CEO Succession

For more than fifty years, RHR International has helped companies effectively manage the critical issue of CEO succession. That task has never been more difficult than it is now. The pace of change in business is so dramatic and so impactful that it has made finding the necessary "fit" between a CEO candidate and a company more complex than ever before.

As a result of RHR's rich experience in this area, Dr. Thomas J. Saporito, Senior Vice President of RHR, was named to the Blue Ribbon Commission on CEO Succession by the National Association of Corporate Director's (NACD).

The Commission was made up of CEO’s, senior executives, academics, and consultants from across the country that met over the course of a six-month period in Washington, D. C. During that time, they attempted to develop guidelines that a board could use to make sure that the executive talent they were developing, or selecting, would result in naming the right CEO for the company. The result of that extensive effort, the Report of the NACD Blue Ribbon Commission on CEO Succession, was recently published by the NACD.

In conjunction with Dr. Saporito, RHR International was a primary contributor to the chapter, "Selecting the 'Right' CEO" and was solely responsible for the information in the appendix titled "Assessing CEO Candidates."

What follows is not merely a summary of the Commission Report. It also reflects RHR's special focus on creating a succession process that will both produce a talent-rich company and develop the best criteria for selecting the right candidate for the company at a specific period of time.


CEO Failures in the News
The numerous failures of CEO’s in recent years are hardly a secret. Newspaper headlines have repeatedly exposed the embarrassing truth. Newly appointed CEO’s have been publicly fired, and many longer-term CEO’s have been asked to step down. In fact, in the five-year period from l992 to l997, 100 of the Fortune 500 CEO’s were replaced by their own board. Blunders of this magnitude not only generate disastrous publicity, they cost investors hundreds of millions of dollars.

To complicate the issue even further, replacing a CEO does not merely create a public relations or financial loss. It involves another challenge: how can the board know that the new CEO will be the right fit for the company's needs?

The Five Principles of CEO Succession Planning
After months of discussion, the Blue Ribbon Commission distilled five key principles as guidelines for the difficult and time-consuming process involved in succession planning.

1. Succession planning must be driven by strategy.
Succession planning is not just about picking the next CEO. Nor is it merely about picking a talented executive. It is about creating a "fit" between what the company must do strategically and the person who can best implement that strategy. That fit will optimize the company's ability to compete successfully in its present and future environment.

2. The goal of CEO Succession is bringing in the right leader at the right time.
Many boards make the mistake of selecting a CEO based on a track record. It is tempting to assume that past success is a guarantee of future performance, but it's an incomplete way to make a decision. In the first place, the skill sets and talent that enable a person to run one business satisfactorily don't necessarily guarantee that he'll be successful as your CEO.

In the second place, using past performance as the primary criteria for hiring a CEO fails to take into consideration what the company needs to do to move ahead and whether the candidate is the right person to meet those specific challenges. Factors that should help determine who is the right person at the right time include industry dynamics, the company's health and competitive position, the corporate culture.

3. CEO succession is a board-driven, collaborative process.
Succession planning is one of the board's two or three most important tasks in its role of protecting the shareholders' interest. Traditionally, CEO’s have picked their own successor with the board rubber stamping the CEO's decision. This practice is no longer viable or acceptable. Recent news stories of failing CEO’s indicate the dangers of this practice. However, selecting a new CEO must be a collaborative effort with the existing CEO. The board must have the final accountability, but it must be done collaboratively. In addition, the board's responsibility is not merely a matter of evaluating the present CEO or even selecting a new one. Board members should understand that it is also their responsibility to ensure that a long-term plan is in place that can ensure continuity of leadership.

4. CEO succession is a continuous process.
A common scenario is this: after exhaustive effort, the board finally finds and installs a new CEO. Since the board realizes it should pick the right person and then let that person govern, it seems natural for the board to simply step back and forget about succession issues until the next time they're in the middle of a search or crisis. But change is part of life. CEO’s can leave unexpectedly, and tragic events can happen without warning. It is a wrenching crisis for a board to discover that it does not have a satisfactory candidate to take over in case of an emergency.

5. The board must ensure that the CEO develops and encourages a talent-rich organization.
The board not only has the right and responsibility to name the CEO's successor; it must insist that the company have a cadre of talent on hand who are appropriate for moving the company forward. One of the hallmarks of a well-run company is that it has developed executive bench strength from within. That is why it is also up to the board to make sure that a plan is in place that will build management talent for the entire top-level of executives. It is no coincidence that companies known for their strong executive talent bank, such as GE, Hewlett-Packard and Allied Signal, are also well managed.

While it is true that most corporations have programs for assessing talent, such assessments will be futile unless the process incorporates a follow-up plan for developing that talent. In addition, both the assessment and executive development must be done in the context of the company's future needs.

Selecting the "Right" CEO
Matching the CEO to the corporate strategy is the very foundation of succession planning. The CEO, as well as the talent pool of potential replacements, must be a solid match with the company's current and future business challenges.

RHR has created a three-tiered approach to create a Profile of Success™ that helps companies develop an adequate succession planning process. (See Figure 1)

1. Articulate the organizations' strategic imperatives
Based on a strategic assessment of a company, a board should ask itself several key questions. What must this company do well to succeed now and in the future? What are the dynamics of the industry? How is the competitive environment affecting the company? In other words, what are the company's overall critical imperatives for success?

