Ensuring that a company has the right CEO is one of the most important responsibilities a public board of directors faces. It requires an ongoing process of succession planning, not a once-every-few-years decision. Boards need to prepare for the unexpected resignation or termination of a CEO, and institute this planning as an ongoing aspect of their jobs as directors. Having a plan in place can greatly impact the confidence that internal and external constituencies have in the overall governance of the company (affecting shareholder value), while managing this effectively can reduce overall company and business-continuity risk.
Boards can significantly improve their effectiveness in CEO succession by forming a succession planning committee and optimizing its performance. The key elements to this operation include the formation of the committee, its composition, its process, and its interaction with the board. It is the execution of these details–and not ad hoc approaches–that make the real difference in a successful succession and selection process.
Choosing the right directors for the job
Many succession committees are composed of board members who volunteer and have the most time available. While enthusiasm and time are certainly required, these are truly the bare minimum; membership on the succession committee based solely on those criteria can lead to a sub-optimal outcome.
Then there is the issue of skill sets–who has been through or even led companies through CEO successions? Many boards take great care to make sure that the people who serve on the audit and risk committees are deeply qualified. Yet when staffing what is arguably the board’s most important committee, they often appoint people primarily on the basis of availability, rather than on skills, experiences, and qualifications.
Increased scrutiny from shareholders and the Securities and Exchange Commission has made this a dangerous path to pursue. While the days of board directors taking a hands-off, more collegial than rigorous interest in company matters have been largely abandoned, populating the succession committee with those who have the most time on their hands has been an all too common practice. But by taking firm ownership of the committee formation process, the lead director or chairman can avoid this mistake.
Ideally, this director would first see to it that the committee is led by someone who has been through an extensive succession planning process and has a highly sophisticated understanding of it. Such experience could come from having served in a similar capacity on a board, or from having led a personal succession planning as a CEO, or having led a complex human resources organization with effective succession planning practices. Being led by someone who has been deeply involved in succession planning increases the chances of success right from the beginning. It also enhances the overall planning process– such a leader understands it and is better able to guide the board through a task that is fraught with risk.
After the committee chair is selected, the board’s lead director or chairman should nominate the most capable and qualified members of the board to fill out the committee. Those members should know how the process works and how to effectively interview and assess CEO-level executives.
Grasping the nuances
Committee members need to understand the difference between recruiting and hiring. Prospective CEOs from outside the company are typically well positioned and aren’t actively looking for another position. Assessing, courting, and engaging them requires a nuanced approach. Committee members must be able to articulate in a compelling manner the company’s current situation and the opportunities for the company’s future. The committee members’ understanding of the situation and passion for the company can enhance the process for prospective candidates, who are, after all, interviewing with their future bosses.
Candidates can also be impressed or turned off, depending on how they are treated. The logistics of meeting with them and accommodating their schedules can either send the signal that you value their time and care about them–or you do not. Committee members should therefore make themselves available for interviews and, if necessary, travel to meet candidates. Bringing the very best candidates to the table requires that each committee member invest in the process and powerfully engage with the candidates. And they shouldn’t forget about a candidate’s spouse. It is critical at the appropriate time to engage the spouse in the process to ensure that he or she is on board and comfortable, and to treat the spouse with the same high level of consideration and respect that is accorded the candidate.
Over the long term, it is wise for the board to take a regular inventory to make sure that it has among its members the recruiting and succession experience it will need. If not, it should actively seek members who can complement the board with these strengths.
The “interim” CEO
Even assuming an ongoing succession process that is part of the cadence of the board, an emergency succession may become necessary. An incumbent CEO may leave unexpectedly through an illness or accident, or be recruited to another company, or even lose the confidence of the board. In these situations, a board member–typically the chair, lead director or someone else who is qualified–will step in as the interim CEO. This buys time for the board to run a thorough succession and selection process, as when Ed Whitacre stepped into the CEO role at General Motors from his position as chairman of the board of directors.
Usually, it is clear that the interim person, whether from the board or the company, will not be a candidate for the permanent role. But, on occasional, a board will naively put an internal candidate into the interim role and then add that person to the list of candidates for the next CEO. If the candidate doesn’t win the position, the results can be disastrous: the candidate will likely leave the organization and the company will lose a valued colleague. A skilled chair of the succession committee, however, could have managed the risk. By selecting a true “interim” candidate, the chair can allow for a proper succession and selection process and allow the board to select the best person, whether from inside or outside, to run the company.