CEO succession is a board’s No. 1 task — and usually its most sensitive. These are the key considerations when managing a CEO transition.
The CEO is about to go
This year, plenty of high-profile boards have dealt with CEO departures — planned and unplanned. In a perfect world, this is a long-term, orderly process with early and ongoing communication between the board and the outgoing CEO. Think Wesfarmers revealing in February that Richard Goyder AO FAICD would hand over to the group’s industrial division head, Rob Scott, in November — giving Scott nine months as deputy CEO to learn the ropes. Or BlueScope Steel CEO Paul O’Malley, who announced in August that he’d retire at the end of the year — to be replaced by Mark Vassella, head of its Australian business — and become a board adviser.
It doesn’t always happen that way. Blackmores CEO Christine Holgate was poached by Australia Post in June, forcing a quick handover to chief operating (COO) officer Richard Henfrey in mid-August (although chair Stephen Chapman FAICD said the board had been focused on succession planning for “many months”). Sims Metal Management announced the immediate departure of its CEO and chief financial officer (CFO) in August, while the CPA Australia board was forced to sack CEO Alex Malley in June after a public outcry over spending, governance and culture.
Although average CEO tenure is 5.5 years (the highest since 2008), according to PwC’s 2016 CEO Succession Study, experts say the board must consider a CEO’s replacement from the day he or she starts in the role.
Internal vs external appointments
The PwC survey found that CEOs recruited from within provide better shareholder returns and are half as likely to be forced out. At 40 per cent, Australia’s external CEO appointments are at a record low, but still 18 per cent higher than the global average. “The key to CEO succession planning is for the board and CEO to work on it together as a normal part of business,” says Stephen Chapman.
“Where you have a strong culture, you often see internal appointments,” says Edward John, executive manager of governance and engagement at the Australian Council of Superannuation Investors (ACSI).
Role of the incumbent
“The key is to build a trusting relationship between the CEO and board,” says Daniel Healy, a director of consultancy Leading Teams. “People must feel safe enough to say, ‘This isn’t working for us’ or ‘I’m thinking about transitioning’.”
“A quality CEO wants capable people around them who could do their job,” says Peter Gahan from The University of Melbourne’s Centre for Workplace Leadership. He rejects the notion that talking too early and openly about succession could antagonise the CEO. One option is for the board to make the CEO accountable for building the next generation of leaders through key performance indicators. Another is to offer the CEO and chair a discretionary bonus for implementing a succession plan.
Executive exhaustion has been a common factor in a number of recent high-profile CEO exits. Wesfarmers’ Richard Goyder talked of the “overbearing responsibilities of being a CEO”. When Fortescue Metals Group CEO Neville Power announced in September that he’d step down in February, after a seven-year tenure that included steering the company through overwhelming debt burden in 2012, he was ready for a break. “It has been a very long time I have been working, it seems, full-bore,” he said.
“Periods of high change tend to be particularly high periods for burnout, as the CEO is usually leading the charge,” says Gabrielle Schroder, head of board advisory at the AICD, adding that CEOs often “forget” to take leave. “The board should be probing for those self-preservation aspects. Usually, it’s the chair’s role to check in on the human element.”
Surprises or information vacuums are big issues for investors, says Edward John from ACSI, which meets with more than 150 boards every year with CEO succession usually a topic. “Clear communication and transparency is valued. Where there’s a lack of information, investors will assume it’s a balance-sheet or performance issue.”
Shares fell 12 per cent when Sims Metal Management announced the immediate departure of CEO Galdino Claro and CFO Fred Knechtel without explanation. Ramsay Health Care was also criticised for announcing in February that CEO Chris Rex would retire, without naming his successor. (COO Craig McNally was elevated to the top position a month later.)
It’s not just the CEO
Boards need to look beyond CEO succession to senior management development and succession, says Peter Gahan. “Most boards are not focused on creating and maintaining a pool of high-quality potential successors nurtured within the organisation. They have an eye on the appointment of the CEO and how the CEO is performing, but they don’t keep an eye on this.”
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