For public companies, aren’t large institutional investors now also exerting substantial influence in governance issues, including CEO selection?
Until recently, institutional investors usually opted for passive role in the governance of the companies in their portfolios. Influence was exerted tacitly through the potential for disinvestment in improperly governed firms.
Today, governments are putting pressure on institutional investors to be more active in corporate governance matters. Many believe that greater involvement by institutions contributes to the improvement of governance standards, and thereby better protects investors – especially the general public.
Clearly, boards of directors should not allow institutional investors the final say in the appointment, but they certainly should listen to their concerns and ideas. Investor relations is an important element of successful CEO successions.
How has the CEO role evolved in recent years?
In the United Kingdom the separation of the chairperson and CEO roles has become best practice corporate governance and is largely adhered to. Of course, sharing roles may present relationship challenges, especially in an environment often characterised by strong egos. However, it does allow some tailoring of the CEO role and permits another to “coach” the CEO during the initial stages of tenure. This could greatly help some new CEOs and should be considered in the succession process.
In the United States, the standard practice is to appoint the same person as chair and CEO. However, many large US companies appoint president or chief operating officer (COO) to share the burden. It will be interesting to see whether the current regulatory reviews result in the chairperson’s role becoming separate from that of the CEO in the US. Each situation is probably best assessed on its own merits.
Finally, there has been recent academic research – for the most part relying on the experience of the 1990s – which seriously questions the importance and value of celebrity CEOs, and the awards of compensation packages that defy rational analysis. The result is that more importance is being placed on the qualifications of the top executive team as whole, as opposed to just the leader.
Of course, the swings of opinion must not cause excess adjustment: the CEO will continue to be vitally important. However, it is essential that the new CEO, together with the board of directors, develop strong executive team that ensures both depth and continuity of leadership. CEO performance will obviously deviate from expectations. If appointment results were highly predictable there would be little reason in attaching premiums to CEOs – or board members.
Fortunately, progress has been made. Over the past 15 years, lessons have been learned and best practices have emerged. Adhering to these should help the CEO succession process and mitigate the downside risks.
What are current best practice standards for CEO succession planning?
The board, or nominated committee of the board, should review the CEO succession plan at least once year. The plan should provide for:
•Assessment of the company’s leadership needs;
•Assessment of the current CEO’s and leadership team’s strengths and weaknesses;
•Identification of internal candidates to succeed the CEO;
•Consideration of external candidates; and
• Development of transitional and emergency succession plans.
The process should be based on detailed assessments and candid reporting. Utmost confidentiality is required until decision is made to either appoint search firm to seek an external candidate or announce the new CEO.
Succession plans must address un-expected events or the need for sudden change of plans. It is not enough to simply plan for the replacement of CEO who is about to retire. The death or incapacity of CEO has left many organisations, which were otherwise well managed, at an impasse. In addition, successful executives expect strong career development and are much sought after. Personal interests combined with market enticement guarantee that boards will continue to be surprised by voluntary CEO resignations. Investors will continue to expect boards to replace underperforming CEOs.
CEO succession plans often contemplate special responses to cover unexpected events. For instance, the board may opt for an interim CEO placement – former top executive or board member – until suitable insider is groomed or an outsider recruited.
For boards, how important is CEO succession?
As governance responsibility, CEO succession is the apex of all board challenges. Excellence in this area is not often found in isolation: it normally reflects high standards in management development and career planning throughout the company and in the systems for measuring performance.
Leading companies now recognise the importance of management development at different levels in the organisation. Although development programmes are normally coordinated by the HR director, they should not be considered purely HR function, but critical governance responsibility. Considered attention must be given to planning the careers of top performers in the company, assuring future corporate leaders the necessary breadth of experience.
In the best-managed companies, boards individually review the development progress and career planning of leading cadre of executives. Outside this core group, the board reviews summarised feedback on development and HR performance metrics.
Often, policies are in place defining the breadth of experience sought in candidates for top positions. This might include the need for international experience or familiarity of both functional and business-line roles – versatility is highly valued in assessing an executive’s potential.
Another important practice is to provoke opportunities for the top group of executives and upcoming stars to gain visibility with board members, both in professional and social settings. This helps the board appreciate talent and facilitates subsequent succession decisions.
Expect to find comprehensive performance measurement systems in strong succession planners. Systems should have greater depth than conventional financial and management accounting statements, hence the development of the balanced scorecard approach to performance measurement – often linked with setting management objectives and variable compensation.
Group HR directors have been important sponsors for improved measurement techniques; they are in an excellent position to appreciate the organisational damage that can occur if executives zealously pursue bottom-line goals without due consideration for other behaviour requirements.
What’s the first thing the board should be focused on in selecting new CEO?
A large fraction of CEOs who leave because of poor performance were applauded for success at previous stages in their tenure. top executive may have demonstrated excellence at implementing an established strategy in stable environment. But what happens when there is fundamental shift in the competitive scenario and in the basic attractiveness of the business? Full-speed ahead may just mean digging bigger hole. In this environment, the best CEO for the job might well adopt detached, shareholder-oriented perspective on strategic direction.
While versatility is recognised prerequisite it is still important to choose the person ideally suited for particular job. So, the first stage of CEO succession should be to identify the company’s main challenges. From this, the related leadership competencies can be identified, and consideration given to where these competencies are best acquired – either inside or outside the company.
Boards of directors that opt for an outsider as CEO can fall into the trap of having focus that is too narrow. Many, for example, make the mistake of restricting their search to candidates in the same indu
