When CEOs botch their exits from a company, their successors and the business itself suffer.
According to Russell Reynolds, between 2003 and 2015, 1 in every 7 CEO retirements in the S&P 500 was followed by the forced departure of the new CEO within the first three years, 85 percent of them due to low performance.
Explanations aren’t hard to find. Leaders find it hard to let go, which makes otherwise intelligent and pragmatic people behave in irrational ways. CEOs may avoid the issue of succession altogether, procrastinate in dealing with it, sabotage the board’s efforts at succession planning or simply withdraw from the process. As a result, succession is delayed, the next CEO arrives unprepared, or the ex-leader sticks around in another capacity and continues to be the boss. Company performance deteriorates, while the new CEO receives a lot of criticism, steps down voluntarily or gets fired.
It doesn’t have to be that way. There are many companies in the world that have mastered the art of leadership succession. The following guidelines will help aspiring and incumbent CEOs to handle this organizational change.
Smart CEOs start planning for their exit as soon as their onboarding is complete, and no later than six months into the job. From that point they spend 10% of their time identifying and (for internal candidates) grooming potential successors. They usually start with a relatively large slate of potential candidates, which they narrow down as their departure date approaches. They take the time to get to know candidates by spending time with them, visiting their operations, speaking to their subordinates and, if possible, talking to their spouses. They will mentor and evaluate them by giving them both developmental and testing assignments.
Succession planning should not be undertaken alone. A CEO must involve the board in defining the responsibilities of the role and identifying candidates. This makes sense because the board, along with the rest of the company, will have to live with the successor, and the outgoing CEO will not.
Of course, board members are constrained in what they can do. They will have limited time to devote to the company and they may not have relevant operating experience. Because of these constraints, board involvement is usually best managed by appointing a succession committee made up of a subset of board members who have the qualifications to contribute to the search.
A key issue is whether to look primarily for an internal candidate or an external one. In general, we would recommend giving preference to internal candidates, because integrating an outsider CEO is expensive and there is a high failure rate. An outsider is preferable only if the person is truly outstanding relative to the insiders or the CEO and board feel that the successor will need to undertake a major transformation that calls for a leader who can bring a fresh perspective. In these situations, CEOs should bring in recruitment consultants to help.
HAVE A RETIREMENT PLAN
Most executives who have made successful exits plan a future for themselves outside the company. Consider Igor (not his real name), who became CEO of an international mining and metals company at the age of 45. He started to develop his vision of doubling profitability by investing in new technology and improving the operational efficiency of existing assets four years before taking the job.
At the time of his appointment, Igor had agreed to stay exactly four years. He already had some vague ideas about what roles to take on after stepping down, and spent the last year of his four years on the job planning his next career move.
He eventually decided to join an investment company, relocate his family to a new country with better educational opportunities for his children and delay taking on leadership development initiatives for the next five years or so.
MAKE THE BREAK CLEAN
For many CEOs, the thought of handing over their companies to somebody else who may start changing things to their own tastes, makes incumbents anxious and overprotective. Denis, the CEO of a retail chain, strongly recommends making a clean break: “Get out of there the day you step down and don’t worry — your successor will call you if she really needs your advice.”
The choice and preparation of a successor is the most visible and perhaps the most important manifestation of a leader’s legacy, and a failed succession may haunt a former chief executive for years. This is why Cees van Lede, a former CEO of AkzoNobel and chairman of the board of Heineken, likes to say that you cannot evaluate a chief executive’s performance until at least 10 years after the person has left the company. It will take that long for the company’s performance to reflect the quality of the CEO’s succession planning.
Copyright 2019 Harvard Business School Publishing Corp. Distributed by The New York Times Syndicate.