Due to the strategic challenges posed by the economic downturn, an increasing number of companies have been facing sudden, unforeseen CEO departures or dismissals. Estimates for 2008 alone indicate that, in the United States, the chief executive officers of more than 1,400 public companies left their positions by the end of the year, a record number for the last decade. And the trend has continued into 2009.

“Of course, some sectors were affected more than others – the financial services industry, for example, given the heightened public scrutiny of the last year and the many banks around the country that became the target of government intervention,” says Matteo Tonello, associate director, corporate governance at The Conference Board and co-author of the report with John C. Wilcox and June Eichbaum. “But this surge in CEO turnover remains a generalized phenomenon and all corporate boards should take notice.”

“When it comes to leadership transition, underperformance can be very expensive,” says June Eichbaum, who advises the board of The Cooke Center for Learning and Development, where she was a founding director. Research shows that the faulty integration of a senior executive can cost the company 10 to 20 times the executive’s salary in opportunity costs and has lasting consequences on the stock price. When taken collectively, succession failures also have repercussions on the U.S. economy, generating productivity losses and social costs valued at nearly $14 billion per year.

“Despite these astonishing numbers, several governance surveys find that as many as half of the U.S. public companies do not rely on a detailed succession plan for C-suite executives,” adds Eichbaum.

Among its recommendations, the report urges directors to make CEO succession planning integral to long-term business strategy and ensure that the compensation committee is fully involved.

Says John Wilcox, chairman of Sodali Ltd. and former head of corporate governance at TIAA-CREF: “The financial crisis showed, once again, that executives do what they are paid to do. The compensation committee charter should reinforce the notion that compensation is central to talent development and should explicitly call for collaboration on issues of succession planning with the full board.”

“Some companies have reinforced this broader strategic role of their compensation committee by renaming it – General Electric, for example, has instituted a management development and compensation committee to assist the board in developing and evaluating potential candidates for executive positions,” concludes Wilcox.

“In these difficult times, The Conference Board is renewing its commitment to provide guidance to the boards of directors of its member companies,” says Tonello, who also directed the entire research series. This report concludes a series encompassing crucial areas of board responsibilities, such as: assessing corporate strategy; overseeing executive compensation and risk policies; CEO succession planning; avoiding shareholder activism; preparing for unsolicited takeover offers; and overseeing internal investigations. The recommendations included in the separate reports are being collected in a single book entitled The Role of the Board in Turbulent Times: Leading the Public Company to Full Recovery, to be released by The Conference Board in the fall.

For more information or to receive a copy of the report, contact Matteo Tonello at 212-339-0335 or matteo.tonello@conference-board.org

Unfortunately, however, the quality of senior-level executive assessment and the board’s involvement in it often leave a lot to be desired. When many of the present-day members of boards were rising in their careers they weren’t exposed to good structures and processes for senior-level executive assessment. So while directors may feel they are on familiar ground when, for example, they’re engaged with financials, they may be unfamiliar with best practices in senior-level assessment. They may even feel a bit uncomfortable with what can seem an amorphous subject. They needn’t. These five principles can help them achieve the clarity that such critical discussions deserve:

Based on 25,000 assessments over a five-year period, we have identified six core leadership competencies: results orientation, strategic orientation, collaboration, team leadership, change leadership and developing organizational capability, which includes developing individuals as well as driving talent management overall.

1. Adopt a behavioral, as opposed to a psychological, approach.Senior-level assessment can have several goals: identifying rising stars, matching people to specific positions, uncovering development opportunities, or planning CEO succession. Psychological assessment purports to tell you who the executive is. We see many clients wanting to use personality tests or employ psychologists to probe the psyches of potential CEOs or senior executives. The approach seeks to gauge such things as problem-solving style, maturity, emotional intelligence, and interpersonal style. By contrast, behavioral assessment seeks to predict what the executive will actually do. Will the executive take swift and decisive action in times of crisis? Will the executive get people on board with dramatic change? Will the executive develop capability within the organization? Although the behavioral approach might include a psychological element, it has the great advantage over purely psychological approaches of being applicable to the business and its results.

2. Use leadership competencies but don’t overcomplicate them.
Assessment rightly focuses on leadership competencies – the abilities that are indispensable for leading people and organizations no matter the industry. These are important because they enable one to go beyond superficial assessments of whether someone is a “strong leader.” However many companies unnecessarily overcomplicate the issue by developing lists of as many as 20 or more competencies they expect in a leader. In fact, far fewer competencies cover the issues of top leadership.

Based on 25,000 assessments over a five-year period, we have identified six core leadership competencies: results orientation, strategic orientation, collaboration, team leadership, change leadership and developing organizational capability, which includes developing individuals as well as driving talent management overall.

Those six things are what business leaders do, unlike people in functional roles where competencies might be more discipline-specific. Beyond these six leadership competencies, lists can become repetitious, unnecessarily detailed, and unfocused. They’re also unwieldy – board members have a hard time keeping them all in their heads and arriving at a clear picture of an individual assessment.

3. Develop a clear sense of what you’re looking for.
Job specifications should be developed in terms of the strategy of the organization going forward. In a time of retrenchment or recession, for example, the role may call for someone with superior operations skills or the ability to do more with less. A growth strategy in global markets may call for someone with international experience and a demonstrated ability to work across cultures. A language of assessment that is behavioral enables you to measure an executive against the results envisioned by the strategy.

