Imagine a corporate board is about to make a significant investment decision. Directors would interview multiple fund managers, review prospectuses, measure funds’ returns against the major stock indexes and insist on proper diversification.
Yet boards commonly forsake that systematic, data-driven approach when they invest in a company’s single most valuable asset—its executive leadership.
“A board would not hesitate to question the CEO and management about investments being made by the company if the directors felt those decisions were not going to pay dividends,” says Jane Stevenson, vice chairman, Board and CEO Services, at Korn/Ferry International. “People, especially the CEO and senior management, are the most important determinant of future success. So the board should ask itself, ‘Do we have a diversified portfolio?'”
How a board builds a strong leadership portfolio is the heart of a new succession planning solution that Korn/Ferry has just introduced. The idea is to give directors all the tools for investing in talent that they have for capital: talent prospectuses, analysis, results compared to benchmarks.
The need is acute. Just last year, even as SEC Division of Corporate Finance Bulletin 14 E announced that boards are accountable for ensuring there is a succession plan, 43 per cent of publicly traded companies had none, according to an NACD survey. Succession and its related risks are also increasingly on the agenda of investors, analysts and the business news media. Yet even at top-tier companies that have a plan, Stevenson estimates only one in five would qualify as “gold standard.”
Thinking Long Term
A board needs to be effectively prepared for three types of CEO succession, says Lowell Robinson, board member at The Jones Group, chairman of several private media publishing boards and former director at International Wire Group and Edison Schools. There’s the pre-planned retirement; the sudden, unexpected (usually health-related) departure; and the removal/resignation of a CEO for underperformance or inappropriate behaviour. Each scenario presents its own challenges, but a robust succession plan covers all bases.
“CEO assessment and succession is one of the primary tasks of the board,” says Robinson. In fact, all boards need to annually review backstopping the CEO as well as other key members of management. Failing to do so may leave the company and its shareholders in jeopardy. After all, CEOs come from inside the company’s senior ranks about three-quarters of the time, so your next CEO is only as strong as your bench.
To be sure, a board wants to know who can step into the CEO role tomorrow, if need be. But succession planning, like the stock market, is a place where long-term investing pays off.
“With the luxury of time, this starts with a strategic planning process where the company looks at where it is today and where it will be in the next 3 to 5 years based upon industry dynamics and transformational trends, the competitive environment and the economy,” Robinson explains. Once a road map is determined, directors and the CEO can assess what skills and capabilities will be required in the future when an orderly transition may occur. “The skills and talents required of a future CEO may be quite different from the current one based upon this road map and future strategy,” he says.
That means that at any one time, a board shouldn’t just have a job specification and candidates in mind for its next CEO, but for generations of chief executives.
Seem like overkill? Consider the volume and variety of experience an incoming CEO should have. Stevenson suggests that an ideal progression goes something like this: a significant general management role, an enterprise-wide leadership role (most often a C-level functional role like CFO or CMO), and a role running multiple sub-businesses (as COO or group president with several lines of business or multiple geographies). With three years or so needed in each position, a person who hasn’t yet done those is nearly a decade away from being prepared to be CEO.
Find Future CEOs
The underlying challenge is this: choosing who gets those essential preparatory roles that build and test enterprise-wide leadership skills.
Korn/Ferry uses its proprietary assessment tools to locate people with high potential for C-suite roles deep within the executive ranks, says Peter Thies, senior partner in the firm’s Leadership and Talent Consulting branch and co-leader of the firm’s new succession offering. Then those individuals are sized up against needed “future senior executive” profiles to determine what leadership experiences will round them out. “It should be more about talent development rather than straight CEO succession,” Thies says.
The process needs to be fair, transparent, repeatable and consistently applied at all levels of the company. It does no one any good to have a mishmash of competencies, methods and ratings. In short, a succession plan needs to be systematic.
“There are many different ways of defining ‘systemic,'” Thies says, “but in my opinion it’s having a handle on strategy first and then translating that strategy into leadership profiles and competency models that…you can actually measure and assess against. We believe every organisation has between five and seven future CEOs hidden in their ranks. The question to the board is: Do you know who they are?”
The most vital attribute that Korn/Ferry uses to gauge leadership potential, Thies says, is learning agility, or how a person extrapolates from their skills and experiences to manage in new, unfamiliar situations. It gets to the heart of who a person really is, how he or she thinks, and how he or she solves problems, he explains. “We have found that learning agility is a higher indicator of potential than raw IQ,” he adds. “That makes sense in today’s world, given all the change and ambiguity. …These people can be stretched in all sorts of situations and perform well.”
