“Within 5 years our CEO, CFO, and general counsel will retire,” an executive of a mid-sized manufacturing company told me recently. This is a major challenge! How do you make sure the baton gets passed adequately to the next generation of leaders?
CEO succession is tricky: “Whether new CEOs are hired from the outside or promoted from within, they should be aware of a daunting statistic: One-third to one-half of new chief executives fail within their first 18 months,” according to this Harvard Business Review article.
Succession is a risky business
The failure rate for new CEOs is much higher than for other functions in the company. Why is it so high? And why is it so high even for CEOs promoted from within the company? Companies and new CEOs alike often make a major mistake: they assume that the selection and onboarding process of a new CEO should follow the same process as for any other executive – but it shouldn’t.
More often than not new CEOs make common mistakes, identified in the HBR article:
- “They don’t read the political situation well enough to build necessary relationships and coalitions.
- They don’t achieve the cultural changes their strategic and operational agendas require.
- They overestimate the willingness or the capacity of the people they inherit to abandon old habits and behaviors.”
Similarly, boards and key executives under-estimate what it takes to replace a CEO:
- “They fail to grasp the complex nature of succession and assume that CEO handoffs are as simple as those at lower levels.
- They fail to carefully consider the cultural and political aspects of the company that will be problematic for the new leader in his early months.
- They set one-dimensional or generic expectations of the new leader—in particular, emphasizing only financial and operational goals and not including equally specific cultural, political, and personal ones.”
The key to avoid these mistakes, and to reduce the risks of succession failure, is to take the necessary time to carefully select the right candidates and to methodically plan out the transition.
How do you identify your successor?
Finding a successor as a CEO can be extremely challenging, especially for a mid-sized company: your company is like your child, and your task is to find someone else to raise your own child.
Ideally, you have identified 2 or 3 internal candidates for each function 2 or 3 years before the handover – enough time to train them and regularly challenge them with extra projects that would normally land on the CEO/CFO’s plate. After 18 to 24 months, it is often clear which candidate should take over.
Where internal candidates are not an option Brad Giles in “Made to Thrive” recommends building and maintaining a “virtual bench” for your 3 most vital roles:
- Identify your 3 most vital roles by answering the question: “If you had people who are in the top 10% of available candidates, in which 3 roles would these A-players have the most impact in your business?”
- Identify 2 potential candidates (among the top 10% of potential candidates) for each of these 3 roles through networking within your industry – you may need to talk to customers, suppliers, and industry organizations to identify these rare people.
- Once you have identified them have a (virtual) coffee with them to get to know them. Giles explains: “Meet the person to determine if they might be a potential A player. If they might be, meet them again and again. When you have a vacancy, call them up.”
One of the keys in succession planning is to build choice. I regularly speak with CEOs who tell me they hired their perfect successor – who leaves a few months later. Succeeding a CEO is tough; don’t put all your eggs in one basket.
During the interview process checking for culture and values fit is critical. Will your culture be better or worse with them on board? Will they become a toxic A? Will they create frictions or drama? Checking for cultural fit is even more important for a new CEO than for a regular job interview, because they will bring past colleagues, who may affect the culture of your company. It is therefore important to have your culture and core values clearly defined beforehand, so that you can make sure whether the candidates will fit in.
I have identified my successor. How do I organize the transition?
Succeeding a CEO is like passing the baton in a 4 x 100 m relay race. It negatively impacts the whole team if done unproperly, but it gives you a competitive advantage if done well.
“Passing the baton” is not “throwing it in the air and hope that the next guy catches it.” On the contrary: the two runners run alongside each other for some time. Similarly, you don’t throw your successor in the arena to see whether they will survive the lions. Often the transition for an outside CEO is reduced to a mere onboarding of a few days – similar to any other function in the company. This can be even shorter for an inside CEO, because the assumption is that they already know the company – failing to recognize that learning to be a CEO is a process.
The new CEO needs to have the opportunity to work alongside you, the outgoing CEO, ideally for 6 months. The new CEO should be able to simply observe and learn in the first 60 days. There should be regular safety checks and feedback opportunities along the way, to make sure that things are working well and that the new CEO identifies their blind spots.
As the exiting CEO you need to be crystal clear about the role of the new CEO. What do they do? Which authority do they have, and what is not under their authority (eg what is their role vs the role of the board)? What does success look like? What does it take to win in your company? Often this information is implied, and is not made clearly available to the new CEO.
You play a key role in laying the groundwork for the new CEO. As this McKinsey article about the CEO’s last 100 days states: “Many departing CEOs view this as a time to step back and avoid making major decisions or stepping on the toes of their successors.” While this instinct is understandable, it deprives the new CEO of several important advantages: “a clear strategy, plenty of operating momentum, a strong management team, and a clean slate, including the firm resolution of any major outstanding operational or people challenges,” this article states.
Here are a few straightforward questions to help departing CEOs create a short list of key actions to complete in their last days with a company.
– Which strategic or major organizational shifts would I undertake if I had 3 more years ahead of me?
– Which people decisions would I make now if I had to stay for 3 more years?
– Which additional initiatives are needed to deliver strong results this year and next?
– What do I wish I understood better when I started as a new CEO?
– Which key priorities should I focus on for the last 100 days? What is my 20-week plan to achieve them?
After the transition: follow the org chart
“Passing the baton” also means that the former runner stops running at some point. The same applies to business succession: once the new CEO is up and running and the transition period is over, the hard part begins for you: you are not in charge anymore. It is critical to clarify your role during and after the transition ahead of time.
People you love will bypass the new guy and go straight to you, their former boss. It will be very tempting for you to help them solve their problems. However: doing so can be massively damaging to your successor. Instead you should listen to them AND direct them back to the proper channel, ie your successor. It is similar to a child who asks something to a parent and, when they hear “no”, will go to the other parent with the same request: when both parents are not exactly on the same page, they undermine each other. Similarly, you need to have a crystal clear role description for yourself once the transition period is over.
Succession planning is crucial to create lasting value. But given the high failure rate of new CEO transition, it is clear that selecting and onboarding a new CEO has to follow a very different approach than for any other executive. Carefully selecting the best candidates not only based on their past performance but also on culture fit is absolutely essential. Helping the new CEO understand the company culture and improve their soft skills to successfully navigate it is critical – even if the CEO has been promoted from within. This may be the best way to increase their chances of success.
As a business coach I work with CEOs and founders of mid-market companies who are frustrated because their business is not growing the way they want; often they lose sleep at night because they are constantly fighting fires and can’t focus on their most important priorities during the day – typically a sign that their company has outgrown their management approach. I help them adjust their management approach to get back on track to profitable growth. I would like to learn about your growth roadblocks; contact me to discuss at Xavier@AmbroseGrowth.com.
What about you? How does your succession plan look like? How are you identifying the potential candidates, and planning the transition period ahead of time?