’s on his fourth try at succession. These are the latest vivid reminders that not solely are succession setbacks widespread, but additionally that transitions from “iconic” CEOs are sometimes the riskiest.

The businesses which have skilled these painful predicaments learn just like the “who’s who” of enterprise. Disney, Starbucks, P&G, Microsoft, GE, Ford, Twitter, Dell, Nike, and scores of different marquee firms of their prime have stumbled painfully in CEO transitions.

And we may even see extra stumbles to return: Our analysis exhibits that nearly 1 / 4 of Fortune 200 firms are led by CEOs who’ve been in place for a decade or longer. Ten of those firms are headed by founders, including additional complexity and dangers to succession.

What makes succession failures particularly unlucky is that they’re largely self-imposed wounds. In contrast to a battle, a shocking regulatory change, or a sudden shift in shopper demand, succession occasions could be anticipated years upfront. A profitable end result is basically inside an organization’s management.

To know what makes the distinction between a profitable and a failed CEO transition, we drew upon ghSMART’s CEO Genome analysis throughout our database of greater than 26,000 assessments of C-suite executives, together with greater than 2,000 CEOs. We additionally drew upon our mixed expertise of practically three many years advising greater than 1,000 firms on CEO succession.

The Darkish Facet of Iconic CEO Transitions

Typically, longstanding CEOs are visionaries who’ve delivered superior efficiency and have steered their firms by means of bold transformations. Lately, firms together with Goal, Caterpillar, and Boeing have raised their CEO retirement age to maintain iconic CEOs in place.

Nonetheless, the nice paradox of iconic CEO transitions is that this: The longer an incumbent CEO’s tenure, the more difficult and riskier the transition. Successors of longstanding CEOs sometimes have shorter tenures and worse monetary efficiency, they usually’re typically pressured out. With the entire investments in money and time and with skilled boards and CEOs on the helm, why are firms unprepared or why do they make the incorrect alternative relating to succession?

In actuality, the foundation causes of succession failures could be traced again to seemingly innocuous habits that over time add as much as a harmful and painful disaster:

Deferring to the Incumbent CEO Too A lot

Over their a few years on the helm, longstanding CEOs hand-pick their board and develop credibility by reaching sturdy outcomes and deep relationships. Consequently, boards grow to be accustomed to following the CEO’s lead and don’t problem them sufficiently relating to succession. They both wait too lengthy to begin a proper course of or depart the method within the fingers of the incumbent CEO with out asking sufficient of the uncomfortable questions. Even with the most effective of intentions, having the incumbent CEO driving the succession course of is akin to having the most effective surgeon performing surgical procedure on themself — a dangerous proposition.

One board member confided in us that she’s tried to boost the subject of succession with the impartial lead director on quite a few events, solely to be informed to “tread flippantly,” lest the uncomfortable dialogue turns into a distraction or a supply of battle with the revered CEO. Our analysis signifies that 69% of boards are much less prepared for succession than they consider.

Assuming the Anointed Successor is the Proper Selection

The required counterbalance to a visionary CEO is usually a dependable executor who makes the CEO’s huge imaginative and prescient come to life. However this trusted lieutenant might lack their very own imaginative and prescient, strategic muscle, or potential to encourage inner followership and affect exterior stakeholders. After they step as much as CEO position, they typically fall brief.

In the meantime, stronger potential successors might find yourself leaving the corporate, as a result of their decisive type ruffles feathers with the incumbent or they’re poached by one other firm after delivering sturdy outcomes.

Consequently, the handpicked successor is likely to be the final (fairly than the most effective) particular person standing. Stanford professor David Larcker’s examine of the biggest firms run by handpicked successors discovered that the majority underperformed the S&P 500, together with GE after Jeff Immelt took over and Microsoft after Steve Ballmer adopted Invoice Gates. (Tim Cook dinner at Apple is the exception.) Our analysis exhibits that 53% of the time, the “inheritor obvious” proves to be the incorrect alternative.

