Corporate Governance

Optimizing CEO succession processes

28 May 2015

CEO Succession

Human Capital Alliance Managing Director Edwin Sim looks at CEO succession processes.

Although many companies view CEO succession as one-off events, ideally it should be a multi-year structured process tied to leadership development.

CEO succession then results from active potential-candidate-development initiatives said McKinsey’s Asa Bjornberg and Claudio Feser in “CEO succession starts with developing leaders.”

On the other hand, one-off CEO succession companies operate in reactive systems that are divorced from wider systems of leadership development and talent management.

Leadership-succession process

An ideal leadership-succession process should be a tailored combination of on-the-job stretch assignments along with coaching, mentoring and other regular leadership-development initiatives.

“Companies that take this approach draw up a development plan for each candidate and feed it into an annual talent-management review, providing opportunities for supportive and constructive feedback.

This results in a multiyear structured CEO succession process that actively develop potential candidates.

Asian succession example

An Asian company chairman appointed three potential CEOs as chief operating officers and rotated them through key sales, operations and R&D leadership roles during a two-year period.

”Rotation is a great way to create stretch moments exposing candidates to exceptional learning opportunities.“

The new CEO selection process itself became the final step in a carefully constructed and individually-tailored leadership-development plan.

Looking to the future

Many companies fail to shape candidate selection criteria to accommodate the company’s future strategic direction and organizational context.

“Many focus on selecting a supposedly ideal CEO rather than asking themselves what may be the right CEO profile given their priorities in the years ahead.”

Any succession process, the authors said should focus on the market and competitive context the new CEO will confront.

“These criteria should be tailored to the business’s strategic, industry and organizational requirements, on a five- to eight-year view.”

Complementing pipeline

In fast-changing industry and organizational environments, companies should also complement the internal-candidate pipeline with external candidates.

“Much as the needs of a business change over time, so do the qualities required of internal candidates as a company’s development programs take effect.”

Companies must therefore update, compare, and contrast candidate profiles against relevant criteria regularly. “This isn’t a hard science, of course, but without rigor and tracking it is easy to overlook.”

Key incumbent CEO role

Although choosing a new CEO is unambiguously the board’s responsibility, the authors said incumbent CEOs have critical leadership roles in preparing and developing candidates.

The incumbent’s powerful understanding of the company’s strategy and its implications creates a unique role for developing a successor.

This approach encourages the CEO to think longer term and “reverse engineer” a plan to create a legacy by acting as a steward for the next generation.

Selection bias

Companies must also be constantly vigilant of biases that may affect CEO-succession planning, and their outcome of appointing a specific individual.

Many CEOS, often afflicted by the MOM (“more of me”) bias they said look for or try to develop a copy of themselves.

“Moreover, incumbents under the influence of the sabotage bias consciously or unconsciously undermine the process by promoting a candidate who may not be ready for the top job (or is otherwise weak) and therefore seems likely to prolong the current CEO’s reign.”

An additional herding bias comes into play when committee members in charge of the process consciously or unconsciously adjust their views to those of the incumbent CEO or the chairman of the board.

Depersonalizing bias

Companies must therefore work hard to filter out bias and depersonalize the process, the authors said by institutionalizing it.

“A task force (comprising, perhaps, the CEO, the head of HR, and selected board members) should regularly review the criteria for selecting internal candidates, assess or reassess short-listed ones, provide feedback to them, and develop and implement a plan for their development needs.”

In advance, it should identify the right evaluation criteria , rather than trying to fit them into an available candidate pool and should ensure candidates are rated anonymously and independently.

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