When IBM announced that Virginia Rometty would take over as CEO at the start of this year, it was a historic occasion. Rometty would be only the ninth CEO in IBM’s 100-year existence, and its first female chief executive. The press was lucky they had that tidbit to focus on. Otherwise, the transition was so smooth, so universally accepted and so undramatic, they would have had trouble filling their column inches.
And that’s exactly what you want in a CEO succession. Why was IBM able to pull it off when other companies’ transitions sometimes devolve into soap operas? Because Big Blue looks at CEO succession as a process, not a once-in-a-lifetime vote with a puff of white smoke at the end.
Dealing with CEO change is so traumatic, boards often leave a chief executive in the top spot for years after his or her mojo has clearly vanished, just to avoid the uncertainty that comes with searching for a new top dog. They’re probably right to worry. Research that Korn/Ferry International has conducted on the pitfalls of CEO succession found that turnover at the top is indeed hazardous. Of the 132 Fortune 500 companies that replaced their CEOs between 2003 and 2005, we found that almost half of the new CEOs were already out the door by 2010. Many of the companies were acquired or ended up in mergers. Most of them underperformed the rest of the Fortune 500. Only 16 had what we considered consistent, strong growth.
CEO succession planning can—and should—be a generational
program of identifying and developing potential candidates. Notice the plural. It’s not about finding “the one” who will sit at the current CEO’s right hand and absorb wisdom. Developing a diverse bench of potential successors is like carrying a full toolbox—you never know exactly what you’ll need in the future. The hammer that saved your company yesterday won’t work if you need a paintbrush tomorrow.
Filling up that CEO toolbox is the focus of succession planning. We estimate that there are five to seven potential CEOs hidden within the hierarchy of most competent companies. The job of the board is to find those individuals, assess their talents, guide their development and have a variety of candidates to choose from when the time for change comes. A truly thorough process not only identifies hidden gems within your corporation, but monitors hot commodities outside the firm as well.
Who is CEO material? Our study found that the education level of the incoming CEO doesn’t matter much; previous experience as a CEO was negligible; and their industry, their age and their gender made little impact. CEOs recruited from the outside did not outperform internal hires, and vice versa. What that means is there’s no perfect template, no squared-jawed, go-getter type that can turn around any company. Instead, it all comes down to due diligence on the part of the board: Who best fits the strategy, culture and current business conditions? That’s not easy, but when the process is organized and efficient, it’s not traumatic either.
The succession process is a reflection of the way a company is managed. Identifying the best successor is as much about cultural fit as it is about having the business capabilities to do the job. Great companies take succession planning seriously, start the process early and see it as an integral part of protecting shareholder value. But the biggest fringe benefit? If you convince your leadership to think about what they will need two, five or 10 years down the road, just imagine how that will impact what they think about today.
Jane Stevenson and Peter Thies head the CEO succession practice for Korn/Ferry International.