CEOs should view succession as a critical part of their role. One of the most likely indicators of successful CEOs is their ability to create and develop a top team that’s aligned to the future capability requirements of the organisation. But to what extent should CEOs nurture the process of succession in their organisation?
There’s no reason why a company’s success shouldn’t continue under a different leader, but a smooth transition frequently depends upon the quality of the top management team. And the CEO has a role to play here, not only as the organisation’s current leader but also as steward of its future direction.
Darryl Eales, CEO, Lloyds Development Capital, says: “The thing that occupies me more than anything else is how to build a sustainable business – one with a clear succession. In every business, a key role of the CEO should be to consider the long-term strategic objectives for the business and, within this, how to develop a team that can maintain the growth of the business when the incumbent moves on.”
The CEO as steward
In his article, Heir to the Throne, leadership expert Kai Peters, Chief Executive of Ashridge Business School, says that: “The CEO sees within his/her organisation that there are many talented individuals, each with a role to play and some that have the ability to fulfil many important leading roles. The CEO, as steward of the organisation, is clearly interested in having the best people possible to achieve the strategic goals that have been identified.”
Don Elgie, founder and CEO of Creston plc, says: “One of the key functions of the CEO is to lay down a succession plan, to build it carefully and internally. But choose your own retirement date. You should not announce it externally until quite close to the exit point, or your role will risk being seen as a lame duck. For an example of how to do it right, see Sir Terry Leahy and his succession plan for the CEO of Tesco. He waited until just six months before his exit date to announce it formally and the perception was that he was still fully functional, even past that point. He chose when it was time to leave.”
In Tesco’s recent baton-passing, while new CEO Phillip Clarke appears more media savvy than Sir Terry Leahy (for one thing, he tweets!), both men are Tesco ‘lifers’: they are the product of the brand’s resilience and a testament to the culture it has nurtured. For the retailer, it’s just another chapter in an ongoing story of succession that regularly garners praise.
Lynda Gratton, Professor of Management Practice at London Business School, says: “Fostering resilience is crucial to the long-term success of a company, and one of the core aspects of this is the way in which the CEO succession is managed. I remember talking to Sir Terry Leahy when he was still the CEO of Tesco, and his pride in the stability and resilience of the company reflected in a succession process that had seen only five CEOs since its early growth.”
The risk of ill-judged choices for successive leaders, and exchanging them too frequently, can play havoc with your share price in the short-term and can do lasting damage to the brand. While uncertainty prevails outside your organisation, the importance of a strong, dependable leader that is the product of a solid succession plan should not be underestimated.
Lynda adds: “Stability can be reinforced by a smooth and dignified transition of the CEO, where the incumbent CEO is seen to support and nurture the succession process and, by doing so, to steward the senior team into the next phase of their development. It is this calm and this stewardship that, in the longer-term, become such a crucial element of resilience.”
Don’t fit the mould; lead by example
In his article, The Perils of Being Shaped for Leadership, Gianpiero Petriglieri, Affiliate Professor of Organisational Behaviour at INSEAD, says: “Most people groomed to be future leaders are chosen because they seem to fit current leaders’ ideas of what good ones should be like. These ideas are captured succinctly in lists of corporate values and leadership competencies. In picking potential successors and prescribing their profiles, senior managers seek to ensure their organisation’s future and perpetuate their own legacy.”
Of course, different organisations present different challenges. If the Founder is still present, for example, it is often difficult to find someone with the right qualities to take over the role: whatever the new CEO’s credentials, he or she will not have founded the business.
Bob Holt, Chairman of Mears Group, agrees: “This is always difficult in an entrepreneurially driven organisation. The CEO must therefore encourage individuals to be their own person and to form their own views, which will challenge and enrich the management team.”
The type of successor should also depend on the stage of a business’ development, explains Chris Merry, CEO of investment banking group Matrix (and a former CEO of the executive recruitment firm Whitehead Mann): “A growing business needs different skills in order to mature from the start-up phase. This might be difficult for an incumbent CEO to see and to understand, and this is largely the chairman’s responsibility, supported by NEDs. Culture and fit are vital in most organisations and the tone should be set from the top.”
‘Grow your own’ or recruit externally?
“Fundamental to the whole issue of succession is whether the company is doing well, or not,” says Tony Cowling, President of TNS Group (and a Criticaleye Associate), who helped found Taylor Nelson Ltd in 1965 and, as CEO, led the company through a prolific number of acquisitions, including a merger with Sofres in 1997. “Where the company looks to be in a strong position in its market, such as Tesco, then recruitment from within should be best. It maintains stability, is good for staff morale and lessens the risk of disruption. When companies have performed badly or disasters have occurred – banking comes to mind – then bringing in outside management that is not tainted with these problems must be a favoured, though not essential, option. In fact, since the crisis, many banks have completely changed their management – and rightly so, many would say.”
Numerous studies highlight the preference for recruiting from within. One of the latest, by The Kelley School of Business at Indiana University and global management consulting firm A.T. Kearney, analyses data from S&P 500 non-financial companies over 20 years (1988-2007) and finds that those companies that exclusively promote CEOs from within outperform companies that recruit CEOs from outside the company.