Holding onto the Iconic CEO Too Lengthy

Iconic CEOs typically keep round as board chair or director after a successor is appointed, making it more durable for the subsequent CEO to succeed. Almost 48% of long-serving CEOs both remained as board chair or assumed the position on the time of succession, in contrast with 28% of shorter-serving CEOs.

Researchers from Peking and Rice Universities discovered {that a} new CEO’s early dismissal is 2.42 instances extra possible when the outgoing CEO stays as board chair. As The Wall Avenue Journal famous, “Think about if the previous president moved out of the Oval Workplace however nonetheless lived within the White Home.”

Being Lulled right into a False Sense of Safety

Boards of profitable firms that haven’t skilled painful setbacks with CEO succession usually tend to be lulled right into a false sense of safety. These boards possible talk about succession however lack the rigor and objectivity required to make sure a profitable end result.

5 years in the past, a lead director of a serious industrial firm shared that he had an awesome diploma of consolation with the incumbent CEO’s alternative of successor. “Now we have identified [the successor] for 17 years. I really feel very comfy that we’re in nice form. We’ve all the time completed it effectively earlier than — it’s not our first CEO succession.” Sadly, two years later this firm was again to the drafting board, changing the chosen “inheritor obvious” after extraordinarily disappointing efficiency.

Seven Habits for a Wholesome Succession Pipeline

In right this moment’s dynamic and fast-changing surroundings, firms want a disciplined succession course of that produces a number of viable choices and optionality.  The next practices may also help boards make sure the succession from an iconic CEO is about up for achievement.

1. Timing is the whole lot.

The essential math of CEO succession is so simple as it’s unforgiving. If we assume a 10-year CEO tenure (which is roughly according to the historic, pre-pandemic averages), beginning CEO succession planning in earnest 5 years right into a CEO’s tenure offers the board and administration crew 5 years to establish and domesticate succession candidates.

Most giant firms favor to transition to an inner candidate. The distinctive calls for of the CEO’s position imply that inner candidates require vital improvement within the type of new roles and job assignments to get them prepared, for instance giving a powerful enterprise unit chief a possibility to chop their enamel in company technique. It takes no less than two years to show oneself in a task. Due to this fact, 5 years is simply sufficient time for 2 job rotations — the naked minimal to arrange an inner candidate.

This five-year timeline additionally gives a helpful window so as to add exterior expertise to the manager ranks and/or think about “skip-level” workers to broaden the pipeline of potential successors past the present C-suite ranks.

But, for a typical CEO solely 5 years into their very own tenure, succession appears like a distant eventuality — unavoidable, however not a every day focus. That is the place a proactive board should step in to ascertain an everyday cadence of structured succession discussions and actions.

2. Set up clear roles.

It’s essential to be specific concerning the roles and tasks of the board and the CEO all through the succession-planning course of. Within the early phases, the board prompts and helps the CEO to make sure a sturdy course of is established, with nearly all of actions led by the CEO and CHRO. As the corporate approaches round 18 months from the goal CEO transition timeline, the board steps in to run the method, with the CEO taking part however now not main it.

This position evolution could be uncomfortable except established effectively upfront. As one CEO confided, “I’m used to seeing ‘resolve’ subsequent to my title on a RACI chart. Now, I’m engaged, however in the end, it’s the board’s choice.”

3. Scorecard the long run as a substitute of cloning the previous.

When requested what they’re searching for within the subsequent CEO, many boards are fast to confess that they want they might “clone” the incumbent. Choice standards shortly devolve into an extended laundry checklist of generic management attributes, and potential candidates pale as compared with the one who’s presently excelling within the position.

As an alternative, boards ought to begin the succession course of with an unemotional enterprise dialog concerning the greatest adjustments the corporate faces sooner or later, what success appears like in that context by way of concrete enterprise outcomes, and the management expertise required to ship on this imaginative and prescient of success.

This types the muse of a future CEO scorecard, which is used as a lens for evaluation and improvement of candidates. The scorecard needs to be up to date recurrently, and in the end used to assist the board make choices primarily based on rational tradeoffs, fairly than counting on nostalgia and bias.