Korn/Ferry Managing Principal Greg Janicik agrees, saying, “CEO succession candidates absolutely must have a high level of learning agility because no set of experiences can possibly prepare them for all the decision making and responsibilities required of that top job,” especially at a large, complex Fortune 500 company.
“Whether it is a CEO or any other senior position, you are generally hired for what you know, but you are fired [or retained] for who you are,” says Korn/Ferry CEO Gary Burnison. “The process around figuring out who somebody is—that is the secret sauce. That is the magic. Ultimately, you are going to have to look into that person’s eye and determine who they are and if they are the right person for your company. You have to make sure that this is anchored in a framework and a process, not just random thoughts or feelings.”
Develop and Coach
Kevin Cashman, a senior leader within Korn/Ferry’s Leadership and Talent Consulting business, says boards are coming around to the view that a high quality succession plan brings more to the company than just its next CEO. It ensures a full talent pipeline, gives a meaningful structure to career development programs, and creates a common way of thinking about (and measuring) leadership and leadership potential.
High-potential successors can get a tailored development plan that includes the mix of business challenges they need to grow, such as leading a turnaround, opening new markets, or dealing with mergers and acquisitions. Their progress might also be accelerated or enhanced by in-depth assessments, “360-degree feedback” programs or executive coaching.
Cashman recently worked with a Fortune 100 chairman who had the vision and desire to find and ensure the development of their 15-year-out CEOs; he wasn’t going to leave that solely to the CEO or the human resources department. “He wants to be able to find these people deep in the guts of the organisation and nurture them and make sure they don’t get lost somewhere along the way,” Cashman says.
Cashman designed a leadership identification and development program that this company now offers two or three times a year. Using assessments (for learning agility and two other proprietary systems that capture leadership style and thinking style), Korn/Ferry helped pinpoint a handful of executives who fit the criteria for a divisional or overall CEO in 10 to 15 years. That was followed by an intense three-day program where those executives discussed challenging topics—business issues, strategic variables, global dynamics, innovation, personal leadership—with Cashman, the head of HR and the chairman himself. “The participants get a leadership development experience,” Cashman explains. “And the chairman and board get a deep, intimate read on their future CEO pipeline.”
Investing in External Candidates
Revisiting the investment analogy, though, a board has to keep an eye on its portfolio, rebalance the mix of investments and redirect money while also looking for new assets.
Awareness of external candidates should always be part of the process, says Stevenson, for two reasons. First, they might be needed to augment the internal talent pipeline. The board should always know the top three to five external candidates whose profiles represent options for CEO succession, another three to five who could be considered for a No. 2 role (such as group president), and another set of people who could be hired as a division president and be ready for the CEO job in five years or so. They might come from a competitor, from within the same sector, or from some other industry entirely.
Second, sizing up external candidates is a good way to benchmark your internal pipeline. Where do your potential future CEOs meet or beat their peers? When were their skills gaps exposed?
Being aware of external candidates is akin to executive recruitment—but without the recruitment part. To be effective, it has to be done continuously and applied to short-, mid- and long-term potential hires. At companies that take this most seriously, Stevenson said, the chairman and CEO make it a point to get to know the top external candidates on their list, track their performance and on occasion, if the time is right, make an offer.
In the end, a board will have an annual report that shows the growth, potential and diversification of its entire talent portfolio.
Skirting the Pitfalls
Directors and CEOs need to understand that succession planning cannot be episodic, says Joe Griesedieck, vice chairman and co-head of Korn/Ferry’s Board and CEO Services. It is a big mistake to wait until a CEO starts rumbling about retiring or, worse, a dramatic event occurs. “It really goes at the very heart of what an organisation is all about, and that is providing growth and opportunity for the employees and steady, sustainable growth for investors,” he says. “Much of this is focused on the board, but the CEO needs to own it too.”
One benefit of a formal succession plan is that it provides a framework for boards and senior management to structure those first candid conversations about what comes next. Then, once a succession plan is up and running, such discussions become routine. Using assessments and purposeful development assignments removes much of the unnecessary emotion from the calculation of who moves up next.
CEOs oftentimes have to overcome human nature to pave the way for a successor, Burnison says. “No one wants to volunteer to have [his or her] job taken away,” he says, but the CEO title is not a lifetime appointment. “As a CEO you have to be of the mindset that you are not just a grower and a change agent, but you are also a steward. Just as there were people before you, there will be people after you. So you have to be anchored around stewardship and leaving the organisation in a better place than when you arrived.”
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