Why the Best CEOs Are Already Thinking About Their Exits
When CEOs botch their exits, their successors and their companies suffer. According to Russell Reynolds, between 2003 and 2015 one in every seven CEO retirements in the S&P 500 was followed by the forced departure of the new CEO within the first three years, 85 percent of them due to low performance or forced by the board or activist investors.
And the costs are high: George Abdusheleshvily, Managing Partner at Ward Howell International estimates that a failed succession can reduce revenues by as much as 3% for a typical $1 billion revenue company, with hits to market cap running in the billions. This confirms earlier findings by Nat Stoddard and Claire Wyckoff, whose research puts a direct cost of failed CEO exit at the ‘range between $12 million and $50 million depending on the size of the corporation’ and ‘total losses to the US economy at $ 14 billion a year’.
Explanations aren’t hard to find. Leaders find it hard to let go, which makes otherwise intelligent and pragmatic people behave in irrational ways. CEOs may avoid the issue of succession altogether, procrastinate in dealing with it, sabotage the board’s efforts at succession planning, or simply withdraw from the process. As a result succession is delayed, the next CEO arrives unprepared, or the ex-leader sticks around in the capacity of chair or senior advisor and continues to call the shots. Company performance deteriorates, while the new CEO receives a lot of criticism, steps down voluntarily, or gets fired.
It doesn’t have to be that way. There are many companies in the world that have mastered the art of leadership succession and thousands of former CEOs who have made successful exits. The following four basic guidelines, derived from 25 years of advising boards and CEOs on leadership succession and a 6-year research project covering 15 countries, will help aspiring and incumbent CEOs to do likewise.
Smart CEOs look on their tenure as a project. Greg (not his real name, as with most examples in this article), former CEO of an investment holding company and now a partner at a private equity company, explains: ‘Perhaps I should blame my McKinsey background, where we hopped from one project to another, but when I was offered the CEO job I looked at it as just another project – with its own scope, goals and time limit. I gave myself five to seven years and agreed with the board that, no matter what, I would step down after seven years.’
In that spirit, CEOs like Greg start planning for their exit as soon as their on-boarding is complete, and no later than six months into the job. From that point they spend 10% of their time identifying and (for internal candidates) grooming potential successors. They usually start with a relatively large slate of potential candidates, which they narrow down as their departure date approaches. They take the time to get to know candidates by spending time with them, visiting their operations, speaking to their subordinates and, if possible, talking to their spouses. They will mentor and evaluate them by giving them both developmental and testing assignments. If possible, they give the most likely candidates a dry run at the job by appointing them as heads of self-contained business entities.
Helen, who served two three-year terms as CEO of a transportation holding company, is a case in point. She started working on succession immediately upon starting her second term. Two years before her designated departure she created two managing director positions for two candidates. After eighteen months, she reviewed their performance with the board and chose one of them. The decision was announced to the winner and loser three months before her departure. Then she worked on her handover and left on the appointed day. Together with her successor, she convinced the second managing director to stay by giving them more responsibility and increased compensation.
Succession planning should not be undertaken alone. A CEO must involve the board in profiling for the job and identifying and evaluating candidates, since recruiting and evaluating the CEO is part of the board’s formal responsibilities. In addition, the board, along with the rest of the company, will have to live with the successor, which the outgoing CEO will not.
From the CEO’s perspective, the board is a valuable resource in succession planning – board members are themselves accomplished leaders with interesting networks of their own. Of course, board members are constrained in what they can do. They will have limited time to devote to the company and they may not have relevant operating experience. What worked in their companies may not work everywhere. Because of these constraints, board involvement is usually best managed by appointing a succession committee made up of a subset of board members who have the qualifications to contribute to the search.
A key issue is whether to look primarily for an internal candidate or an external one. In general, we would recommend giving preference to internal candidates, because integrating an outsider CEO is expensive and there is a high failure rate. An outsider is preferable only if they are truly outstanding relative to the insiders or the CEO and board feel that the successor will need to undertake a major transformation that calls for a leader who can bring a fresh perspective. In these situations, CEOs should draft in recruitment consultants to help.
Take the case of Oleg, CEO of global steel company. He initiated discussion about succession with the board three years before his planned departure date. The board delegated its role in the project to the nomination committee, which reviewed and edited the future CEO’s mandate and profile twice. The chair of the committee got to know all potential successors personally, and for the last two years of Oleg’s tenure as CEO, succession was a standing item on the committee’s agenda. Finally detailed evaluation of three remaining candidates by the committee and CEO led to a joint recommendation to the board.