4. Solid a large internet.

To make sure probably the most various and strong candidate slate, boards have to recurrently get an goal evaluation of key leaders one to 2 ranges beneath the C-suite. Whereas nearly all of CEOs are promoted from the C-suite ranks, current analysis by Spencer Stuart exhibits that “leapfrog” CEOs, who had been uncovered and moved up from roles deeper within the group, typically outperformed the extra conventional selections. GM’s Mary Barra and Microsoft’s Satya Nadella are two examples of this phenomenon.

To uncover probably the most promising expertise, the most effective boards go far past the informal familiarity of assembly excessive potentials at dinners and curated occasions to demand in-depth, goal evaluation to totally perceive executives’ capabilities. For instance of how bias can infect the succession-planning course of, our analysis discovered that absent an goal evaluation, people with a powerful accent had been 12 instances much less prone to be chosen for the CEO position — whereas a powerful accent had no influence on CEO efficiency.

5. Make daring bets to speed up improvement.

The easiest way to arrange and check inner CEO candidates is by inserting them in difficult roles. Our analysis exhibits that 75% of executives who bought to the CEO position on an accelerated timeline took on a number of of three distinct challenges that flex their potential to make choices, adapt, and carry out in testy waters.

  • Huge mess: Examples of those tasks embody turnarounds or bushy and messy issues like merger integration or a large-scale know-how implementation. They check an government’s decisiveness and resilience beneath intense stress.
  • Huge leap: These are alternatives (roles or tasks) that problem an government at a a lot better scale than their prior roles — for instance, stepping up from main a $500 million enterprise unit to heading up a $5 billion world enterprise with a number of merchandise.
  • Go small to go huge: On this case, an government is given a task or venture that may be a microcosm of the corporate, similar to a big nation supervisor or business-unit management position that requires the particular person to step out of the CEO’s shadow and lead autonomously.

The problem with daring bets is that CEOs, CHROs, and even the candidates themselves could be uncomfortable with taking up these strikes which have a excessive payoff — and a excessive diploma of danger. That is the place a proactive board could make an enormous distinction. For instance, on the urging of the board, a Fortune 500 CEO we advise reluctantly agreed to place the lead succession candidate in command of the biggest acquisition within the firm’s historical past – the position that she later considered the one most difficult and helpful expertise in getting ready her for the CEO position.

6. Proactively search and supply divergent views.

In analyzing failed CEO successions, we sometimes discover that no less than a number of board members had been uneasy concerning the chosen candidate however had been reluctant to contradict the prevailing consensus or didn’t really feel heard. That is very true with transitions from longstanding, revered CEOs who’ve a disproportionate affect on the succession course of.

To counteract this harmful sample, the most effective boards actively encourage range of views and hunt down divergent views from board members and outdoors specialists. For instance, a brand new board member lately requested a full background screening for the ultimate two inner candidates for the CEO seat. Regardless of preliminary resistance from the sitting CEO, CHRO, and lead director, who had identified each candidates for many years, they went forward with the evaluate, which uncovered essential knowledge that impacted the ultimate board vote.

The lead impartial director has an particularly essential position in institutionalizing open debate. The most effective lead administrators assume there are divergent views and proactively search them out, fairly than shortly settling for a snug consensus.

7. Let the subsequent one in.

When overseeing the transition from a longstanding, profitable CEO to an unproven newcomer, boards typically search to protect continuity, assuming that extra of the identical individuals will result in extra of the identical nice efficiency. This typically interprets into holding on to the outgoing CEO in some capability or tasking the incoming CEO with retaining the earlier administration crew, together with runner up(s) for the CEO job.

Sadly, this typically backfires, as the brand new CEO is handcuffed from totally making the position theirs and constructing a crew that enhances their very own expertise, fairly than these of their predecessor. In well-executed successions, the incoming CEO is empowered to personal the position from day one with assist and partnership of the board.

. . .

Boards that apply these practices proactively and constantly are in the most effective place to excel on their most essential job — deciding on the suitable CEO. Many firms slowed down or deprioritized succession efforts throughout Covid, and consequently have to be particularly considerate and proactive to make up misplaced floor in growing a powerful succession pipeline. The time to behave is now.

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