The truth is that cases such as those at Starwood Hotels & Resorts, Sanofi Aventis, SeaWorld, American Apparel and Mattel aren’t as unique as they may appear in headlines. Last year, more than 1,300 CEOs “vacated their posts,” MainStreet.com reported in January. And experience has taught us that such cases are not rare. In fact, they are far more common than they should be.
With a bit of forward thinking on the part of boards, similar situations can be avoided—or at least significantly mitigated. Boards should always be thinking about structuring their relationship with the CEO around ways of working that are clear and comprehensive— leaving no room for surprises and addressing succession planning and performance management on an ongoing basis.
When surprises do occur—as Murphy’s Law guarantees they’re bound to, regardless of forethought—there are a few key steps boards can take to ensure the process of succession is managed as seamlessly as possible.
1. Immediately, make sure the top management team is aligned and poised to act as the “office of the CEO”—all under one umbrella and maintaining a “business as usual” approach. The ease with which board members can step in on an interim basis to fill the leadership role will depend heavily on the strength of relationships they’ve forged with other senior leaders over time, through open and frequent dialogue.
2. Next, the board should very deliberately look internally for the next CEO, before turning outward. In a moment of crisis, Boards are nearly twice as likely to look for a new CEO externally as they are to pull from internal leadership (27% vs. 15%). Yet looking internally for new leadership from employees who already share the firm’s culture and outlook helps to build internal confidence and reinforces continuity. Enabling a successful internal search typically means boards need to plan ahead and ensure a leadership development program is in place that makes internal hires feasible.
3. Finally, once a new CEO is in place, the board must establish a way of working that incorporates routine performance and priority checkups with the new leader. The board should regularly ensure that the strategy is on track, milestones are met, the organization is positioned for success and the right investment decisions are being made. This feedback loop requires strong governance and open two-way channels of communication between the board and the CEO.
Gone are the days when CEOs and boards could operate at arm’s length from each other. Modern boards and CEOs must work in a more integrated fashion if they are to effectively head off crises and mitigate risk. If it does come down to the board asking the CEO to leave, that should be the cue for the board to turn the spotlight on itself and ask why—and how—they can avoid the situation in the future.
Cory is a Senior Principal and executive compensation consultant that specializes in the design and delivery of cash and equity-based compensation programs for executives, non- employee directors, and employees. Cory is based in Dallas and can be reached at Cory.Morrow@haygroup.com.