Figure 1 Building a Business Linked Profile of SuccessTM


2. Determine the success factors for the CEO
The board must ask itself what the next person in the CEO seat must do extremely well to achieve the company's strategic imperatives. What this step comes down to is this: the board should define the job and its success factors.

Consider, for example, the strategic implications for a company whose growth strategy has been changed to include acquisitions. The executive capabilities that match the new company's future may be very different from those that were adequate for the same company in the past. To be successful in such a new environment, the CEO must now possess leadership capabilities that let him build collaboration and merge cultures and traits that are different than simply running a single company.

3. Articulate the behavioral requirements of the new leader.
It's clear that the challenges facing the company will have important implications for shaping the leadership requirements at the top. The key question about a CEO candidate, then, is not how well this person did somewhere else, but whether this person will be able to succeed in this new job in this new environment.

The board should ask itself, what kind of person would fit the needs of the company. What values are important? Does the candidate fit the existing culture--or is a shake-up essential?

The picture provided by the "Profile of Success" will not only help the board select the "right" candidate, it will prove indispensable for determining the skills and types of experiences that can best prepare a group of executives to meet the challenges the company must face in the future.

Assessing CEO Candidates
To go more deeply into the issue of CEO candidate assessment, the Blue Ribbon Commission interviewed seven experts from RHR and asked them to identify the characteristics of successful CEO’s with whom they had worked. Over the course of more than 50 years of working with corporate clients, RHR recognizes that there are several general characteristics that can be seen as the common denominators of successful CEO’s.

The traits in the following (Figure 2) exist across corporate cultures and situations of all types.

Figure 2 Characteristics of a Successful CEO
Traits
Indicators

Intellectually resourceful
Possesses sound judgment and keen discernment
Strategically focused
Problem-Solving Capability

Temperament and Motivational Factors Emotionally robust
Strongly committed to personal and business values
Mature use of power
Interpersonal Relations and Communication Communicates effectively
Able to manage a variety of constituencies, both internal and external
Consistently articulates and adheres to company vision
Insight into Self and Others Understands own strengths and weaknesses
Grasps the needs of the organization and of others
Leadership Characteristics Paints exciting picture of change
Sets the pace of change and orchestrates it well
Demonstrates recognition and concern for others
Clearly defines expectations
Serves as a trusted example
Determines company's values agenda
Develops and enables a talented team



But these general characteristics are not specific enough for creating a good match between the CEO and the company. Corporate challenges and objectives must be considered as well: how a company ranks in its competitive situation; where it is in its development as a company; it's strategic intent; its performance.

In an attempt to provide guidelines for matching the company's needs to the individual, RHR identified four corporate scenarios that have a bearing on the capabilities and behavioral style needed by CEO’s in those circumstances. There are numerous situations, but for the purpose of the study, RHR delineated only four:

• Rapid growth: Marked by a dramatic increase in revenue and market-share often accompanied by new products and/or markets.

• Turnaround: a company in significant trouble and need of major financial and operational restructuring.

• Merger integration: two companies faced with the challenge of combining resources to function as a single entity.

• Industry shift: a company in an industry undergoing major changes that require the company to change its culture.

The entire matrix reported in the NACD CEO Succession Report matches the optimum CEO traits needed in four different corporate scenarios. It is by no means exhaustive, nor is it meant to suggest that an individual must possess all of these characteristics in order to be successful. However, these are traits that are critical in creating a fit between the company's strategic needs and the CEO's behavioral capabilities and qualities.

While there is not room in this synopsis to present the complete guideline, the following (Figure 3) is intended to give readers a sense of how certain traits and characteristics can support one corporate situation better than another.

Figure 3
Corporate Situation Key Leadership Factors
Rapid Growth Sees alternatives beyond traditions and habits
Embraces change easily
Effectively communicates clear vision of the future
Willing to surround self with needed talent
Delegates authority; trusts others to get the job done
Turnaround Near-term focus with long-term awareness
Stands ground in face of resistance
Clear and concise communicator
Motivates people to think about where the company is going-not where it is coming from
Generates solid team around new agenda
Merger Integration Able to visualize picture of future organization
Understands the cultures of the two organizations and potential implications of their differences
Recognizes that cultures are more powerful than individuals; willing to work with cultural dynamics
Consensus building management style
Industry Undergoing Structural Shift Excellent industry knowledge
Able to think out-of-the-box
Comfortable with ambiguity
Passion for change
Creates a sense of urgency
Motivates others to change their mind-sets as well as their management practices


Conclusion:
Preparing and selecting a CEO are the most important tasks a Board of Directors must handle. The process is a long-term effort that involves planning, continuous effort, and collaboration with the current CEO. At best, it should include building executive bench strength; but for this process to be meaningful, it must be based on developing leadership skills that match the company's strategic imperatives.

All this and more are part of CEO succession. But, in the end, it finally comes down to selecting the right person at the right time: that person who is best qualified to implement the strategy that will drive the company forward. Finding and selecting this person is the board's central and most important issue.

This information has been prepared in order to assist anyone who wishes more knowledge about this critical topic. This matrix of success indicators or the entire NACD Blue Ribbon Commission report on Succession Planning is available by request from RHR International.