CEOs may be the leaders of their company, but when it comes to choosing a successor, they should take a back seat to the board.
A generation ago, when CEOs dominated their companies, it was almost standard practice that the CEO pick a successor before heading into retirement. Sweeping changes in corporate governance have done much to reshape the balance of power in the boardroom—giving rise to independent, professional, outside directors.
But even today CEOs often have outsize influence, if not outright control, over the decision of who takes over when they leave.
This is a mistake, for a variety of reasons. Few CEOs have actual experience picking a CEO. Yes, they may have hired, promoted and fired countless executives over the course of their careers. But unless they have served on the board of another company that went through a selection process, it is unlikely they have faced the challenge of identifying an executive capable of being the final authority and bearing the ultimate responsibility for all strategic and operating decisions in a company.
Unique demands
The distinction might seem trivial, but it isn’t. The CEO job is vastly more demanding than other executive positions, and requires a unique set of managerial, leadership and decision-making skills. Many highly qualified No. 2’s just can’t succeed when they become No. 1, with the full weight of decision making resting on their shoulders.
Furthermore, CEOs might not have the right perspective to evaluate successors. At the end of a long career, many CEOs are concerned about their legacy. This can bias them toward favoring candidates who will guide the company in the same direction—and in the same manner—that they themselves led it. Research bears this out: When powerful CEOs play a role in the succession process, they steer the choice toward someone with similar characteristics to themselves. However, the future is rarely like the past, and if the company’s success going forward requires a change in strategy or a different mix of skills, duplicating the old CEO—even a very successful one—can be a costly mistake.
CEOs can also distort the process through their behavior. Because they generally control top talent development in their companies, they control the flow of information that the board receives about how internal candidates are progressing, as well as shaping the board’s assessment of that information. In addition, they control access—the opportunity for directors to meet face-to-face with the people they will be evaluating. Subtle actions can serve to block a disfavored candidate or promote a favored one, biasing the board’s understanding of the candidates’ strengths and weaknesses, skewing the evaluation process, and ultimately leading to the incorrect choice.
For these reasons, the directors should own the succession process. It is the responsibility of the board, not the departing CEO, to outline the managerial and leadership criteria needed for the next CEO, based on an independent assessment of the company’s future needs. The board, too, should be closely involved in developing executive talent—ensuring that internal candidates are groomed with the potential to gain those skills, comparing internal candidates with the external marketplace to identify the most promising set of finalists, deciding when it is time to go outside for a new CEO, and owning the final selection decision.
This doesn’t mean that outgoing CEOs shouldn’t play a role. They clearly should—particularly as it relates to talent development and reporting the progress of those individuals honestly and objectively—but the selection process and ultimately the final selection decision should rest solely with the board.
Directors with experience
Hiring the CEO is a fiduciary duty. The board owes it to the shareholders—legally and financially—to get it right. A subcommittee of independent directors with previous experience in succession at other companies should manage the process, with an open invitation to all board members to participate. If the board doesn’t have depth of experience in place, it can bring in an outside adviser to help. The head of the succession committee should be a director with strong leadership and credible authority, someone who can invite the participation of the outgoing CEO but stand up to him or her if necessary to keep the process on track.
To be successful, participating board members need to have a clear understanding of the company’s strategy, the criteria needed to succeed in the coming environment, accurate knowledge of the executive labor pool—both internal and external—and a rigorous process for narrowing the candidate pool to the subset of people qualified to succeed. At that point, they need to make a clear, objective decision, independent of the wishes—no matter how well intended—of the CEO who will no longer be serving in that position.
After all, they—not the outgoing CEO—have to live with their choice.
