The news that Microsoft CEO Steve Ballmer, who has held the position for nearly 13 years, will be stepping down in 12 months drove stock prices to jump nearly 7%, an anomaly to the standard. Yet, finding a suitable, long-term replacement for any organization can be challenging, especially in the midst of undergoing a major organizational change. Only time will tell how successful this transition will be for Microsoft, but it is further proof that boards should be making CEO succession and senior leader development a frequent standing agenda item.
CEO change brings a lot of brouhaha–whether good or bad–to shareholders and other interested parties. The risk is real, and boards need to hedge against its fallout through smart and informed risk management planning. Nobody wants to be the last to learn this lesson, especially when all your competitors have developed and implemented strategies to best mitigate share price deflation as a result of CEO succession. There are clearly two camps emerging: those who are still doing this the old-fashioned way and those who are applying new thinking that makes leader development part of the fabric of the business and the risk management strategy.
According to Korn/Ferry research featured in The $40 Trillion CEO Succession Risk, “The total market capitalization of the world’s publicly traded companies is approximately $40 trillion–shareholder value that is put at risk whenever companies transition to a new chief executive officer.”
Boards may be digging their own graves simply by not giving CEO succession enough attention in a preparatory capacity. Data from 2007–2009 shows that nearly 10 percent of S&P 1,500 companies experienced a CEO succession yearly.
Additional data released by Stoddard and Wyckoff shows that 40% of all new CEOs rotate out of the position within 18 months. Hasty CEO departures seem to be increasingly the standard, further underpinning the need for better, more thoughtful planning at the board level.
According to Korn/Ferry, the next time you are at a board meeting you should ask the following three critical questions to help determine whether the company is CEO-succession risk averse:
- Is the board leading succession planning down through the C-suite?
- Does the board have empirical assessment data on each succession candidate?
- Has the board outlined the experiences, capabilities, and competencies needed to achieve the company’s future strategy?
Answering no to all or any of the above means that swift and deliberate action should be taken, because changing executive talent is a when, not an if scenario. The most effective plans will be built around the following key tenets:
The future should lead the now.
Many boards create their incumbent CEO talent list based on credentials that are needed today to meet job demands, not what qualities and skills would better serve the company’s future business goals. CEO candidates should be subject to sophisticated assessments to determine whether they possess key competencies, such as: decision-making techniques, ability to adjust to new situations, and innovation. Their past performance is only a moderate predictor of their future success. Yet, far too many companies use that as a key component of their assessment.
How do we stack up against competitors?
Take advantage of the fact that no company exists in a silo, and create a benchmark for where your talent is and how it can evolve based on your direct competitors. Mapping your bench of talent and gathering intelligence on the executive talent pool should be an ongoing practice. You should also be proactive about comparing external candidates’ profiles with those of potential internal successors.
Think long-term success, not short-term wins.
Don’t make hasty decisions about who your CEO will be. Boards that are in a reactive position when a new CEO needs to be appointed will often be forced to make a rash choice that may seem like a good decision in the moment. Therefore, in large Fortune 500 companies, thinking two or three CEOs ahead will enable them to make the longer-term talent development investment needed to have a strong stable of future executives.
Is there a potential C-suite successor among the group or beyond?
Boards should be developing a bench of talent within the C-suite, in order to increase their ability to quickly identify a long-term or interim CEO replacement from within the organization. The best way to cultivate C-suite talent is to use sophisticated assessment tools to create development plans, so the company can issue stretch assignments and provide leadership and job coaching throughout someone’s tenure. Additionally, you should ask yourself what the depth of your talent bench is beyond the C-suite. Growing talent within the organization should be a priority. This should not only be a consideration at the executive level, but throughout the organization. Identifying upcoming talent and developing careers in a meaningful way to the company’s business strategy could result in generations of C-suite successors.
When you think you’ve thought of everything, keep thinking.
Succession planning may seem like a tired topic–one that needs to be swapped for more timely agenda items. Boards may also feel comfortable abandoning it once they are confident in their plan, but a sound plan will, as part of its success requirements, include a mandate for an ongoing succession-planning dialogue. Creating a reporting line where the chief human resources officer reports directly to the board on the CEO succession process would be a big step in formalizing succession planning. Not unlike the healthy dynamic that is created with the general auditor reporting to the audit committee.
Time and time again, the news cycle hits with an onslaught of coverage on forced CEO turnover, but that begs the question of what kind of burden and responsibility should the board share in the failure. The board should feel as much responsibility for making a CEO a success as the candidate does. After all, there is a lot at stake if a succession is botched. More aptly, the board is present to provide deeper analysis, long-term planning and rigor.
[Image: Flickr user Marc Blackburn-Wilson]