4. Develop a common language.
Clear job specifications, a manageable list of leadership competencies, and assessments couched in behavioral terms provide board members with a common language through which they can engage the issues. Tied to action and business results, this language enables them to talk in concrete terms rather than engage in psychological speculation or vague, unfocused discussions. Further, the more they use this language, the more adept they become, continually improving the quality of their participation in senior-level executive assessment.

5. Leverage third-party assessments.
In putting together rosters, top sports teams don’t evaluate only their own players. Neither should companies. They should benchmark internal talent against external talent, continually assessing them against company-specific challenges and behavioral leadership competencies.

Companies that conduct assessment in a vacuum determine only who is the best they have, not the best that they can get, or what “best” looks like from a global perspective. Third-party partners who track talent and are experienced in senior-level executive assessment can bring that wider perspective. Further, third parties that are free of the biases that can inhibit discussion offer a way of surfacing issues that might otherwise go unspoken. And with a behavioral approach, third parties can bring real business discipline to the conversation.

A number of everyday maxims affirm our sense that what people do is more important than who we, or they, think they are: “Actions speak louder than words.” “Walk the talk.” “Lead by example.” A behavioral approach to assessment reflects not only those common-sense sayings, but also the growing empirical evidence that how a person does something predicts success better than his or her qualifications or psychological traits.

In skilled hands, competency-based interviewing probes for competency-related situations and behaviors that are relevant to the job and the company. Instead of simply retracing a person’s achievements, the interviewer focuses on the “how” questions that open windows into the individual’s behavioral characteristics, enabling clear judgment of the candidate’s ability to perform as a leader. Board members who insist on this approach will not only help improve the organization’s capability in assessment but also the board’s ability to oversee it.

Stephen P. Kelner, Jr. and Ashley R. Stephenson are global leaders in Leadership Strategy Services at Egon Zehnder International. They can be contacted at steve.kelner@ezi.net and ashley.stephenson@ezi.net.

After striking out on Madoff and Stanford, the SEC’s unprecedented probe into whether Apple’s board of directors failed to disclose material information about Jobs’ health may be considered a form of playing catch up. But the commission’s priorities are wrong, and its inquiry is misguided. Considering that in the Madoff case the SEC failed to close in even after receiving tips for over 10 years, it seems to me that its resources should be spent on ensuring that there are no other Madoffs at large, not hunting for a paper trail about  Jobs’ physical condition.

Regulation governing CEO health disclosure is unnecessary and impractical—and wasting our resources in this futile attempt won’t do anything to prevent another Madoff-like scandal. Even former SEC commissioner Joseph Grundfest said recently that Apple crossed no line if it failed to provide thorough disclosures about Jobs’ health, unless company insiders traded on the knowledge before it was disclosed publicly. “One of the hallmarks of a complex medical condition is a diagnosis can change over time,” Grundfest said. “If the board has told the truth, then they’ve handled it best as they could.”

If the SEC brings a case against Apple, it would set an alarming precedent and open the floodgates to frivolous lawsuits from shareholders curious about a CEO’s health and personal life. The possibilities for abuse are endless. What if a CEO has a condition which is treatable and not immediately life threatening? Worse, what if the condition is generally not life threatening but the CEO dies—would this constitute a failure of disclosure? Will we be appointing physicians to boards of directors next?

The Board’s Job
The answer to this issue is simple. The responsibility of determining whether a CEO is able to continue in his or her role and what, if any, health issues should be disclosed rests squarely on a company’s board of directors. Boards have a fiduciary responsibility; they are elected by shareholders to oversee management’s performance, and are directly responsible only to them. They have the ability and the authority to balance the competing needs of public disclosure and private matters. The board’s principal charge is to ensure that the company’s leadership is fully capable of running the enterprise and that includes physically, emotionally, and intellectually. That is the bright line boards use when determining what kind of disclosures and actions they are required to take.

With regard to health matters, there are too many gray and sensitive areas to make regulatory scrutiny appropriate. We know this from the manner in which our country’s Presidents’ health issues have been treated throughout history. Health issues often are not cut and dry. Tests and second opinions take time. People may recover complete health even after a debilitating illness. In all likelihood, Jobs was unsure of his health issues and any determination of his condition was evolving and neither clear nor final. His recovery from Pancreatic cancer is an example of an illness that generally would incapacitate its victim, yet Apple’s great successes have been formed during and after the time Job’s suffered from this illness. Shouldn’t a CEO and his or her board be allowed to deal with this time of uncertainty —taking the right amount of time and the right professional advice to understand the implications fully? CEOs may shoulder greater responsibilities and so their health is a fair subject for inquiry, but they deserve the same respect for due process as the rest of us.

“If the SEC brings a case against Apple, it would set an alarming precedent and open the floodgates to frivolous lawsuits from shareholders curious about a CEO’s health and personal life.”

Most important, why should CEOs disclose personal health details when they do not interfere with their performance? Even in the face of personal adversity, Steve Jobs has been a stellar CEO. He has fulfilled his duty to deliver shareholder value. Apple’s board has done a pretty good job too. It did not panic when Jobs had surgery for cancer five years ago and it allowed him to come back and drive extraordinary value for shareholders. Carol Bartz, who has just been tapped to be CEO of Yahoo!, was diagnosed with breast cancer the same week she became CEO of Autodesk. She worked through her treatment and went on to grow Autodesk’s revenue by almost five times and increased the share price nearly tenfold.

Regulatory Distractions
Just like with Sarbanes Oxley, more government intervention in board room affairs does not necessarily make things better and I think arguably will make things worse. Unnecessary interference by the government on this issue simply distracts CEOs and boards from the real imperatives—getting the company through tough economic times, getting the strategy right, and executing.

