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CEO Succession: Value Destruction of the Unprepared

Posted by Peter Thies on Nov 2, 2015 8:31:27 AM
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CEO Succession: Value Destruction of the Unprepared

CEO turnover is on the rise and continues to be front page news. Turnover is at the highest level since the recession, according to executive search firm Spencer Stuart. CEO tenure has dropped to 4.8 years, according to a recent Harvard Business School study. Meanwhile, a post Baby Boom generation of market savvy, technology friendly executives in their early 40s are ready for more challenging roles.

Given the increased CEO turnover and bumper crop of successors, Boards can capitalize.

If they’re ready.

Yet many remain unprepared for the crucial fiduciary responsibility of ensuring effective CEO succession. For every positive story of a seamless transition, 1-2 companies grapple with succession surprises, from health or scandal related turnover to rising investor impatience over lackluster corporate performance, easily catalyzed by activist shareholders.

The Cost of Complacency is Rising

Dramatic stories of bumpy or failed CEO transitions make for riveting front-page copy, but they are not usually good for business. When unprepared, Boards are more likely to hire a CEO from the outside. While outside CEO hires may be the best or only answer in situations such as crises or dramatic turnarounds, the ROI of the external hire isn’t favorable to shareholders over the long term. 

Whether it involves hiring an external CEO or not, lack of preparation for effective CEO transition continues to destroy value across a wide range of companies. A Board’s passivity can result in one of two all-too-familiar scenarios. Either they are caught napping by surprise failures, or activist investors step in to force changes.

Our view is that successful CEO Succession is neither glamorous nor rocket science. It just takes time and hard work. Rigorous preparation is not sexy, but it works.

A Better Way: Preparation is the Key to Value-Creating CEO Succession

Preparation involves proactive movement of executives into key roles, clear criteria in assessments, high intensity coaching/skill building of potential successors and real-time knowledge of the external market. 

Build to last. Create a CEO profile built on what the company needs in the future so you can assess and develop internals now against that spec. Don’t just ask, “Who’s ready to succeed the incumbent?” Also ask “What does the company need in future CEOs, and how do our first, second and third generation internal candidates compare to that profile?” 

Put your executive development programs on steroids. Don’t just ask, “How long until they are ready?” Also ask, “What specific experiences are internal candidates being given to prepare them for a job they’ve never done before?” At the level of C-Suite candidates, most executives require intensive development experiences to break through old habits and transform into more enterprise level leaders. Plain vanilla assessments and canned programs won’t cut it. 

Know the external market. Don’t just ask, “Which Executive Search firm would we use if we went outside?” Also ask, “Which executives in other companies/industries fit best with our future CEO profile, and how likely would they be to come on board?” Convergence in many industries means that the Board should be tracking executives in other industries, not just their own. 

Know your own. First hand knowledge of the “heirs apparent” beats talent reports every time. Boards shouldn’t just ask for names of internal candidates; they should get to know them formally and informally, beyond presentations. 

 

Download white paper on CEO Succession   

 

Topics: Advising CEOs