How regularly should the board be assessing the kind of leadership it needs currently and in the future?
At a minimum, boards need to think about what type of leadership the company needs on an annual basis. The velocity of change is so fast today that many companies have instituted a multi-day offsite meeting as part of that forward view of strategy in the competitive landscape. A high-functioning board is continually probing to get an external view of the competitive dynamics that are impacting the company’s performance. The obvious next piece is to look at current and future leadership and map it against the expected future competitive dynamics. Is your company under assault? Or is the priority profit growth through operational efficiencies?
When and how should boards be thinking about replacing the CEO?
If you feel that you are leading, growing market share and innovating with new products and services, then you can feel good about the continuity of the leadership team. But if you are losing share or your growth is below your peers, then you need to explore why: Is it that our products and services are not as relevant as those of competitors? Is it execution?
“One of the key mistakes companies make in screening potential candidates is abdicating reference checking to a search firm.”
Part of that review is evaluating the performance of the CEO’s direct reports and the CEO. It takes boards a few years to decide to replace the CEO. When a company is under performing for the second year, flags go up. You should scrutinize, look for the patterns and consider, ‘Do we need a different leader?’ By the third year, you’d better be doing something about it.
Research shows that CEOs who come from within tend to have a better chance of succeeding, but we’re a small-cap company without a deep bench of talent from which to draw. How should we address succession planning?
The data supports internal candidates: two-thirds of CEOs hired from within succeed, versus only one-third of external CEOs. When possible, small and mid-sized companies should start developing internal candidates well before a planned exit by giving high-performing individuals operational experience and board exposure. In addition to positioning them to be CEO ready, this helps with retention. I’ve been approached by a firm that does CEO candidate assessment, including a psychological screening. What can that level of candidate scrutiny bring to the succession planning process?In my experience, the psychological screenings that are often done by executive search firms are helpful, adding a level of input, especially when you have internal and external candidates. In and of themselves, these screenings aren’t definitive, but they can help you identify candidates who have the attributes you need, such as an ability to deal with uncertainty, focus in managing high-velocity change and strength in delivering incremental financial improvement.But psychological screenings are no substitute for spending time getting to know a potential successor or for doing your homework. One of the key mistakes companies make in screening potential CEOs is abdicating reference checking to a search firm. Previous employers tend to be reluctant to say anything negative, so a director needs to be on that call listening for that telltale pause or sigh and reading between the lines.
We are recruiting a replacement for our CEO and founder, who has broachedthe idea of staying on in an emeritus capacity to advise the new CEO. Is this something the board should consider?
It is always awkward and difficult for a board to transition a founder out of the CEO role. There are few examples where having the founder move into a chairman emeritus position has worked successfully, and a long list of companies where it hurt performance and significantly distracted the new CEO. Founders feel ownership for their companies and have many deep relationships. It is extraordinarily difficult for them to avoid overstepping and inserting themselves into operations. When boards agree to this structure, I fear they are not facing the really hard decisions. Directors really have to ask themselves, do we truly believe ours is the one in 1,000 case where this will work? What are the risks of destabilizing the new CEO? A better idea is to come up with a special adviser role for the founder, with special projects that are predefined.