Lately, changes at the helm seem to be coming fast and furious. Volkswagen, United Airlines, Twitter, Google, P&G and Ralph Lauren are among the many high-profile CEO turnovers that made headlines in recent months.
Leadership transitions like these are arguably one of the most significant events in a company’s life. Plus, the cost of a lengthy search process—or, worse yet, making a poor pick—can be severe, Ted Bililies, managing director at AlixPartners, pointed out to participants at a recent roundtable discussion sponsored by AlixPartners. “Studies have shown that the amount of time it takes to place a CEO is negatively correlated with its future earnings,” he said. “You need to think of this as really a risk management event in your company.”
Yet, while most CEOs and board members nod sagely whenever the importance of a strong succession plan is voiced, few companies can attest to having one in place—or, in many cases, even knowing what one entails. In a recent AlixPartners survey of more than 100 senior executives, 31% of respondents said their companies had no CEO successors identified, while 20% said their firms had just one potential successor identified.
Organizations that lack a pipeline of multiple, viable candidates risk having to scramble to find a successor in a hurry—which, in turn, heightens the potential for a clumsy passing of the baton. Such was the case at Cooper Companies when its former CEO retired for medical reasons. “The transition process proved more difficult than the board would have guessed at the time, with a lengthy outsourcing engagement to look at who was available and a lot of meetings,” recounted CEO Robert Weiss, who was subjected to a rigorous 360-degree review process as part of the CEO candidate vetting effort. “I had worked hand-in-hand with the CEO since the early ’90s and been on the board for most of those years, so you would have expected it to be a smooth transition.”
Instead, board members struggled to reach a consensus, dragging the process out.
The Insider Advantage
Determined to avoid repeating the experience, Weiss and his board immediately began planning for its next CEO succession by identifying a pool of six potential successors and focusing on filling in gaps in their experience and skill sets. “We spent energy making them as good as they could be by rounding out whatever they lacked—operations background, marketing expertise, Wall Street exposure,” he explains, adding that he made the outside consultant who had been charged with evaluating him as a CEO candidate a member of his team.
“All six [CEO candidates] have been through 360 reviews, which is a good exercise to see who really wants to rise to the occasion. I think the cream will rise to the top and it will go from six to four to two over time.”
This type of process—undertaken in advance and methodically identifying and developing internal candidates—helps ensure that a company won’t remain in a lengthy leadership limbo while its board scrambles to evaluate successors. For the same reason, some companies adopt emergency succession plans that cover “what if” scenarios. Citizens Republic Bancorp, for example, had an “uh-oh envelope” when Cathleen Nash, now CEO of Woodforest National, held the bank’s corner office. “It covered ‘What if, heaven forbid, I got in a car accident and ended up in a coma or died,’ what would the board do?” she explained. “We had a whole package ready with everything from press releases to organizational charts and internal communications.”
Designating successors ensured that Citizens Republic wouldn’t be left rudderless if a crisis hit, but Nash didn’t stop there. The bank also developed a long-term, internal succession process to nurture high-potential employees, helping them get the skills they would need to be prepared to step into leadership roles down the line.
Nash is now embarking on a similar effort at Woodforest National. A focus on creating internal candidates also boosts the odds for a smooth transition, noted Bililies, who works with CEOs and corporate boards on sourcing and developing senior-level talent. “In general, you want someone coming up from the inside, unless you’ve got a very, very particular need,” he said. “There are debates around this, but the fact of the matter is there are risks with an outside hire that you don’t face with an internal promotion. We think of leadership development and succession planning as two sides of the same coin.”
One of the most frequent stumbling blocks in bringing in a CEO from outside is also one of the most subtle and difficult to screen for—and that’s cultural fit. Most companies find assessing a candidate’s knowledge of the industry and skill set more straightforward than figuring out whether he or she will mesh with the organization culturally.
The Culture Conundrum
“Can you articulate the culture of the organization that you currently reside in and not just the town hall speech articulation?” asked Rob Elsey, Ph.D., a director at AlixPartners, directing the question at CEO participants. “Can you break it down to actual behaviors at every level; and if you’re sitting across from somebody as a candidate, would you know the right questions to ask to know if they, in fact, could be a good cultural fit and a cultural leader?”
“I can describe the culture we have very effectively,” answered Joel Trammel, CEO of Khorus. “But in translating it to an external candidate who I don’t know well, even if I asked the right questions, I would not be [confident] that I would be able to really get to the bottom of whether or not it would be a good fit.”
Vetting job candidates for a good, cultural fit is a challenge at every level, pointed out several CEOs, a few of whom shared their personal approaches. Tom Rogers, CEO of Lewis Tree Service, said the best way to get a sense of whether a candidate will fit in is to simply spend time with him or her. “It’s not unusual for me to spend anywhere from eight to 12 hours with candidates,” he said. “I’m talking about meals away from the office, time in a relaxed setting to get a sense of their personality, who they really are.”
Woodforest’s Nash described an unconventional approach that she found helpful in getting past the “canned” answers that candidates often deliver. “I took out magazines and scissors and had candidates cut out pictures of dogs to describe the company that they came from and how they like to work without telling them anything about ours,” she explained. “One used a Russian
Wolfhound, and I knew I didn’t want a Russian Wolfhound in with my Golden Retrievers.”
Research suggests that using a “constellation” of selection criteria produces stronger candidates and improves the outlook for a successful leadership transition. The top three selection criteria for choosing a new CEO are people-leadership skills, experience with similar strategic challenges and having values that align with those of the board members or the company owner, according to executives who participated in a recent AlixPartners survey.
To evaluate candidates on these multiple fronts, Elsey generally begins with a “behavioral event” interview that essentially walks through the careers of each candidate, looking at everything from how they conducted themselves and why they left previous jobs to what they excelled at—and where they failed.
Ultimately, while there is no way to guarantee a smooth CEO transition, a rigorous assessment process can vastly improve your odds of success. “When you do that chronological walkthrough
of 500 or 600 data points of someone’s career, the patterns just start to fall out,” he said. “It tells you an awful lot—but not enough. Then, you add personality and cognitive assessments.
How flexible are they, how learning oriented? How decisive are they? By combining all these sources of data, along with the culture and the contextual elements, you can bring the [success] rate of a hiring decision from 50/50 to 80% to 90%. In the business of predicting human behavior, that’s a very high rate.”