Although not corporate CEOs, Abraham Lincoln’s depressive episodes, John F. Kennedy’s battle with back pain, John McCain’s fight with melanoma and Lance Armstrong’s battle with cancer should serve notice to the SEC and for that matter to shareholders that health issues and company performance are not necessarily correlated.

Clearly, we shouldn’t turn a blind eye to the issue of CEO health. But private health matters should not become public spectacle. The board of directors, with its clear roles and responsibilities, can and should make the call when a CEO’s health becomes a material issue.

Dennis Carey is a Senior Client Partner in the CEO & Board Services division at executive search firm Korn/Ferry and author of “CEO Succession.” Carey specializes in CEO succession and the recruitment of CEOs and corporate directors.

Editor’s Note: Opinions expressed in Viewpoint are those of the author only and do not represent the views of Directorship or the National Association of Corporate Directors.

The first challenge, according to Miles, is that boards need to move beyond the initial feeling that there are no great candidates within a company. While there may be well-suited external candidates, looking within first may be the best solution. “Get over the paradox that no one inside appears to be perfectly qualified for the position at first glance,” he advised. “Succession planning requires a board to consider the future needs of the company.” And that means keeping a close eye on potential inside candidates.

During difficult times, there is a tendency to want to put succession on the back burner.

Lines of Communication
When narrowing down the list of contenders, keep in mind that communication with internal candidates should be the first priority. Dana Mead, chairman of MIT Corp., the governing body of the Massachusetts Institute of Technology, and a director at Pfizer, said that when internal candidates realize that a board is also considering external options, it can lead to backlash or an exodus of top talent. Mead stressed that internal candidates might become restless, questioning why they aren’t being promoted or why the company is considering “an outsider” for the post. “It may be because the board has a dysfunctional succession plan,” he explained.

During difficult times, there is a tendency to want to put succession on the back burner. “The idea is, ‘we’re trying to survive—we aren’t thinking of succession,’ ” said Thomas L. Doorley, chairman and CEO of Sage Partners and lead director at Natrol. Doorley also pointed out that sometimes the CEO believes he or she is the only person who has the ability to guide the company through the rough patch. A challenging economy is exactly when CEO succession planning matters the most, advised Dysart, since volatile market conditions might force a change in the top post, either voluntarily or through termination. A CEO might be doing a good job with a flailing company in a turbulent economy, but if stocks are down 20 percent, investors are likely to cry foul and may call for new leadership.

Boards are increasingly devising formal processes for identifying capable individuals in the organization who are qualified for top posts or should be groomed for future consideration. “What are your tools for making that determination about who should be on the list?” asked Doorley.

“It’s important to know the top executives in the organization who should be managed, to make sure they are acquiring the right skills,” noted Miles. As a board looks deeper into the organization for potential candidates, directors need information about each individual to determine who is high on the list and what the next tier looks like. Since the board rarely sees employees below the C-suite, they are often unable to know each potential candidate well. When sizing up candidates, particularly in a larger company, Miles urges boards to have brief synopses written on each person since it would be difficult to remember details about 100 or more individuals who might be discussed.

When to Say Goodbye
“Changing the guard—terminating a CEO—is there a better way to do it than what we often see now?” asked Jeffrey M. Cunningham, chairman and CEO of NewsMarkets. The panel agreed that there is no easy way to remove a CEO once the board decides termination is the answer. When changing CEOs, boards must consider current business needs and future scenarios. While the decision should be carefully weighed, it should not be delayed and should follow a set process.

Engaging the whole board by tapping into members’ expertise is key. “While it’s unlikely that every member on the board will know the ins and outs of a company, a good board consists of a medley of experts: those who can lay out industry-specific information and others who have experience on how to run a business,” said Miles. “The compilation of talents is what truly makes for a well-rounded, well-informed board.”

MIT’s Mead agreed, emphasizing that succession should never be the responsibility of just one committee— the entire board needs to contribute. “Make it a regularly scheduled item, so you know every six months what is going on,” said Mead. When the compensation committee meets, either after or during the same meeting, Mead advises that succession candidates under consideration should go in and meet with the board.

Miles cautioned boards to be realistic about evaluating candidates, suggesting that sometimes it can be counterproductive for boards to be too focused on finding faults or shortcoming in the current or prospective CEO. “Pick one or two things to improve about someone—not 20 things,” he advised.

Role Migration
While the road to the top post must be mapped out carefully, panelists agreed that the path to other executive positions must also be re-examined. Doorley said the role of the COO is changing and is now often focused solely on operations, so many companies are uncoupling that role from the president’s title.

But the COO role differs in each company and industry, which makes it difficult to create a “one size fits all” scenario for succession planning. “There’s no ‘COO magic [formula]’ because they are unique to their company,” said Miles, who likened the roles of CEO and COO to a Venn diagram. “The COO is a customized role—if the CEO and COO roles overlap too much, it won’t work,” he concluded. He also noted that many CEOs have been reluctant to have a powerful COO, although that sentiment is changing.

Panelists pointed out that the role of the CFO depends on the industry. “In the biotech industry, the CFO is the second spokesperson after the CEO,” says James Frates, senior vice president, CFO, and treasurer of Alkermes. In some industries, the CFO is taking on responsibilities such as working more proactively when closing deals and communicating with clients and other partners. Board members should be familiar with a company’s specific requirements, so qualified internal candidates are on deck for consideration when necessary.

Engaging Your Board
Due to increased scrutiny from both shareholders and the public, many CEOs are now under intense pressure to demonstrate and sustain performance. Typically, however, they’re not focused on finding their own replacement. An effective board must take the reins and be proactive by putting a disciplined succession-planning process into place that emphasizes the recognition and cultivation of internal talent.

