Planning for CEO succession

Boards and General Management

Lead Director Network, April 2013

Handling CEO succession is one of the lead director’s primary board duties. “The most important thing boards do is hire and fire CEOs,” said one LDN member. Shorter CEO tenure  and increased shareholder interest  make the succession responsibility an even weightier one. Members discussed six key aspects of CEO succession planning:

  • Forming a productive partnership with the CEO on succession
    The CEO should be a productive partner in succession planning, but the process must be driven by the board. Members discussed how to engage the CEO in the process and how to maintain an appropriate level of professional skepticism about the CEO’s recommendations.

  • Identifying potential successors
    Succession planning starts with identifying the profile of the leader who can execute the company’s strategy. A focus on talent development, and particularly on well-selected growth opportunities, can yield good internal candidates. Members also discussed occasions when it may be necessary to hire an external candidate, for example, when the business is in need of a turnaround, the company’s culture needs to change, or when no internal leader emerges as ready for the job.

  • Selecting the next CEO
    Members suggested that the board should get to know leading internal candidates in formal and informal settings outside the boardroom. Members also discussed the use of rigorous assessment services and some of the negative climate and culture effects of a drawn-out selection process.

  • Emergency succession situations
    One practical way to improve emergency succession plans is to identify in advance two individuals who could assume the CEO’s role in an emergency. Members discussed factors to keep in mind when considering interim CEO appointments, such as whether a board member should fill the role and whether an interim CEO may be hired permanently.

  • Successful transitions
    Careful shepherding of the new CEO through the transition is the all-important final stage in the succession process, and the task falls largely on the shoulders of the lead director. Members suggested five steps to ensure a successful transition: clearly outline the role of the departing CEO, work with the runners-up, fill any gaps left by the prior CEO, consider broader leadership changes, and gather and provide detailed feedback to the new CEO.

  • Combining the CEO and chairman roles
    Should a new CEO also be given the role of board chairman? While some members strongly oppose unified leadership, a little more than half of large US companies have a combined CEO/chairman. Members shared reasons why it may not make sense to separate the roles at a given company, such as the expectation in certain industries and in certain parts of the world that summit-level discussions proceed with the company’s final decision maker, which can lead to perception problems in cases where the roles are split.