Kelvin Harrison, Chairman of Maxima Holdings plc, says: “All the CEO’s direct reports should want his/her job and at least one of them ought to be capable of it. If this is not the case, the management team needs to be strengthened. However, a good CEO is always keeping an eye out for external talent. It is a very weak CEO that does not have diversity in his/her senior management team. When the CEO reaches the point at which he or she wishes to move on, or is taken out, then the nomination committee, or the board, should have a choice of internal and external candidates, to which they may choose to add.”
Don adds: “I would call into question any management that doesn’t have a succession plan. It should be seen as a clear risk to business continuity. Statistically, recruiting from within is considerably less risky than recruiting from outside. Often, CEOs are brought in externally when there’s a performance problem or the board does not have confidence in the current team. The CEO should work with the board to put in place, on a confidential basis, a ‘train list’ of potential candidates – those potential suitors that can take up the reigns in the event of sudden or unexpected departure.”
The risk of unplanned succession
Tom Taylor, Chief Executive of the Agriculture and Horticulture Development Board (AHDB), says: “I am a great believer in what Charles De Gaulle said; ‘The graveyards (of France) are full of indispensable people’. None of us will survive for ever so the sooner one gets to grip with a succession plan for all key positions in the organisation, the better. We have to be honest and look in a mirror. What our organisations need is someone in the CEO role that can lead and deliver results in the prevailing business climate, whatever that may be. It means we need different skills for the CEO at different times of an organisation’s development. CEOs need to be honest about that. Additionally, if one is looking to replace from within, is it really healthy to have a CEO and his/her clone in the current management team?”
One of the best recipes for failure is when a company is taken by surprise, yet the idea of replacing a CEO should never come as a surprise, as the one certainty is that the tenure of the CEO will end at some point and a replacement will be needed.
“Any good leader needs broad shoulders, and by virtue they should think about who will follow them once they leave,” says Simon Howard, Executive Chairman of Work Group plc. “It’s largely about giving yourself options from the top team and you do that by ensuring you develop the best talent around you. How a CEO goes about succession is a matter of individual style, but they must consider how they are going to nurture the process. And they must be open about it, internally at least, because if it is communicated properly, everyone knows where they stand. Instilling an air of certainty – that the CEO will go and how succession will be handled – is paramount.”
Chris adds: “Having clear succession plans for each key role is sensible risk management. For a regulated financial services business, succession planning is of interest to the FSA in assessing proper governance and management, and quite rightly so. The smaller the business, the harder it is to have a qualified successor in place for each key role. In CEO succession, logically, it’s the responsibility of the chairman to recruit the CEO, but this is not always done. And many see it as a threat to have a successor in place before having decided to go … unless he/she is at, or approaching, natural retirement age. Naturally, there is a tension between ensuring one’s own survival and protecting the business.”
John Leighton-Jones, HR Director at TT electronics plc, says: “Succession planning at the executive level is usually driven and directed by the nominations committee. Succession plans should be reviewed twice a year. This review should be used to baseline the capability requirements of the next CEO. The requirements should be shaped by examining the business strategy over the next five years against the global challenges, risks and opportunities likely to face the business in the future. Evaluating the impact of the challenges will help ensure that the next CEO has the leadership skills, capabilities and experience to respond to the changing environment.”
Retaining value on exit
While all CEOs leave behind a legacy, some endure for longer than others. Those that last have done so because the skills and value of the CEO has been absorbed by the top team and become a part of the fabric of the organisation.
Bob agrees: “Retaining the value of an exiting CEO is largely about ensuring that the core values and strategies of the organisation are understood and accepted by all stakeholders.”
Or, as Gianpiero puts it: “Rather than merchants of hope, as Napoleon called them, leaders are more like custodians of it. Iconic leaders are people whose personal trajectories mirror closely the ambitions of their communities. They lend their faces and voices to principles and aspirations that people hold dear at a point in time. They don’t tell stories; they are stories that match their times.”
One of the most likely indicators of successful CEOs is the quality of the team they create around themselves. Therefore, a key skill of a CEO is to create and develop the top team in line with the future capability requirements for the organisation.
Simon says: “The CEO must appreciate that his/her success is more a matter of team achievement rather than the result of single-handed autocracy. And he or she doesn’t have to aim for the slam dunk of one perfect successor, rather ensure that the top team is cohesive and working together so that there may well be more than one possible successor. Of course there’s always a risk of losing talented people along the way, but top talent is more likely to stay if individuals have been sufficiently developed within the top team. Some of the most talented CEOs I have met aren’t 24-hours-a-day workaholics, rather they have developed a top team around them. Key to this is that succession has been a natural part of the top team’s development plan.”
Tom adds: “The key to effective CEO succession lies in being confident enough in your own ability that you can safely develop talent below you in the knowledge that they will never be able to replace you until you are ready to move on. When one is planning to move on you should give others opportunities to tackle some of your tasks on your behalf in the knowledge that you are still there to guide them – and if needs be take corrective action – while you are still in a position to do so. It is too late once you have left!”
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