As tensions mount and the economy continues to flounder, many CEOs find themselves in situations they never anticipated. Unable to predict the fallout that has occurred, leaders are now faced with salvaging the remains of their businesses and preparing their strategies going forward.

Peter Warshaw, PhD, vice president of RHR International Company and management psychologist, offers steps both leaders in the c-suite and boardroom can take to cope with their company’s current situation and strategize future plans for the company.

“CEOs think they’ve gotten their arms around the problem, but then the bottom falls out again,” says Warshaw. Warshaw believes that many leaders are focusing on the short-term and are working toward getting stabilized. Top priorities such as succession planning, while always important, take a back seat as companies are seeking to plan short-term strategy as long-term planning can easily fall victim to the faltering eocnomy.

“At the same time, when it’s not working, boards need to make changes,” adds Warshaw.

Warshaw says there are a few fundamental changes that CEOs need to embrace in order to utilize their potential.

• CEOs should lead, not manage;

• Really think through your message;

• Succession planning is out the window—more scenario planning;

• Get help to encourage senior team effectiveness—collective thinking is a must;

• Be both analytical and logical—find the right balance;

• Frequently communicate with employees;

• Don’t isolate yourself: engage with others on your management team/board, reflect with them.

Leadership Goes Global

Warshaw notes that Europe is suffering from the economic fallout just as much as North America. While some aspects of the relationship between the CEO and managing director in Europe are different, a CEO is always seeking trusted advisors to provide counsel.

However, in Asia, the impact of the economic turn has yet to be widely felt. In China, the relationship between the CEO and his/her advisors differs greatly from that of the United States and Europe. “Many companies are family-owned, not public,” says Warshaw. “This creates a very different dynamic.” People who lend advice are either family members or close friends sitting on the board or serving as an executive. We see a similar setup in South American companies and boardrooms.

Above all, Warshaw encourages leaders to listen. “There are some CEOs that are ready-aim-fire… that’s scary. There are also those who are afraid to make a decision under stress,” adds Warshaw. He believes that someone who has the experience and expertise to lead in a positive and constructive way will not fall into extremes. A balance of assertiveness and caution is what makes a leader successful. One who carefully listens and absorbs the advice from his board and fellow executives will be able to endure today’s economic hardships while formulating risk strategies going forward.

“No one has the answers here,” says Warshaw. But he says that those who are doing all the right things will forage through based on their good principles. “And a little luck,” adds Warshaw.

The Laborers’ International Union of North America (LIUNA) shareholder group’s proposal on succession planning at Whole Foods was blocked by the SEC. The SEC’s decision also encourages other corporations to ignore similar efforts.

The proposal by the Central Laborers’ Pension Fund would have required Whole Foods to adopt and disclose a written and detailed succession planning policy, according to a statement.

In its no action statement, the SEC stated that succession planning is routine company business and does not need to be disclosed. As a result, Whole Foods will take no action placing the shareholder proposal on proxy statements.

“By granting no-action on succession proposals, the SEC is standing on the sidelines and failing to fulfill its primary duty of protecting shareholders,” LIUNA General President Terence M. O’Sullivan said in reaction to the SEC’s decision. “America’s economic crisis, caused in part by corporate irresponsibility, calls for more regulation and oversight, not inaction.”

The SEC issued similar no action statements when LIUNA shareholder filed proposals in 2007 which would have required financial services corporations to examine their relationships with credit rating agencies. The idea was to insure that any sub-prime mortgage lending risk was disclosed.

• There are a number of circumstances under which directors must decide how to respond when the situation indicates that their organization needs a new CEO. This can happen because:
• The CEO decides to retire or not renew at the conclusion of his or her contract.

• He or she is suddenly and unexpectedly unable to continue in the role due to sickness, death, or other unexpected circumstances.

• The CEO accepts another position.

• The board determines that the CEO does not have the right mix of skills, abilities, personality, and values to cope with current challenges.

Regardless of the reason, boards need to be prepared for the possibility that they no longer have the right leader.

Many directors are, or have been, CEOs at other companies. Many of them reached their positions from outside the company with the aid of an executive recruiter, so it is quite understandable that some may harbor thoughts along the following lines: “Since this approach has worked for me in the past, it can certainly work again here if something comes up that requires us to remove the current CEO.”

Depending on the situation, this line of thinking may actually be correct—an outside candidate who fits the company culture may be just what is needed to address the needs at hand, especially if the company has been suffering from stagnant thinking. Today, 37 percent of Fortune 1000 companies are run by executives recruited from the outside. Going outside, however, will not necessarily produce positive results. According to the available data, there is no statistical correlation between achieving success as a CEO at one company and doing so again at a new one. In fact, according to a 2005 Booz-Allen-Hamilton survey, CEOs who had successfully headed up publicly traded companies previously and were subsequently recruited to new public companies actually delivered slightly worse returns to investors in eight of the nine years studied (1997–2005). That same study also showed that while outside CEOs excel in the short term, insiders performed better over the long term.

The CEO turnover rate has escalated rapidly in the last 10 years. A decade ago, the rate at which senior executives were terminated was a mere 4 percent per year. In 2007, it was 14 percent—3.5 times higher than the prior decade’s average. But while the rate of CEO departures has increased, the way in which new CEOs are selected has not changed appreciably. Perhaps if boards were able to do a better job of selecting the right CEO for a particular situation in the first place, the problems of replacing the CEO later would be reduced.

