The succession work boards oversee is more complex than it once was. Oversight of the internal talent pipeline has grown beyond a narrow focus on CEO successors to include other internal and external talent. This relatively new role for the board or governance committee demands the hands-on ability to assess upper-management aptitude and readiness for the top job.
On September 21, the NACD Atlanta Chapter invited three exemplary former CEOs who serve on public boards to advise Atlanta-area directors on how to navigate this more demanding process. The panel, moderated by NACD President Peter R. Gleason, was comprised of Richard Anderson, previously CEO of Delta Airlines, and member of the Cargill and Medtronic boards; Martha Brooks, former CEO of Alcan, and director of Bombardier and Jabil Circuit; and Frank Blake, former CEO and chair of Home Depot, and currently a director at Delta Airlines.
For context, CEO turnover within the world’s largest 2,500 companies has increased in recent years, according to a 2016 study by PwC titled 2015 CEO Success that analyzed CEO turnover data from 2015 in the U.S. and around the globe. Among the study’s findings were the following data:
CEO turnover around the globe reached a record rate of 16.6 percent.
In North America, the rate of CEO turnover was 14.3 percent.
Planned turnover accounted for 10.9 percent of all turnover indicated in the study.
Force-outs were reported at 3 percent.
CEO turnover triggered by mergers and acquisitions occurred at a rate of 2.8 percent globally and in the U.S.
Looking specifically at U.S. turnover data, of all CEO turnovers, 4.4 percent were planned and 2.2 percent of the CEOs were forced out.
The traditional tactic when seeking new CEO talent has been to “go inside” for the most qualified internal candidate, but boards are now deliberately bringing in external CEO candidates. When the same PwC study compared statistics from 2004 to 2015, the percentage of outsiders hired as CEO increased from 14 percent in 2004 to 22 percent in 2015—a 50 percent increase in external hires in 10 years.
Hiring an outsider to serve as CEO was once seen as a last resort—something that typically only happened when a board had to force out the incumbent CEO suddenly, had failed to groom a suitable successor, or both. In recent years, however, more companies have chosen an outsider CEO, and frequently as part of a planned succession.
The stakes are higher. The process is more transparent and invites activist investors, pundits, and media to scrutinize a company’s process and its decision. Often the current CEO is left somewhat in the dark about the progress and the remaining leadership team may just not know status, which leads to uncertainty and process dysfunction.
The distinguished panel offered these nine valuable lessons learned about successfully navigating this board responsibility.
Succession must be a CEO-driven process. The panelists urged that a board place the CEO in the middle of the succession process but not as a direct party to the final decision process. They argued that the current CEO brings unique knowledge and passion for the future of the business, and that he or she wants a leadership legacy that includes a smooth and smart transition to a new CEO. The CEO also knows the internal talent pipeline better than any director, which could be an asset to the board. The panel added that with the board’s involvement and perhaps that of external resources, the risk of the “favored son” effect could be mitigated.
Succession is a full-board endeavor. Ownership of the process, knowledge of internal candidate development, insight into what could potentially derail the process, external benchmarking, and strategic issues that await the new CEO are matters for the full board to address. Committees can execute on specific tasks but the work, insight, and decision-making process related to CEO succession must be owned by the full board.
One committee member urged every board member to meet and assess final candidates against a written success and impact profile during lengthy one-on-one interviews. The panel expressed their belief that the successful candidate would develop a sound, unique relationship with each director. Panelists also perceive interviews as the gateway to relationship building and ultimately to the CEO being accepted into the board’s inner circle.
The lead director plays an integral role as mentor. The board’s succession method needs a quality control focal point, or someone who will manage group processes among directors so that the “loudest voices” around the boardroom table are not those that necessarily carry the most weight. The panel suggested that the board could task the lead director with this quality-control leadership.
Remember that the board’s loyalty belongs to the company—not the current CEO or internal candidates. The board needs and values input from the CEO and there may be internal candidates who are highly regarded. But decisions must be based single-mindedly upon duty-of-care philosophies—the company’s future.
Competition among internal candidates must be monitored and managed by the CEO and board. Internal candidates should be explicitly informed or they are likely to figure out whether or not they are a candidate for the CEO role. With that information or suspicion, a competitive “horse race” may begin and performance may peak. There is also the inevitable dysfunction that can occur between the contenders as well as their organizations as they “bid up” their candidacy. CEOs and lead directors may intervene to manage negative behavior, and reinforce that senior-level performance is a collective effort. Compensation schemes for these candidates should be aligned in the spirit that “we all row the boat together.”
