February 26, 2021
February 26, 2021
The road to CEO success is rocky. The average tenure of CEOs has plummeted, from 8.5 years in 2003 to 3.7 years as of 2020. The Corporate Executive Board finds that in the first year and a half in a new role, 50 percent to 70 percent of executive leaders recruited both internally and externally fail. This lack of success comes at a huge cost. Companies that have to remove a CEO forfeit almost $1.8 billion in shareholder value compared to companies with successful placements. Add to that internal disruption and lost opportunity and the cost mushrooms for companies of all types and sizes. It’s a board’s nightmare.
Despite these odds, there are some lessons to be learned about how to avoid a CEO transition failure and how to get it right in the first place. As consultants to boards and CEOs on leadership and succession, our front-row view of the missteps that create costly mistakes in CEO placement decisions offers a cautionary tale for all leaders considering their own successors and those of their colleagues.
Take the example of the first-time CEO of a growing technology company who, not long after her internal succession, brought BTS Boston in to help focus her team on their strategy. She was frustrated by the mistrust and finger-pointing on the executive team, and as we worked with her to rebuild the team and culture, the challenge of her position became clear. About 18 months previously, the board had by-passed internal candidates to recruit an external industry leader from a marquee brand to follow their long-time, retiring CEO. The high-profile search took a year, and though fully supported by the board, within the first 12 months the new CEO’s divisive leadership style had created an “in crowd” and an “out crowd,” leading to siloed arms of the organization that could not collaborate. When that chief executive abruptly departed, the board scrambled to circle back to internal candidates, and our client got the nod. She would enter her first year with strong headwinds, tasked with rebuilding the team, the culture, and the strategy.
This scenario highlights the blind spots companies have when taking on the high-stakes, high-risk task of CEO succession. One big misstep is often followed by years of recovery. Before going any further with succession planning, boards should pressure test their own processes against these five common mistakes.
The CEO of the tech company above went on to see tremendous success, building a top-performing company with a strong team, culture, and trust with the board and shareholders. Her board chair told us two years after her initial ascent to the position that promoting her into the CEO seat was the best decision they had made. But what was that “off-the-paper” difference that made her so successful? And what had they missed about the external candidate who failed?
Character. When evaluating candidates or internal successors, search committees too often rely on hard skills as the concrete metrics to decide on CEO placement. They miss out on the opportunity to ask critical questions about the candidate’s personal values and how they build relationships, instill trust and confidence, grow company value, build credibility with analysts, promote a strong corporate culture, and inspire a shared vision.
Board members must get to know candidates and internal successors personally through conversations over time to learn how the leader thinks, what they find important, how they listen and engage, and how they share their own life lessons and values.
The profile of a successor is the foundation upon which the future of the company and strategy are based. One of the biggest derailers of success is relying on the wrong profile and the wrong set of criteria for your next CEO. Avoid the following common missteps when setting candidate criteria:
In the case study of our tech client, the board’s belief that an external change agent would advance the existing strategy led to a cultural mismatch, and ultimately failed.
Many boards and CEOs put active succession-planning on the back burner until they are at the precipice of a transition because, quite frankly, it’s hard to do. They perceive too much risk in signaling advancement to internal successor candidates, fearing they’ll create a horse-race that distracts from execution and potentially leads to the loss of key talent. The consequence is a readiness gap with possible successors weakening the organization’s ability to weather the storm of an unexpected departure. Additionally, putting off succession planning reduces the strength and breadth of the candidate pool that comes with a deep leadership bench and those in line lose out on the opportunity to gain exposure to critical audiences, issues, and experiences that would make them more ready and effective to step into the role.
Making the right selection is the starting point—but setting the new CEO up to succeed is the difference-maker. It can be easy to forget that there is a steep learning curve involved with entering a new CEO seat, even for experienced executives. Particularly for an internal successor, time allocation, building board relationships, executive team management, navigating external visibility, and other new routines need to be established and can make for a bumpy first year. For any candidate, developing trust, building a successful executive team, stabilizing client relationships, setting and selling the strategy, and creating a CEO narrative requires a high level of focus that should be core to the onboarding process.
So often the CEO succession process happens behind closed doors, far away from even those who will work most closely with the new CEO. Beyond the search committee, few have insight into how the CEO will be selected, what the criteria are, and how the decision will be made. This vacuum of information gives rise to rampant speculation, skepticism, and cynicism, and, in more extreme cases, suspicion and concern. The void is sometimes filled with a fear of hidden agendas, such as those involving insider relationships and favoritism, diversity goals, potential unannounced mergers or acquisitions, or the influence of activist investors. If those concerns take root, at best it will make it hard for the team to trust their new leader. At worst, this can create destructive infighting and even cause key players to leave when you can least afford their departures. Make sure to set your next CEO up for success by communicating the how and why of the selection process early and often.
In addition to reviewing company processes and the common missteps above, boards can take the following steps now:
CEO turnover is a perennial issue, one that will continue to plague companies who fail to plan and prepare for the future. The failures will become more and more costly as the pace and competitive environment of global business continue to accelerate at warp speed. Going forward, it will be even more important for boards to put this issue front and center, plan carefully, and consider actions to take now to develop potential internal candidates to deliver future success.
Sarah Woods is a partner at BTS Boston, formerly Bates Communications, a global management consultancy that improves performance through communicative leadership. Joe Andrews was formerly chief human resources officer for Progress Software Corp. and is currently a consultant, coach, and CEO succession expert with BTS.
NACD: Tools and resources to help guide you in unpredictable times.