The traditional selection process that has been used by most companies lacks steps to gather and analyze substantive, empirical data about the true needs of the company and about the various cultures in which the new CEO will be enmeshed. As a result, directors have achieved the dubious distinction of knowing when to terminate a failing CEO, but have had measurably less success in finding the right replacement. As executive advisor Ram Charan puts it, “The problem isn’t that more CEOs are being replaced. The problem is that, in many cases, CEOs are being replaced badly.”

In 2006, the National Association of Corporate Directors published a Best Practices Study pertaining to the role of the board in CEO succession planning. It identified 10 best practices recommended to directors at that time.

In addition to these 10 best practices, the NACD study also described nine basic steps that constitute the essential events in a thorough CEO successionplanning process.

Using this succession-planning process as a framework, 15 enhancements to best practices for boards embarking on the development of a CEO succession plan are detailed here.

Step 1: Set the Stage for CEO Succession

Best practice enhancement: Engage an outside planning consultant.

As you set the stage for succession planning, identify an outside planning consultant who can serve as the board’s special advisor throughout the process. The board’s consultant should be experienced at managing projects with this degree of complexity, sensitivity, and confidentiality. To ensure objectivity and clarity of counsel, it is essential that the board’s advisor have no ties to the internal candidates or to the company’s culture.

Step 2: Establish a Timeframe for the Process

Best practice enhancement: Conduct timely research and analysis of needs and cultures.

Ensure that adequate time is allotted to gather the factual data needed at critical points in the process. It is recommended that a qualitative team assessment and a quantitative cultural assessment be prepared at the earliest stages of the process for benchmarking purposes and also for use in the event the current CEO encounters health or other problems requiring immediate action on behalf of the board. In the case of the planned retirement of the CEO, the essential fact-finding research and analysis work can be conducted just prior to initiating the selection process. The research and analysis can also be conducted concurrent with the process if an unforeseen change is required.

Step 3: Develop Criteria for the Future CEO

Best practice enhancement: Define success criteria in terms of actions, not outcomes.

This is where an in-depth assessment of the needs of the company is absolutely essential. Without knowing what actions are required to achieve the desired results, it is not likely that an optimal match of abilities, personalities, and energy needed for the job will be achieved.

Step 4: Source Candidates—Internal vs. External

Best practice enhancement: Use executive recruiters for what they do best.

Clearly define the role of the executive search professional who is chosen to source external candidates and to interview internal ones. Ensure that the same research and analysis of the needs and the cultures of the organization are understood by the search executive(s) involved in the process (as well as everyone else on the selection committee).

Step 5: Understand the Talent Pool

Best practice enhancement: Conduct interview training.

Conduct behavioral-based interview (also called Behavioral Event Interview or BEI) training for everyone on the succession-planning team who will be called upon to interview candidates in the leaderselection process. This technique will produce the greatest insights into the relevance and true nature of the candidate’s experience.

Step 6: Assess the Candidates

Best practice enhancement: Use BEIs to get to know candidates’ abilities, personalities, style, energy, and character.

Use appropriate assessment tools to gain better insight into each candidate’s personality and values. Use a character interview conducted by the individual to whom the new CEO will report (i.e., the chairman or lead director). The alignment of the selected leader’s values with those of the organization is essential to building organizational trust, loyalty, and followership.

Step 7: Develop the Candidates

Best practice enhancement: Use assessment tools to identify development gaps.

Use the information gathered from the candidate assessment process and the company’s research of its needs and cultures to identify specific development needs of each internal candidate. Review their deficiencies with the candidates and formulate plans to provide experiences to close the development gap.

Best practice enhancement: Measure progress on a regular basis.

Ensure that a “scorecard” identifying the individual’s specific development needs is completed periodically and reviewed with the head of the selection

committee and the individual every six months. This measurement of progress helps avoid surprises at the end of the process and maintains a more objective focus on very personal agendas.

Best practice enhancement: Cast a broad feedback net about the candidate.

Establish a procedure requiring each director who has contact with an internal CEO candidate— regardless of whether it’s in conjunction with an assessment interview, a social event, or a regular part of director-executive interaction—to provide feedback indicating how the director evaluated the candidate on those specific points the individual is working to improve.

Step 8: Map the Event

Best practice enhancement: Use your planning consultant as a project manager.

As the time approaches to activate the leaderselection process, utilize the outside succession-planning consultant to drive the process, taking the coordination of schedules for all interviews out of the company’s offices for greater security and anonymity of outside candidates.

Best practice enhancement: Provide a “clearinghouse” of information for candidates.

Give each internal and external candidate the telephone number and contact information of the administrative assistant to the board’s planning consultant as the “central clearinghouse” for questions and concerns that may arise during the process.

Step 9: On-Board the New CEO

Best practice enhancement: Use data gathered to select the CEO as a basis for the transition plan.

Beginning the development of the new CEO’s “first 100 days plan” upon his or her arrival is at least 100 days too late. By using the research findings from the needs and cultural assessment work as well as the team assessment analysis, the succession-planning consultant should be ideally positioned to serve as the on-boarding coach for the selected individual. The development coach who has worked with an internal candidate may also make an excellent onboarding coach, depending upon the coach’s business background and skills.

Best practice enhancement: Solicit feedback for continuous improvement.

All candidates—internal and external—who have come in contact with the selection-planning process at any point in time should be notified of the outcome of the process and should be requested to provide anonymous and confidential feedback about their experience, treatment, and perceptions, and share suggestions for future improvements to the process through the board’s independent planning consultant.

