Sometimes, CEO succession goes horribly wrong, and that’s very often public. We see the failings of the CEO selected and think, as they fire them, “How could they get this so wrong?” That’s convenient Monday morning quarterbacking, because the reality is that it is very tricky, and no one (except maybe search firms) gets a lot of practice at it. Some of those that made it less than two years: Hein Schumacher (Unilever), Michael Conway (Starbucks), Ted Christie (Spirit Airlines), Pat Gelsinger (Intel), and finally, Kohl’s Ashley Buchanan, who only lasted 100 days. A PwC study found that $112 billion in shareholder value is lost annually because companies pick the wrong people to lead them.

I recently went to Philly (or Philadelphia, PA if you’re proper) to attend a discussion on CEO succession hosted by the National Association of Corporate Directors at the brand new KPMG offices. I didn’t take a picture at the event, so you just get my picture of Philly. 

On the panel included CEO, Spirovant Sciences, Dr. Joan Lau; Consultant at Egon Zehnder, Jeremy Lisnoff; Chairman and former CEO of J.G. Wentworth, David Miller; and retired Philadelphia Office Managing Partner, KPMG, Frank Mattei. This was a fantastic program and the reason I value my NACD membership, and while I won’t summarize the entire discussion, I do have some important reflections worth sharing. 

We may be undervaluing internal candidates, and overvaluing external “superheros” 

CEOs have in the past been considered superheroes in a way that they are good at everything. But that’s rarely true, or sufficient. Some may be more of a people leader, some more business execution, and others great strategists. But you’re not likely to get the superhero, and even if you could, it still doesn’t mean they’re a good fit and the right individual for the job. As Gallup has stated: “The great leaders we’ve studied are not well-rounded individuals. They have not become world-class leaders by being average or above-average in different aspects of leadership. They’ve become world-class in a relatively limited number of areas of leadership.”

An absolutely amazing stat for me is that the average tenure of an internal candidate CEO is 6.7 years, and for an external hire is 3.7 years. Sure, there are circumstances that skew some of that data, but just on the surface, it’s a powerful stat that suggests internal candidates should be given major consideration. 

If you were already supporting the current CEO, who do you think was the mentor of that internal candidate? If you want stability and consistency, at least for some of the most important things like culture, then an internal candidate can be a great choice, IF you are supporting and developing them correctly (more on that later).

That doesn’t mean putting the “heir apparent” tag on someone as that has lots of complicated consequences. For example, you are starting a clock under which that individual will expect to be elevated. Don’t make promises that you can’t, or won’t, keep. On top of that, the CEO can start to look like a lame duck, or at least less engaged, as the heir apparently begins to throw their new weight around. 

Egon Zehnder finds that the #1 predictor of success in the CEO role is an extraordinary curiosity about themselves and the world around them. That doesn’t surprise me, and it’s how you future-proof around a strategy, or competitive environment, or crisis that you can’t predict. By developing potential internal candidates, you can certainly test for that extraordinary curiosity. 

Finally, remember that not everyone who looks like a candidate is a candidate. Someone might be a candidate at age 55, but by 57 they are starting to think differently about their life. Circumstances change. Motivations change. Have conversations without making promises, because if you assume too much, you will likely make mistakes. 

CEO succession isn’t a process but a “constellation of activities” 

Said another way, if your CEO announces their retirement or departure and then you begin a search for a new candidate, you are certainly doing it wrong. 

As just indicated, internal candidates are fantastic choices if your development of senior-level positions is “always on.” In my opinion, at senior levels, you are either exploiting existing talent or developing future talent. 

But we also have to be aware that we are asking boards of directors to exercise a rarely used muscle and do it flawlessly. Boards should not have a lot of experience replacing CEOS, and if they do, something is likely wrong. Of course, they have experience and judgement, but that doesn’t mean they’ve practiced applying it to this particular decision. Go around the table and ask how many have actually done this before. 

Once you do, you need to be developing a profile for the CEO rather than a job description (since that job description is “you’re accountable for everything”). This is one of those moments where it’s extremely valuable to get input independently from each of the board members and then compile, and debate, and debate further, that input. Heindrick and Struggles states: “The development and assessment process starts with creating the future CEO profile, which the board should develop in conjunction with the current CEO. The profile is based on the company’s strategy and defines the crucial CEO skills and attributes for the next phase of company growth.”

Part of those sets of activities is being prepared for the “hit by bus” scenario, although these days it seems more likely a “went to a Coldplay concert” scenario. Who will take over in a pinch? Knowing that someone is ONLY an interim candidate, versus an interim-to-permanent candidate, is important, because it very quickly changes the process. At the very least, whoever took over as interim should not also be on point for the replacement search. 

As part of these processes, be prepared for a more-than-thorough background check. It’s amazing when a CEO is fired for ethical lapses, how many employees say out loud: “I can’t believe it took them this long,” because it seemed like everyone knew. You know that your employees are starting their own background check the moment an announcement is made. 

Your next CEO hire is vital and hard. Get the best help you can, be rigorous, take it seriously, and once you make it, do everything possible to ensure it is successful. 

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