How to get CEO succession planning right

An AICD director tool, developed from global research by Thomas Keil and Marianna Zangrillo, provides practical guidance on effective CEO succession principles and frameworks. It identifies four CEO mandates that may be adapted to any industry, sector or size of organisation.

Thomas Keil teaches strategy and international management at the University of Zurich, Switzerland. Marianna Zangrillo is a corporate leader and angel investor with experience in companies such as Nokia and Swissport.

Selecting the CEO is one of the most important decisions a board makes. It impacts the organisation’s culture and is key to driving stakeholder value. Yet a significant proportion of CEO appointments fail, often with detrimental effects to all involved — shareholder value is reduced, jobs are lost and high-profile careers can be destroyed.

CEO search processes frequently stem from a general CEO profile, often targeting candidates within the same industry who may have led organisations of comparable size. However, for each stage of its life and depending on its particular situation, the same organisation may need a very different type of CEO. To find a CEO who can lead the organisation to success in the future, it is important to clearly identify the strategic challenges that need to be addressed for the period ahead. Only after these strategic challenges are identified is it possible to define the right mandate that the future CEO will have to be tasked with.

Mandates set the direction and boundaries for the CEO’s action and will depend on the degree of change they entail and the required pace and time scale of that change. They should be set based on a diagnosis of the situation the organisation is in and a deep understanding of the strategic imperatives that arise from that situation. Once the mandate is defined, the board can then proceed to develop a CEO profile that fits not only the organisation in general, but also the specific strategic challenges of the years to come.

Mandate options

Based on the degree of change required, and the time horizon, four broad classes of CEO mandates can be distinguished: continuation, evolution, transformation and turnaround.

1. Continuation

The continuation mandate is a common choice when boards favour the continuation of the existing strategic direction and the implementation of a given strategy with minimal changes over a relatively short period of time. The new CEO is tasked with executing an existing strategic path that has been chosen under the predecessor, leaving them limited discretion.

It is often chosen when founders step away from CEO responsibilities (for example, in the succession of family-controlled organisations), when the CEO departs unexpectedly, or when the CEO retires, but remains influential in the organisation through board positions. This type of mandate is also possible in ordinary CEO succession when the organisation is simply on a good path that the board chooses to continue.

Continuation mandates typically are the domain of internal candidates who not only need to fully buy into the existing strategy, but must also be willing to work within a relatively tight framework set by the board. CEO profiles fitting this mandate often aim to replicate the profile of the predecessor, may well have grown within the organisation under the predecessor, and are focused on driving operational excellence.

Contrary to other mandates (for example, the transformation mandate, where the CEO may also be expected to change the corporate culture) CEOs in the continuation mandate also need to fit the existing culture of the organisation.

Common problems with this mandate involve misaligned candidates (in particular when external candidates are chosen) and the potential friction that can subsequently arise between the CEO and the board. This friction may happen when the CEO starts taking action outside the organisational path predefined by the board.

2. Evolution

Boards choose evolution mandates when they desire gradual adjustments to the organisation’s strategy over a longer time horizon or when they seek changes in how such a strategy is being implemented. CEOs in evolution mandates have more leeway to make changes and over time can gradually adjust the strategy. That is what boards expect with evolution mandates and the main difference when comparing them to continuation mandates.

Boards may typically choose inside CEOs with experience in the business and the chosen strategy, who quite often have themselves contributed to the creating of the current strategy. Yet external CEOs may also turn out to be a viable option, based on the specific focus of the strategy evolution and the need for specific skills.

Under evolution mandates, CEO profiles need to balance the fit with the existing strategy and organisation — with the skills and independence needed for its evolution. Friction between CEO and board over changes in strategic direction or pace of implementation may also arise, and the appointment of an external CEO has further potential to lead to misalignment.

3. Transformation

Boards choose transformation mandates when they desire a fundamental change in the organisation’s strategic direction — and a more significant change to the organisation, its operating model, structure or culture — over longer periods. Organisations may, for example, be aiming to position their organisation better for emerging opportunities within their industry or lift their global strategy to the next level. Transformation mandates offer the CEO substantial latitude to design and implement the change around a new vision. Given the strong departure from the organisation’s past, boards are advised to consider external candidates who can envision the organisation without past legacy. The specific CEO profile often emphasises a break from existing management rather than continuity and may differ depending upon the specific type of transformation intended. Boards need to be mindful of the inherent difficulty and risks involved in any transformation. Under this mandate, new CEOs tend to make changes to the management team, organisational structure, processes and culture. This may be to send a strong signal of change and, possibly, to upgrade the organisational skills required to meet future needs. Accordingly, they may encounter organisational resistance and boards need to be prepared to accept a period of upheaval accompanying these changes.