Have a retirement plan
Many CEOs make the fundamental mistake of considering the job the be all and end all of their careers. As Alexey, the head of a Russian extraction company, told us: ‘I have been a CEO for 12 years and I can’t think about doing anything else.’ John, the leader of a UK financial services company, shared that sentiment: ‘From my first job I dreamed of becoming a CEO. It took me 25 years. Some of the jobs I had were very exciting, but nothing compares to the CEO’s position. I wish I could keep it forever.’
It’s not a realistic ambition. Although there are some cases of very long-serving CEOs, the global trend in our fast-changing world is unambiguous: tenures are shrinking in all markets from North America to China. Anything above ten years in the top job of a public corporation today looks like a special case. Our own research into Russian companies also shows that CEOs who serve for over 15 years are twice as likely to have a failed succession as chief executives who leave after less than a decade on the job. This is in line with PwC research on the world’s 2,500 largest companies, which shows that around 35% of successors to long-tenured CEOs’ successors are forced out of their jobs.
All this suggests that most CEOs will still have years of activity ahead of them after retiring, which is why the smart ones plan a future for themselves outside the company. Igor, who became CEO of an international mining and metals company at the age of 45, provides a textbook example. An insider, he had started to develop his vision of doubling profitability by investing in new technology and improving the operational efficiency of existing assets four years before taking the job.
At the time of his appointment, Igor had agreed to stay exactly four years. He already had some vague ideas about his life after stepping down – joining an investment firm (one of the company’s largest shareholders), starting his own private equity firm, advancing leadership and management development in the world, or even dedicating himself fully to his family to look after his two children and support his wife’s research work. Very busy with his modernization program in the first three years, Igor nevertheless took time to reflect on each of the options and discuss them with knowledgeable people. In the fourth year he made his next career move a part of his working routine, spending around 15% of his time on it.
During those 12 months Igor had 10 meetings with a potential employer, over 20 meetings with potential private equity partners, visited a number of business schools and universities, contributed to a leadership development initiative at one of them, regularly discussed the future with his wife, and had two career coaching sessions. After stepping down as CEO, he settled for a five-year contract with the investment company (with no mandatory office hours), relocated his family to a new country with better educational opportunities for his children, and put on hold his private equity and leadership development initiatives for the next five years or so.
Make the break clean
Many CEOs consider their companies their ‘babies’. The thought of handing them over to somebody else, who may start changing things to their own taste, makes incumbents anxious and overprotective. Denis, the CEO of a retail chain, said: ‘In ten years I have built this company into a market leader with a productive, inclusive culture. I am not sure my potential successor will keep it this way. I can hand over my job only if I have an effective mechanism of control over her actions, such as being the chair of the board or of the strategy committee.’
Denis will do his company no favors, if the experience of Bill, an ex-CEO, is anything to go by. Convinced that his successor would benefit from his experience and insight, Bill negotiated a 24-month consulting agreement with the board in order to support his successor. The role included an office at the company HQ and free access to all information and all employees. The first serious clash with the new CEO came just two months into the process – over the appointment of a Chief Digital Officer – but in the end the incumbent yielded to his predecessor’s point of view. The next confrontation – over M&A strategy – lasted three months and required the direct intervention of the board chair.
After that, the new CEO wrote a letter to the board asking it to forbid Bill to give orders to company executives. Bill was furious. After the first year, financial results deteriorated, and the management team’s morale plummeted. Some senior executives complained to Bill about their new boss, others avoided Bill at all costs. When, just 18 months into the job, the new CEO resigned, citing lack of autonomy as the main reason, the board immediately terminated Bill’s consulting contract.
In hindsight Bill regrets the decision to stay, which he says, ‘not only dealt a strong blow to the company but tarnished my reputation and legacy’. He now strongly recommends making a clean break: ‘Get out of there the day you step down and don’t worry – your successor will call you if she really needs your advice.’
The choice and preparation of a successor is the most visible and perhaps the most important manifestation of a leader’s legacy, and a failed succession may haunt a former CEO for years. A number of former CEOs I advise have still, after several decades, failed to come to terms with their botched exits.
For the company, the consequences of poor succession planning can be counted in hard currency, and botched successions can and do end up driving a good company int the arms of administrators. This is why Cees van Lede, former CEO of AkzoNobel and chairman of the board of Heineken, likes to say that you cannot evaluate a CEO’s performance until at least ten years after the CEO has left the company. It will take that long for the company’s performance to reflect the quality of the CEO’s succession planning.
Courtesy : Harvard Business Review