Making a poor decision around CEO succession is incredibly costly. Our work in this area indicates that, depending upon the size of the organization, the cost of replacing a failed CEO after only 18 months on the job ranges from an average of $13 million for small-cap companies ($300 million to $1 billion) to $53 million for large-cap firms (greater than $4.5 billion). But these amounts pale in comparison to the impact that most leadership changes have on a company’s organization, stock price, and volatility.

A better approach to selecting the right leader may very well be the way to solve some of the costly leadership failures so prevalent today. And to improve the efficacy of CEO succession planning, too.

Despite the current economic downturn, most American companies do not have a set strategy to deal with a worsening economy. One-third of U.S. companies say they do not have a workforce contingency plan, according to Watson Wyatt Worldwide.

More than half of American companies say that contingency plans in place are focused around layoffs, while an additional 46 percent say their plan is “to restructure their organizations.” Few companies are thinking of creative methods to protect key talent, said Layra Sejen to FinancialWeek. Only eight percent of companies say they are planning to offer a reduced workweek.

“Maybe some companies are thinking they can’t anticipate what’s going to happen, so they will just address issues as they arise,” Sejen told FW. “But it’s hard for me to believe that any business could think that they would not be subject to the volatility of the market.”

Companies are not focusing on planning ahead which could result in paying higher premiums for talent in the future. Peter Cappelli, director of the Center for Human Resources at the University of Pennsylvania’s Wharton School of Business told FW, “If they are not planning during bad times, I doubt that they are planning in general about what their workforce needs are going to be in the future.”

He warns that because so many employers in China and India are new, they aren’t stuck in the old ways of doing things that American employers can’t seem to relinquish. European companies deal with unions so they are more proactive about workforce planning. Most often contingency plans are part of the agreements companies have with unions.

Rich says American employers are still short-sighted and need to address the need for contingency plans.

Externally hired CEOs make 75 percent more than those promoted from within during their first year on the job, according to a new study by Equilar, an executive compensation data and consulting firm. Poor performers and small companies are the most likely to hire from outside.

At large-cap companies (S&P 500), externally hired CEOs received a median total compensation package of approximately $12.1 million in 2007, or 51.1 percent more than CEOs with at least two years of tenure, who made approximately $8.0 million. Internally-promoted CEOs made less than both groups in 2007, pulling in a median pay package of approximately $6.9 million.

To examine compensation differences between chief executives hired internally vs. those hired externally, Equilar compared the pay of these two groups to the compensation of tenured CEOs in place for at least two full years. Focusing on overall pay levels,

restricted stock awards, and stock option grants, the analysis highlights the fact that CEOs hired from outside a company continue to earn more in their first year than CEOs who are promoted from within.

“This study highlights the costs of poor succession planning by Boards and senior executives,” says Alexander Cwirko-Godycki, Research Manager at Equilar. “When companies don’t have a solid pool of internal CEO candidates to choose from, they often pay extra to outside executives by offering signing bonuses, large initial equity grants and make-whole payments.”

• Smaller Companies Tend to Hire From Outside. Additionally, Small Cap companies had the largest number of external CEO hires in 2007, representing 3.8 percent of CEOs, versus 3.1 percent at Mid Cap companies and 1.9 percent at Large Cap companies.

• Less is Still More for Internally Promoted CEOs. Although internally promoted CEOs made less in median total compensation than tenured CEOs or CEOs hired externally, they usually made much more in their first year as CEO than the year before.

Conducting a thorough and thoughtful board evaluation, however, can provide great insight into the connections among company strategy, board and management roles, board composition and skills, development priorities, and action plans. Going forward, it can provide year-over-year comparisons to track the direction in which the board is moving.

That’s not all. The evaluation process itself can be a great communication tool for the board. It can get at difficult problems bubbling beneath the surface or reveal that some board members are not on the same page about a particular strategy or another member. And it sends a positive message to shareholders that the board is holding itself accountable.

A good evaluation—which can range in formality—will provide a matrix on the varied skill sets of the board. It will also show that a board is lacking in a particular area of expertise. And the assessments provide individual board members and committees with feedback on their performance, which can be used to develop self-improvement plans.

Care should be taken about how the information is collected. Typically, a nominating committee made up of independent directors will oversea the evaluation. They will want to guard against the possibility that the board becomes fractured by one or more members receiving a harsh criticism or a public rebuke. Board members should feel free to speak their minds without fear of retribution.

Once the evaluation is complete, boards can use the information to put in place a plan to secure specific skill sets that have been identified as needed.

]]> http://www.directorship.com/board-evaluations-getting-the-conversation-started/feed/ 0 http://www.directorship.com/book-excerpt-how-leaders-lead-leaders/ http://www.directorship.com/book-excerpt-how-leaders-lead-leaders/#comments Thu, 01 Jan 1970 00:00:00 +0000 Joseph McCafferty http://www.directorship.com/?p=2424 What follows is an excerpt from Talent: Making People Your Competitive Advantage, by Edward E. Lawler III (2008, John Wiley & Sons).

One outstanding way for senior executives to show their commitment to leadership development is to actively participate in leadership development programs. Depending on their skill sets they can be active teachers or simply show their support by attending sessions. A number of highly visible CEOs in fact have been excellent role models of how senior executives should behave in this respect.

When Roger Enrico was the CEO of PepsiCo, he regularly taught sessions on leadership with his direct reports. Similarly Bob Eckert of Mattel has sponsored numerous leadership development programs at Mattel and has taught and participated in them. When asked why he participates in Mattel management development programs, Eckert doesn’t hesitate. He says it is because he learns from the programs and it gives him a chance to see the company managers in action. He adds it also shows his support for talent development.

