I recently attended an annual governance conference at Stanford University, Directors College, where we heard from a number of well-known speakers including Deloitte CEO Cathy Engelbert, General Motors CEO Mary T. Barra, Santander Group Executive Chairman Ana Botín and Hans Vestberg, CEO of Ericsson.
A very impressive group of US based directors were in attendance. More than 200 directors and senior executives of publicly traded firms gathered for the three-day executive education program.
From my point of view, a highlight of the event was gaining a better perspective on the board role in appointing and monitoring the CEO.
There are powerful arguments for companies to excel in succession planning.
The "home grown" CEO is, on average, more likely to outperform an external appointment, cost less and deliver fewer surprises. Yet more boards worldwide are appointing CEOs from outside the organisation to freshen executive thinking and strategy and help capitalise on emerging market opportunities.
And, they are using new tools to find the right CEO, and seeking different personality traits.
Appointing the CEO is surely the board's most critical task.
The right CEO can transform a struggling company or take a good one to new heights, develop the executive team, enhance corporate culture, work constructively with the board and create value many times in excess of his or her salary.
The wrong CEO can wound or kill a company and be the board's worst nightmare.
Here are some of the top tips gathered from several sources on how boards can ensure the smooth changing of the guard to the right person at the right time.
Make it a priority
Appointing the CEO is the board's most critical task. A trap is being less focused on succession planning when the company is performing well and the CEO appears happy and committed. Monitoring executive succession planning should be a constant and consistent board function.
Create a structure
Implement strong structures and systems to understand short- and long-term succession planning within the company. This might include a regular discussion on succession planning at the CEO's annual performance review, and a special session on long-term succession planning at board and/or management off-site strategy days. Develop strong board processes for succession planning through sub-committees and other structures, such as planned discussions on the topic at some board meetings.
Identify emerging talent
Identify and monitor potential CEOs. Ask the top three or so candidates to present at board meetings, watch how they handle questions under pressure and monitor their performance reviews.
Making succession planning part of the company culture
Firms that have a history of good succession planning embed the process within all organisation levels. That is, all managers are expected to develop talent and ensure they have a successor, so that they can grow their role. "Nobody is allowed to build fiefdoms and create structures where he or she is irreplaceable and able to hold the company to ransom. The lesson for boards: understand how succession planning works well beyond the top executive ranks."
Understand the CEO's intentions
Good boards work with their CEO to understand his or her career plans. "Sometimes it involves difficult conversations with CEOs about when they might retire, and paying special attention to remuneration incentives, such as a tranche of options that vest, that could encourage them to leave."
Have a plan B
Aim for the best internal succession planning possible. But know that even the best plans can unravel when CEOs depart suddenly, have health problems or are embroiled in scandal. Always know who will act as the interim CEO (either from the executive team or possibly the board) should the CEO abruptly depart or be fired. Identify potential external search firms that could help conduct an external search if required.
Mutual due diligence
Top CEO candidates usually conduct significant due diligence on the organisation before accepting a role. Have key information ready including financial statements, employment engagement survey or other relevant information.
Ask the potential CEO to outline his or her preliminary view of the company's strategy and how it might be changed or improved. Ensure there is a reasonable alignment of expectations around corporate strategy before appointing the CEO.
Take your time
It is tempting to hire a new CEO quickly to reduce internal damage from an abrupt CEO departure and restore market confidence. A more measured approach is to appoint an interim CEO while internal candidates are assessed against external ones.
This need not take six months; spending a few months finding the right person, assessing their skills and traits, and understanding their view of strategy, seems like a small ask to find the right CEO who can lead the company for at least five years.