August 05, 2019

Navigating A Succession Boom: Turnover without Turmoil

Kelly Haggerty

Kelly Haggerty
Founder/Neacro Transaction Advisors, LLC

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The Succession Boom

There is little doubt that we are experiencing a leadership succession boom.  According to DDJ Meyer, 60% of large-cap CEOs plan to retire in the next 6 years.  Executive search firms report averaging 10-12 new CEO requisitions each month, creating intense competition for high-quality candidates.  And the impact of this boom reaches beyond the CEO office.  In fact, history shows that if an exiting CEO is over 60 years of age, between one-third and one-half of the company’s remaining senior leadership typically leaves within 3 years. 

High Stakes

A 2015 Forbes study showed that forced CEO turnover results in a loss of $112 billion of market value over two years.  To put that in perspective, this is more than the total market cap of General Electric, Goldman Sachs, or United Parcel Service!  What’s more, other studies have shown a significant correlation between companies in the lowest quartile of performance and poorly executed CEO transitions.  This suggests that even if the transition is not forced, the loss of value from executing poorly is still significant. 

Here I will suggest a 3-phase approach to a well-managed CEO succession.  This approach utilizes leading practices to not only get to the right CEO, but also to update governance, incentive structures, and performance measures to put the company on the path to post-succession success.

Step 1-Alignment Phase

This first step is critical and should be undertaken with great consideration and egos cast aside.  The exiting CEO and the board should carefully consider:

  • Anticipated future value drivers, customer demographic trends, and strategy basics. This is an ideal time to dust off the old B-school textbooks and re-examine SWOT, PESTLE, and Porter’s 5 Forces.
  • Company culture attributes, including which should be preserved and which may need to evolve.

Armed with this information, leaders can then document and prioritize the skills, traits, and strengths that would be present in an ideal CEO candidate.  Adjusting for the requirements of other key stakeholders, such as activist investors, regulators, etc. will solidify and further refine this ideal candidate profile.

Once the ideal CEO profile is complete, the board will ideally look at their own structure, asking two key questions. 

  • What pending exits/retirements will create vacancies during the transition and onboarding window?
  • Given what was learned from the CEO analysis, what new skills will be needed on the board to provide adequate governance and oversight?

The answers to these two questions will indicate whether the board should be undergoing a transition as well, in order to ensure proper governance and continuity of leadership throughout.

Finally, before leaving the Alignment phase, it is useful for the CEO and board to agree on 5-10 guiding principles.  These will be used to drive decisions during the remainder of the succession process as the CEO and Board will be on parallel paths during most of the remaining activities.

Step 2-Assessment Phase

The CEO has two major tasks in the Assessment phase.  First, internal candidates should be evaluated against the ideal CEO profile for gaps.  For each candidate the CEO should evaluate whether the gap:

  • Can be addressed via development, in which case a development plan should be created.
  • Can be addressed via augmentation, i.e. the skills of other management resources from within the organization or a strategic acquisition that provides the needed attributes.
  • The gap can be accepted, which of course applies only to low-priority attributes.
  • The gap is insurmountable in the time allowed, which will preclude the candidate from further consideration for this transition.

The second task of the CEO is to evaluate performance incentives and compensation structure.  It is imperative to a productive transition that these are aligned with the development objectives of internal candidates, and that any resources which are key to an augmentation strategy are also incentivized properly. 

Concurrently, all potential candidates should be developing leadership talent in their organizations at least 3 levels below themselves, to ensure adequate management capability remains should they be selected as the next CEO.  Incentives and compensation for these resources should also be considered and adjusted where needed.  Note that in an ideal world talent development and incentive alignment is not a special event tied to CEO succession, but rather part of the ordinary course of business!  Nonetheless, it is neglected often enough to make its inclusion here appropriate.

The board’s role in the Assessment phase is to define their approach to any director gaps identified during Definition & Alignment.  Interestingly, though boards should also have routine development and succession programs, fewer than 30% report having such programs in place.  An ideal board is composed of one-third each senior directors, experienced directors, and new directors.  To ensure adequate governance throughout the CEO transition, the board may wish to consider several options:

  • Adding additional seats temporarily, to be phased out as retirements occur.
  • Using paid board advisors for some skills, in lieu of full directors.
  • Creating special transition committees for not only the CEO succession but also for any concurrent board transition and adding readouts from both these committees to all upcoming agendas. Such committees can have retaining additional advisors as part of their mandate as needed.

Step 3-Accomplishment Phase

The Accomplishment phase has two major components.  First, management and the board must operationalize the activities defined in the Assessment phase.  This will include:

  • Implementation of new incentive and compensation structures
  • The rollout of development plans, preferably with defined measures/metrics and a quarterly review process
  • Supporting internal candidates in activities designed to promote board visibility, such as requesting and funding special projects for candidate delivery
  • Candidate selection and evaluation

The second component of the Accomplishment phase involves executive oversight targeted at mitigating the negative behaviors that can accompany succession programs.  This critical component should include:

  • The rollout of a comprehensive change management program, preferably bringing in change management consultants with experience in CEO succession. These outsiders can be of great value, helping management avoid common pitfalls and providing an external perspective.
  • The rollout of a communications strategy and plan. This should occur alongside the change management program but will require enough effort to be called out as a separate endeavor. Paramount in the communications strategy will be providing internal candidates with a good understanding of the ideal CEO profile developed during the Alignment phase and identifying how the candidate’s development plan ties to characteristics of this profile.  While candidates will understand the zero-sum nature of CEO succession, they should never view the selection as a “horse race”.  Rather, it should be much more like a pentathlon, with each candidate honing their own strengths and capabilities.
  • Inclusion of soft skills in the development objectives, performance criteria, and compensation measures across the organization. As these structures are being refined during this phase, the inclusion of soft skills measures can be a great help in driving the right behaviors. 
  • Reinforcement of selection criteria directly from the board. The board should communicate from the outset that they will perceive any maladaptive behaviors to be indicative of a lack of readiness and suitability.  Such behaviors would include:
    • o Lower productivity and/or lower employee satisfaction attributable to reduced collaboration and/or increased internal competition
    • o Refusal to support the development of other candidates, including withholding requested assistance on other candidate’s projects or any form of sabotage
    • o Any behavior that indicates prioritization of personal advancement over the creation of shareholder value and/or over-attention to the external business environment. Candidates should continue to look out the window, not be overly fixated on the mirror.

Conclusion

The succession boom is a challenge, but also an opportunity.  Following the process outlined here helps ensure leadership and governance are equipped to meet emerging market and demographic challenges and that their employees are incentivized and ready to adapt.  Given the breadth of the succession boom, this could result in a significant advantage over competitors that do not manage their successions using these leading practices.

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