Enrico and Eckert exemplify what effective leaders of HC-centric organizations need to be. It is not the hero or imperial leader who can single-handedly take an organization by its neck, shake it, and send it in the right direction. It is a leader who can turn leadership into a team sport and who can develop a company of leaders.

In a business world that is turbulent, constantly fluctuating, and intensely competitive, what is needed is an organizational ability to adapt and constantly learn. This in turn requires having leaders at all levels who can lead change. A very important part of the leadership activities of managers at all levels should be searching for better and newer ways to do business, new approaches to organizing, and of course for changes in the environment that should alter the business strategy.

Where possible, the search for better alternatives ought to involve experimentation, use of metrics to validate the effectiveness of new procedures, and sharing learnings with others. Admittedly this type of mind-set and behavior needs to start with leadership by the CEO, but at its very core is the principle that leaders everywhere in the organization need to ensure that learning, experimentation, and attention are focused on what is happening in the external environment.

Jeffrey Pfeffer and Robert Sutton, in The Knowing-Doing Gap, make a statement that captures my feeling about how managers should think about their jobs. According to Pfeffer and Sutton, the major job of managers is architecting organizational systems that establish the conditions for others to succeed. In other words, good managers are a combination of coaches and builders that enable performance by others. They help define success as well as identify relationships and processes that will lead to it. This applies at every level of the organization. In a shared leadership organization the expectation is that leaders at all levels are thinking about and creating systems and situations where teams, individual contributors, and entire business units are able to be successful.

Shareholders proposed the evaluation of mortgage practices and the establishment of a committee of outside directors to develop and enforce policies regarding lending practices at homebuilders Beazer, and Pulte. A total of five different proposals were submitted for consideration and of those, three were won by the companies and two by the proponents.

Succession planning also stemmed from the mortgage securities crisis. As a result, Citigroup and Merrill Lynch had a change of CEOs. Activists believed the lack of succession planning at those companies warranted a needed succession planning process.

Merrill Lynch, Verizon, Bank of America and Toll Brothers sought no-action ruling from the Securities and Exchange Commission this season on proposals asked the board to initiate a process with written and detailed guidelines for a succession planning policy.

These companies’ proposals were excluded on the basis that CEO succession planning is related to “management of the workforce.” The concern was allowing the public too much knowledge of confidential information. Going forward, this issue will reappear as increased public debate will most likely bring the need for attention to CEO succession procedures.

Imported product safety also made its debut as a result of the recent product recalls due to lead tainted children’s toys. Interestingly, Walmart and Home Depot’s proposal to report on the safety of imported product received no-action relief because the proposals dealt with the “sale of particular products,” while Mattel’s request was denied.

While shareholders have voiced their concerns, this 2008 proxy season so far seems to be tipping in favor of the companies.

Inside Advantage

A fast-departing CEO usually signalspoor economic performance,although most highperformingcompanies regresstoward the average within adecade. One constant associatedwith companies that can sustainhigh performance is that theymanage succession well. Andmore often than not, these longtermhigh performers pickinsiders to succeed incumbents.My research also shows thatCEOs chosen from inside thefirm perform better than outsiders,whether or not the companyhas been doing well(although the difference is lessdramatic when company performanceprior to succession hasbeen good).

Careful case-by-case analysisof succession suggests that thereasons for this difference in performancehave to do not onlywith knowledge of the company’stechnologies, operations, andcompetitors, but also its capabilitiesand culture. Moreover,increasingly competitive globalmarkets mean that world-classefficiency, capability for innovation,and customer focus are allnecessary for a company’s sustainedsuccess. To achieve thesecapabilities, continuity in leadershipis critical.

In the face of the complexity ofmodern companies and thegrowing demands on leadership,turnover at the top is increasing,as is the number of outsiderschosen to be new CEOs. As indicatedby recent events at MerrillLynch and Citigroup, for example,we are in the throes of asuccession crisis.

Why is the process workingso badly? To begin with, someCEOs find the prospect of successiondepressing. For them, itmeans failure or organizationaldeath. They think of building acohort of potential leaders not asthe path to growth and prosperity,but as a sure route to their ownlame-duck status.

Even among those executiveswho plan for succession, somemanage the process in such animperial, overbearing fashionthat the potential crop of leaderswithers in the shade. Someincumbent chief executives alsofear being surpassed.

Many companies think a horserace is all they need to pick a winner,without worrying aboutwhether the horses are fastenough for the years ahead.These are companies that pridethemselves on being obsessiveabout managing for performance,on paying and promotingthose who deliver, while firingthose who don’t. But often theyturn out to be companies thatthink developing general managersis a waste of time, humanrelations an administrative task tobe delegated and then ignored,and succession what you worryabout the year before the CEOretires.

Inside-Outsiders

Although I’ve already suggestedthat the best place to look for aCEO successor is inside theorganization, the trend is towardhiring outsiders. Why? Becausethe process of nurturing greatcandidates is demanding, andmany corporations do a poor jobof developing insiders who mightdo a good job of leading them. Asa result, many companies—morespecifically the CEO and theboard—are often forced to gooutside for candidates.

In addition, when many CEOsand their directors finally turn tothe subject of succession, theymay have a bias against insiders.If things have gone well, it is easyto develop the view that “Thedemands of our scale and scopeare more than any of our peoplecan handle. They haven’t grownwith the company.” In a similarvein, an imperial CEO maybelieve that “None of my peopleare up to my standard.” Manychief executives who think thatway have created a self-fulfillingprophecy. Most problematic, theinsiders who have demonstratedgood performance sometimesseem to lack strategic vision.They are inside-the-box operatorswho don’t understand the needfor change.