Get a written exit report from the outgoing CEO. Have the CEO personally develop a lengthy perspective about the future focus of the business and the CEO’s most critical areas of personal attention. Develop an “issues list” of those matters that the new CEO will likely bump into in the market, inside the company, and with regulators. Ensure the list is heavy on issues and light on recommendations. Finally, ask the outgoing CEO to list what strategic items and enabling matters must be done by the incoming CEO.
Develop a plan for easing out a reluctant CEO. The chair or lead director must have a “personal legacy” discussion with the CEO, and the CEO will inevitably get the message that it’s time to transition, and yet the panel emphasized that this should be a clear—not a nuanced—discussion. Have a plan for how and when the cord will be cut and communicate that plan clearly.
Define how unsuccessful transition candidates will be treated. If these executives can see a good path forward, embrace them. If not, help them leave, and do so quickly.
With a C-suite succession event, corporate strategy is likely to change. The board should endeavor to ensure that a sound corporate culture makes it through the transition.
At NACD’s Master Class this August, directors from companies like Boingo Wireless Inc., Colgate-Palmolive Co., Kimberly-Clark Corp., GameStop Corp., and the Royal Bank of Canada convened in Laguna Beach, California, for peer-to-peer discussions on strategy, risk, and leading through disruption. One common thread ran throughout the discussions: companies expend enormous resources and efforts to mitigate cyber, geopolitical, and other threats, but they have yet to allocate the same attention to technology disruption. Kelvin Westbrook— president and CEO of KRW Advisors LLC, and a director of Archer Daniels Midland Co., Stifel Financial Corp., and T-Mobile US Inc.—framed the issue this way for Master Class participants: “Companies can survive cyber data breaches, but many don’t survive innovative technology disruption. It’s a bigger deal that we need to address.”
A prosthetic hand created using low-cost 3-D printing technology was demonstrated at the 2015 Global Board Leaders’ Summit. Photo by Denny Henry.
This year’s Global Board Leaders’ Summit puts technology and disruption front and center, with a variety of leading-edge speakers and sessions that focus on these themes. But more than just convening discussions, the director community get hands-on experience with emerging trends via Innovation Nation. This popular feature, launched at last year’s Summit, is back once again, featuring an even more robust cross-section of the trends, technologies, and innovations that are disrupting your businesses and shaping your world. This year’s exhibits include opportunities to immerse yourself in virtual reality, experience the sharing economy at work, and see the latest in drone technology up close. Here is a sampling of who will be on hand:
Dancing With the Start-Ups, a new feature modeled after the popular show Shark Tank, builds on popular sessions from past Summits that gave directors a chance to “Meet the Disruptors.” This fast-paced competition will feature 12 companies across three key industries—healthcare, financial services, and energy— to showcase the latest and greatest in emerging business. Both the competition and a booth showcasing the startup talent in Innovation Nation will offer Summit attendees the chance to meet the entrepreneurs who are hoping to be your next competitors in the marketplace. For those who can’t make the Sunday session, or who just want to get to know the companies a little better, swing by Innovation Nation to learn more about innovative new ways to diagnose malaria, the latest in solar energy technology, the intersection of market data with sustainability, and much more.
Dave Meadows is a self-described “lifelong ‘tinkerer’ and inventor”—inclinations that served him well in his former role as a senior research and development executive with Novartis International AG. Several years ago, Meadows set out to solve a problem that has plagued wine drinkers for nearly 9,000-years—adverse physical reactions, especially when drinking reds. Five years later, The Wand™ was born. This invention removes 95 percent of the histamines and sulfite preservatives from wine. The result—a whole legion of wine enthusiasts who had previously learned to avoid wine can once again partake without the fear of headaches and other adverse reactions. You can experience the power of The Wand™ firsthand and talk to Meadows about and his work in the areas of medical diagnostics, sports medicine, and consumer packaged goods.
