Rethinking the CEO transition.
Here's my hypothesis: The combination of a first-class succession process and an appropriate governance structure should enable organizations to appoint a new CEO who is professionally prepared and structurally empowered to operate as a fully functioning CEO on Day One. The board should have such confidence in the new CEO's readiness to do the job that it feels no need to hang onto a security blanket in the form of the retiring CEO.
But at the majority of public companies, and many private ones, that's not what happens.
According to the Conference Board, 52 percent of departing CEOs remain, at least for a while, as chairman, up from just 33 percent in 2011. Spencer Stuart reports that 36 percent of retiring CEOs remain on the board for two years or longer, and fully a quarter stick around for five years or more. That number is likely to keep growing, as more and more companies--now approaching 80 percent of Fortune 500s--select their CEOs from among internal candidates with no prior CEO experience.
It's easy to understand why that happens. Most boards are change averse; a gradual overlap between the old CEO implies an orderly transition, and the old CEO's continued presence is considered an insurance policy against the successor's rookie mistakes. In short, boards feel much more comfortable handing the wheel to a new CEO if the old CEO shares the front seat. Which inevitably poses the question: Who's driving this thing?
Academic research and my own advisory experience suggest at least three problems that can result from that model of muddled, even conflicting leadership:
* Loss of strategic dexterity. Having the former CEO presiding in the boardroom often limits the new CEO's strategic options and ability to change course. In a landmark study of 181 high-tech companies, Donald Hambrick of the University of Pennsylvania and Timothy Quigley of Lehigh University found that the presence of these "shadow emperors"--the 39 percent of departing CEOs who stayed on as chairman--imposed either "implicit or explicit constraints" on the new CEO's ability to significantly change their predecessor's strategies and policies. Consequently, these new CEOs majored in avoiding problems and minored in pursuing new opportunities.
* Delayed talent changes. A study I led in 2013 at Heidrick & Struggles, in which 60 CEOs were interviewed about their early experiences in the job, found that their greatest regret was that they hadn't moved faster and more forcefully to make key changes--and talent ranked first. But replacing the team is tough with the old boss looking on. As the CEO of a privately-owned electronics firm once told me, "If I had it to do over, I would have taken faster action on changes in top leadership. Unfortunately, I was saddled with the old CEO for the first three months I was there. As soon as he left, I was able to make some personnel moves that I couldn't do while he was there."
* Muddled leadership roles. Just watch what happens in the boardroom when the new CEO's proposal is interpreted as a repudiation, no matter how polite, of the previous CEO's position. The directors' heads sometimes swivel like spectators at a tennis match, looking for reactions from each side of the table. Nothing so clearly illustrates the uncertainty about who's really in charge. Recalls the CEO of a household products company, "It's very easy for the board to vector toward the previous CEO, particularly on something controversial where their instinct might be to turn to him and ask him if this is ok ... It took two or three meetings for the board to get totally comfortable with me in the CEO role, and I think one of the biggest things that helped was that the previous CEO had left immediately."
Getting to the point where the transition marks the true beginning of a new CEO's tenure, rather than extended apprenticeship with ambiguous leadership, requires serious commitment from all the key players: the board, both the new and departing CEOs, and, in a very major way, chief HR officers.
Fix the Succession Process
If directors aren't confident the new CEO is ready, that means there's a serious flaw in the succession process. To be sure, no brand-new CEO enters the job as seasoned, capable, and savvy as one assumes he or she will become after several years on the job. But if the board isn't in a position to promote a candidate--or, even better, choose from among several candidates--with the demonstrated business skill, leadership talent, and personal capacity to do the job, then the succession process has failed.
Together, the board, the CEO, and importantly, the CHRO, should execute a succession process that starts early enough to provide promising candidates time to develop and demonstrate their readiness. Boards should never be in the position, as I've observed, where the succession event approached and directors nervously admitted that they really did not know much about any of the internal candidates.
Time to Say Goodbye
As difficult as it is for both the retiring CEO and the board, it is almost always in the organization's best interests to make a clean break. Boards could make that easier by adopting bylaws prohibiting the retiring CEO from remaining on the board, so that it becomes standard practice rather than an individual decision. But according to the National Association of Corporate directors, only about 10 percent of public and private companies have such provisions.
Some CEOs say their own experience would lead them to voluntarily make that choice. "The biggest lesson I've learned, in terms of how I will handle the transition to my successor," says the CEO of a Fortune 500 manufacturing company, "is to step away as smoothly as possible--to demonstrate to all the constituents that the individual who has been chosen is absolutely the best possible person for the job--and then to step away as rapidly as possible. And I mean totally step away."
Just to be clear: I'm not proposing that the new CEO automatically assume the tide of board chair, as well, which only 9.5 percent of new public company CEOs are doing now. Far from it I believe companies are in much better shape pairing a new CEO with an independent, non-executive chairman, and waiting several years before deciding whether to combine the roles.
Properly Orient the New CEO
A number of studies--including "Move Faster, Drive Harder," the Heidrick & Struggles project mentioned earlier, and "Expect the Unexpected," a recent study of 75 CEOs by The River Group--underscore how shell-shocked most new CEOs are by the complex, time-consuming challenge of learning how to work with a board for the first time. Even COOs and CFOs were badly unprepared for the unique relationship between the CEO and the board.
Unfortunately, the great majority of boards leave it to the new CEO to take the initiative and figure all that out, at the same time they're learning all the other new requirements of the job. As Peter Thies of The River Group and I have been advocating for some time, it's time for boards to seize the initiative and proactively assume the responsibility for helping new CEOs to fully understand the board's individual members and collective role. Rather than maintaining the old relationship with the former CEO, they should focus their attention on building the relationship that will take them into the future.
Mark B. Nadler is a principal and cofounder of Nadler Advisory Services, a firm that consults with boards of directors, CEOs, and executive teams on issues of leadership, governance, and team effectiveness. Mark can be reached at firstname.lastname@example.org.
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|Title Annotation:||Perspectives: POINT: COUNTERPOINT|
|Author:||Nadler, Mark B.|
|Publication:||People & Strategy|
|Article Type:||Viewpoint essay|
|Date:||Jan 1, 2017|
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