The answer to problems withCEO succession is what I callinside-outsiders. These are menand women who have performedwell and risen high, buthave maintained their objectivity.They are aware of howmuch change is needed to sustainsuccess or turn around afailure, but they also know theorganization, its culture, and itspeople. They can do more thanbring in consultants or makeacross-the-board cuts. Beyondgetting short-term profits, theycan build for future growth.These unusual people are oftenfound at the periphery of theorganization, managing newbusinesses or new markets.

Take General Electric’s JeffImmelt, for instance. The firstGE chief executive to come fromsales, he had dramatically increasedthe scale and potential ofGE’s medical systems business—far from the corporation’s coreengine-and-turbine operations.Other well-known examples ofthe inside-outsider CEO areProcter & Gamble’s A.G. Lafley,who rose through the ranks inP&G’s personal-care businessand spent years building its successfulFar East operation, andSam Palmisano, chairman andCEO of IBM, who in a companyknown for closed systems andhardware championed open systemsand software.

Why is the succession-planning process working so badly? Some chief executives find the process depressing. For them, it means failure or organizational death. 

But if performance has beenpoor, a natural response might bethat the insiders are part of theproblem. There may be sometruth to this.

Unless the company’s organizationpermits several managersto have experience running businessunits, it is hard to sort outthe insiders who haven’t mademistakes. Moreover, outsidersbring a fresh view and an attractivetrack record. Especially ifthey have been stars at CEO factorieslike GE and P&G, outsidersare easy choices for boards,which are under great pressure tomake a defensible choice. For aboard that is worried aboutdeclining performance or acrisis, outsiders provide the samekind of comfort that used to reassurepurchasers when theybought IBM mainframes.

Up-and-Comers

For most outsiders, the transitionto leadership is a difficult process.Many outsider CEOs who arebrought in to turn around or reenergizea company simply donot have a long-lasting positiveimpact. Outsiders are often generalistswho know how to driveefficiency but are fundamentallyunequipped with the leadershipskills or industry, organizational,or market knowledge necessaryto craft and implement an innovativestrategy and meet the company’schallenges. It’s a miracle ifmajor issues that influence longtermgrowth are faced andresolved. One study says thatthree years is the reported averagetenure for turnaround artists.When they leave, profits may bebetter, but the company is strategicallyweaker. And their turnaroundplans have not includedinvesting in leaders for thefuture, so there are no CEOswithin the company.

Chief Talent Officer

How can a board help avoid thiskind of outcome? Well-managedsuccession is a multi-step process.The first step is to help the CEOfocus on the challenge. It isn’teasy. If a company doesn’t have atradition of building talent, it willtake awhile to build the humanresources organization—startingwith a first-class chief talent offi-cer who has the complete trust and commitmentof the CEO. It may take time justto persuade the CEO that successionplanning is a marvelous opportunity, not athreat, particularly if the chief executive isinsecure, domineering, or preoccupiedwith current poor performance.

Especially if they have been stars at CEO factories like General Electric and Procter & Gamble, outsiders are easy choices for boards, which are under great pressure to make a defensible choice. 

Building a pool of leaders begins withrecruitment. It continues with a pattern ofassignments that permit the developmentof real expertise in a line of business whilenurturing managerial skills as well. Evaluationand compensation are critical. Planningand budgeting have to be carefullymanaged to create an environment inwhich managers grow, not one in whichthey succeed or fail based on meetingshort-term targets.

Mentoring is vital for inside-outsiders toflourish. They need to be protected fromimpatient elders, and their individualitymust be developed and matured. That ishow their ability to see the need forchange is transformed from a nuisanceinto an asset.

In the process of picking out the pool’smost talented people, with a bias towardinside-outsiders where they can be found,the CEO and board must establish criteriathat reflect the needs of the company. Andin making their selection, it is essential thatthey focus on values, intellectual integrity,and alignment with future needs, as well aspast performance. In today’s fast-changingworld, the past is not necessarily prologue.As the size of the pool of candidates isreduced to a smaller group from which afinal choice will be made, the transitionmust be managed in a way that gives thenew CEO a maximum chance of success.

The whole board needs to spend timeon each of these steps, but it should be thepreoccupation of the governance andnominating committee. When a board ispassive, none of this may happen. When aboard intrudes and tries to manage theprocess directly, its interference with theorganization’s operations can lead to a governancecrisis. The board can insist thatthere needs to be a process. But becausethe process is a central aspect of the waythe company is managed, it cannot be carriedout by the board.

By following the series of prescriptionsI’ve described,—early attention to recruitingand developing talent to establish apool of potential inside candidates, carefulpruning and then selection againstfuture-oriented criteria, ensuring a transitionthat gives the new CEO a maximumchance to succeed, and keeping boardmembers who will make the final choiceaware throughout the process—chancesare good that your next CEO will be asuccess.

Joseph L. Bower is aBaker Foundation Professorat Harvard BusinessSchool and theauthor of The CEOWithin: Why Inside-Outsiders Are the Keyto Succession Planning,recently publishedby the HarvardBusiness School Press.

Wright cites a number ofcontributing factors: “the cult of the Napoleonic leader,” which results in U.S. investmentbanks combining the roles of chairman and CEO, the failure of boards tochallenge executive management, and the weakness of executive compensationwhich may tempt corporate leaders to “chase profits wherever they can findthem.”

Whether you agree or disagree withWright’s assessment, it provides ample food for thought on the current state ofcorporate affairs both here in the United Statesand the United Kingdom.