4. Turnaround

Boards choose turnaround mandates when large-scale strategic changes are needed in a short time horizon. Usually, this happens when there is already some degree of financial distress or when the organisation is fundamentally misaligned with the changing environment. In this mandate, the new CEO must take drastic action to turn the organisation around or break the inertia, often under strong time pressure.

Turnaround mandates may be the result of years of ineffective management and limited board oversight. To be successful, turnaround mandates typically call for an external CEO and are often the domain of turnaround specialist leaders who have repeated experience with the required fast-paced, radical restructure. These experienced leaders are often given wide latitude in decision-making given the dramatic situation. At times, they may even advise the board that a wide latitude of action is a requirement for them taking up the challenge.

Common problems often occur when inside CEOs leading turnarounds are encumbered by past commitments, or when outside CEOs are too radical or culturally different from the organisation they lead. Such problems may result in an inability to implement the turnaround. CEOs focused on turnarounds may also not be the ideal candidates to lead the next stage of development following the turnaround.

Selecting the right mandate

Before identifying the right mandate, boards need to engage in a systematic diagnosis of the organisation and consider internal and external factors that may impact its future and performance. Such diagnosis should involve at least the following:

Organisational environment

To understand the strategic demands of the environment, it is important to focus on the structural properties of the industry and consider the most important macro- and industry-level trends, actual and potential, and their impact on the business of the organisation.

Organisational capabilities

As a second dimension, the strategic diagnosis also needs to include a critical evaluation of the organisation’s capabilities, strengths and weaknesses, relative to the context and situation.

Financial situation

This often defines the boundary condition and required speed of change and, accordingly, is a critical component when assessing the strategic mandate.

Strategic ambition

Based on the above dimensions, the board needs to define a strategic ambition that provides a clear goal and time frame for the future, for which the incoming CEO and the organisation at large should strive.

When should a board change the CEO?

One of the most difficult board decisions related to succession planning is to start seeking a new CEO. Ideally, CEO succession is started in agreement with the incumbent CEO, in line with a long-term schedule that allows for extensive search and decision-making, and gives potential candidates sufficient time for transition. However, succession often arises out of frustration with the performance of the current CEO, a desire to redirect the organisation, or the sudden departure of the incumbent.

Ideally, unnecessary time pressure should be avoided when planning for CEO succession. This can occur when decisions are delayed, when the performance of the organisation has already deteriorated substantially or when environmental change has already weakened the strategic position. Financial results are lagging indicators that reflect problems that may have been perpetuating for a period of time.

Instead, boards are advised to identify leading indicators that may signal problems long before financial performance declines.

Warning signs

These include non-financial warning signs of the organisation and behavioural warning signs of the CEO.

Non-financial

• Turnover among top talent
• Customer complaints
• Increased employee absenteeism
• Decreased employee engagement
• Negative sentiment voiced by external stakeholders.

Behavioural

• Top management team members being removed by the CEO
• CEO communicating less openly and/or operating behind closed doors
• Defensive CEO responses to board questions 
• CEO avoiding openly reaching out to board
• Top management team members misaligned and/or clashing for power and attention.

Today, the median CEO tenure is between five to eight years (depending on the industry) and more than 15 per cent of all CEOs depart within two years. At the same time, some CEOs have led their organisations for more than 30 years. Even when CEOs perform well over extended periods of time, boards may choose to consider limits to CEO tenure and carefully weigh the benefits and drawbacks of long tenure. Long tenure may bring advantages related to experience, relational assets and the avoidance of change cost and risks. At the same time, with excessive tenure, organisations run the increased risk of becoming detached from changed environments, complacency, ossified structures, lack of learning and development, and talent loss.

Given these drawbacks, and in most cases, organisations don’t benefit from CEOs who remain in their positions for too long a period.

To avoid potentially stagnant leadership, boards may consider limiting the tenure of CEOs to no more than 10 years.

Creating a succession pipeline

Boards need to be ready for CEO succession, even when a well-performing CEO is in place. Prudent organisations should always have a bench of candidates with different capabilities — and ideally to address two or three mandate types — who can step into the CEO position at least as an interim, in case the CEO leaves unexpectedly or is incapacitated. In addition, candidates who have the potential to succeed as CEO in the medium term of three to five years, should be developed at top management level.

Expecting that a succession pipeline can produce the ideal candidate for the large range of contingencies an organisation may face may not be straightforward, especially when it comes to producing turnaround or transformation specialists at the same time. Even in well thought-out and managed CEO succession management systems, the need for targeted external hires to renew the capability base and fill novel capability needs will always need to be considered.

Central to successful CEO succession management is that throughout the entire organisation — from the board down — there has to be a strong recognition of the importance of talent development and succession planning. This organisational culture is facilitated by a comprehensive talent development concept, which contains the following elements:

This is an edited excerpt from CEO Succession Planning. More information here