Boards should set the new CEO up for success and have a solid plan in place before they are forced to remove them. This is an edited version of the discussion from two recent AICD webinars.
The board’s role is to hire and onboard the CEO, evaluate and reward performance, and manage the transition and succession planning when there’s a need to bring on the next CEO.
The lifecycle of a CEO begins with a clear job description that aligns with the board’s strategic agenda, a methodology about remuneration and a discussion about transition and succession planning.
To set a new boss up for success, directors polled in a recent AICD webinar said they thought CEOs needed agreement on strategy from the board, an effective chair-CEO relationship and an environment where they felt safe to raise concerns, using the board as a sounding board. Remuneration is one element of the executive contract, but there’s more than money to think about.
Linda O’Farrell MAICD, founder of Go Higher, said much of what needs to be understood should happen before the CEO is hired. The executive contract can be confusing and if things go wrong, the board will want to know they can look at the document to find the answers. Things such as termination and notice provisions, restraints of trade, confidentiality and succession planning must be discussed at the start of the tenure.
Finding a CEO should be seen as the most important decision the board will make, said René Johnson MAICD, managing director of Pacific Search Partners, so the board has to put the time and effort in throughout the process.
“There’s nothing worse, from both a search and a client’s point of view, than when you lose a candidate because things stall,” said Johnson. “The big strategy piece is what most CEOs want to understand, to figure out where they can add value in the mix. The board has to understand, if you want to engage a CEO, you’ve got to share information with them.”
Use a non-disclosure agreement to do that, he added, noting internal candidates should always be treated the same as external ones, even though they might actually know more about how the business operates.
Show me the money
With CEO remuneration (REM), it’s more about quantum and linking any incentive to actual deliverables, according to Allan Feinberg, managing director of REMSMART.
“In looking at the business, you’ve got different stages of development,” he said. “That, in turn, affords different types of remuneration. When looking at the stage of the business, you also have different shareholders. This all needs to be taken into account, because you need to win them over in terms of putting together a good reward system. As companies mature and take on a more sophisticated investor base, it becomes more difficult how you structure these packages. It’s very important to understand what shareholders want and it’s part of the chair’s job to speak to them.”
The value of feedback
Best practice performance evaluation has many elements and starts when the board is hiring the CEO, said O’Farrell. The CEO cannot be expected to operate well without continuous performance feedback. This should come not only from the board, but from everyone around them, and can be made formally and informally. CEO KPIs should be clearly set out, because holding people to account can be problematic when there are different points of view on what is actually important, she said.
Feedback alignment and the feedback process are some of the most important considerations for an effective CEO performance evaluation, according to Steve Pell, managing director at BoardOutlook.
“We see across the market — from some of the very small organisations we work with up to some of the biggest ones — that the average graduate is getting better-quality feedback than the average CEO,” said Pell.
Michael Stutley, a partner at workplace law specialist Kingston Reid, said the board should provide the CEO with measurable KPIs, with clear alignment to strategic goals. “Not just the short- term financial goals, but long-term strategic thinking and assessing those against financial performance, innovation and sustainability.”
External benchmarking is another tool the board can use to understand how a CEO is performing, he said.
Tying performance to short-term remuneration incentives can be quite effective for driving good performance, said Stutley. “There’s no other real sting in the tail for a CEO than to attack the short-term incentive.”
However, Pell disagreed, arguing that if a board wanted awareness and improvement, it should separate performance feedback from remuneration evaluation.
Time for transition
Along with those starting points comes an ongoing focus on transition and succession planning — with an increasing focus around succession planning and boards transitioning CEOs out in a planned way, according to O’Farrell.
She added that putting more focus on internal development might also lead to longer tenure and greater organisational performance.
When polled, 83 per cent of respondents said they thought a lack of good process would lead to the board deciding it needed to terminate the tenure of a CEO.
From a legal perspective, O’Farrell noted that pre-planning and engaging help early in the process can often be key to a successful CEO transition. Procedural fairness and psychosocial safety must also be achieved.
“As directors, we all have obligations to provide a safe place of work,” said O’Farrell. “Bullying or harassment claims, those things can apply to CEOs, so the way around that is to actually do the right thing. Don’t catch people by surprise. If you’ve got concerns and there’s a review underway, make sure your CEO has an opportunity to respond, that they’re properly communicated to, and [decide if] mediation might be appropriate.”
Stutley said drafting a separation agreement can help to clarify what is expected and what needs to take place in order for the transition to be communicated to other stakeholders appropriately, along with outside third parties — including, potentially, the media.
Pell noted that many CEO termination cases reported in the media allege the CEO believed he or she was treated unfairly, because with no progressive feedback, they were hit by surprise with the termination.
“If you went back to day one of that CEO’s tenure and started having a succession discussion about it not being a ‘forever role’, and ‘this is what success looks like’, then there should be no surprise,” said Pell.
“With that at the beginning, you have the ability to terminate at will without ever catching that CEO in a circumstance where they believe it’s unfair or has caught them by surprise.”
You should always have a plan, control the narrative, engage internal stakeholders, show appreciation for the outgoing leader and be prepared for contingency, said Stutley.
The board’s job then was to support the incoming leader, said O’Farrell. To learn from the experience and put into practice the understanding from that learning to provide stability and growth for the next CEO.
This article first appeared under the headline ‘The CEO Lifecycle’ in the December 2024/January 2025 issue of Company Director magazine.
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