Big data and analytics are driving the growth of nearly every business, from heavy hitters like General Electric and Alibaba to early stage start-ups and family farms. This new trend is poised to transform industries, power new business models, enable innovation, and create greater value. According to research from International Data Corporation, worldwide revenues for big data and analytics will grow to $187 billion by 2019—a 50 percent increase from revenues in 2014. But Powerlytics Inc. cofounder Kevin Sheetz cautions that, when it comes to data, big doesn’t mean better, and behind the hype are a number of critical questions boards should be asking to ensure their companies are taking full and smart advantage of this trend. Sheetz will be at the Summit to give directors real-time interaction with the company’s platform, which aggregates publicly available consumer and business financial data from sources like IRS tax returns, the U.S. Census Bureau, and the U.S. Department of Labor.
February 15, 2011 became a milestone in both game show and artificial intelligence (AI) history, as the IBM-designed super computer, Watson, bested previously undefeated players Ken Jennings and Brad Rutter to win Jeopardy! The Watson team has been hard at work in the intervening five years to use natural language processing and machine learning to make sense of large amounts of unstructured data. IBM developers will be available to demo this technology and answer questions about the intersection of AI and analytics.
The Internet of Things (IoT) is reshaping the business landscape in ways that aren’t yet fully understood. The U.S. Department of Transportation (USDOT) is one of many organizations harnessing the IoT to save lives. According to data from the National Highway Traffic Safety Administration (NHTSA), there were more than six million police-reported crashes on U.S. roads in 2015. While the number of people surviving car accidents has increased significantly thanks to airbags, antilock brakes, and other technology, USDOT’s Connected Vehicles program aims to stop many of those crashes from happening in the first place. This unique partnership between state and local transportation agencies, vehicle and device makers, and the public, aims to test and evaluate technology that will enable motor vehicles, roads and other infrastructure, and devices to “talk” to one another so every vehicle on the road is aware of the position of other nearby vehicles. Chris Gerdes, USDOT’s chief innovation officer, will discuss the program Monday on the main stage. Swing by the Innovation Nation to check out this technology, learn more about how you can bring the program to your home city, and get inspiration for how the IoT might just help your own business survive and thrive.
These are just a few snapshots of the incredible line-up of thought leaders and emerging technology at next month’s Summit. Want to learn more? View the full list of speakers and sessions at NACDonline.org/summit.
Meet Jeannine Strandjord, a seasoned public company director whose board experience has spanned information technology to retail, and whose executive résumé includes the role of chief integration officer at Sprint, where she oversaw the transformation of the telecom giant during a period of radical change. She recently spoke with NACD Directorship magazine about her path from being a first-time director to becoming a boardroom leader and shared her best advice for new or aspiring directors.
Just what should newly minted or aspiring directors keep top-of-mind? “First of all, learn what you have to offer to that board,” Strandjord said. “Be sure that it’s something that adds value—not just that you’d like to be on a board. Second, if you really want to serve on a board, you better learn how to network. Meet as many other people as you can and find a great mentor who could be helpful in finding the right board for you. A wonderful mentor provided much of the reading material and later helped recruit me to his board, and I’ve acquired other mentors along the way through networking.”
Strandjord currently raises the bar for boardroom excellence at Euronet Worldwide, MGP Ingredients, American Century Mutual Funds, J.E. Dunn Construction, and the Ewing Marion Kaufmann Foundation. To advance her boardroom education and enhance her director skills, she decided to pursue the NACD Board Leadership Fellowship. “I believe I owe it to my boards to continue my education,” she said. “Continuing education is extremely important for all board members. You can’t be as effective in any endeavor unless you keep up your skill sets, because things are changing too quickly.”
NACD Fellowship, the gold standard for director credentials, is a comprehensive program of study developed to educate directors about perennial and emerging boardroom issues and best practices. Completion of this rigorous program demonstrates a director’s serious commitment to exemplary board leadership. “NACD brings the most value in terms of the education that they provide—and I’ve been to programs at the New York Stock Exchange and the Investment Council Institute,” Strandjord said. “NACD’s program is terrific, and I really believe in it.”
Read the full interview with Jeannine Strandjord in the September/October 2015 issue of NACD Directorship magazine, where she also talks about the biggest disruptors she faced at Sprint, her experience as the first and only woman on a board, and how the decision to pursue NACD Fellowship has shaped her board service.
Future issues of NACD Directorship will introduce you to other outstanding NACD Board Leadership Fellows. To learn more about the program and how you can attain the NACD Fellowship credential, click here.
Dawn Mahler and Jesse Rhodes contributed to this piece.