Changing Leaders

The board's role in CEO succession, and why they often pick the wrong leaders

The selection of a chief executive counts among the most crucial—and riskiest—events for any company. Yet the process is little understood, usually unfolding in secrecy behind closed boardroom doors.

But in this age of takeovers, megamergers, global competition—and rising CEO visibility—the stakes in chief executive succession are higher than ever. Investors, analysts, and reporters have begun scrutinizing the decision makers—and questioning their process.

The implications? Boards must play a more active role in CEO succession—crafting a rigorous and defensible process.

Idea At Work

To ensure the most successful selection process, boards must:

1. Cultivate internal candidates. Your best source of candidates is the company. Establish a management-development program focusing on the top three managerial tiers: Track candidates' assignments, identify their development needs, and establish career paths preparing them for higher responsibility. Review the program annually.

Start this process four years before the current CEO's expected departure. Review and challenge his plans for the process throughout that period. The goal? To cultivate several strong candidates—not just the one the current CEO favors.

Get to know candidates through ongoing formal and informal contact. Ask them to make presentations at board meetings. Chat with them over dinner or lunch. Evaluate how they relate to peers.

2. Prepare for sudden departures of CEOs. A strong management-development program is even more essential in emergencies. Each year, ask the CEO to designate someone to take over if needed. If no appropriate individual is available, prepare to bring in an interim CEO—often, a seasoned executive who's too advanced in age to fill the role long-term.

3. Understand key CEO qualities. Most CEO candidates have been unit or division heads. They haven't had to demonstrate a strategic vision for the entire company, represent the firm to outside constituents, or handle solitary decision making—essential CEO qualities.

How do you spot the candidates most likely to handle this transition to CEO? Look for individuals who listen rather than formulating replies before others have even finished talking. Get a sense of their ethics, their stability (evidenced by family and other nonwork activities), and their tolerance for pressure.

4. Think twice about hiring outsiders. Ideally, your multiyear succession process will cultivate candidates who can cope with dramatic changes to the company's competitive landscape. But if your process falls short, you may need to go outside.

Sometimes outsiders can best lead the radical changes necessary to navigate shifts in competition, technology, and markets. However, they can also catalyze an exodus of internal talent. To avoid the shock that comes with hiring an outsider, regularly introduce out-side talent into the executive pool before the current CEO departs.

5. Use search firms judiciously. You're better off if you don't need recruiters. But if you do, don't leave the entire process up to them. Instead, develop a clear, detailed spec for the CEO position. A search firm is only as good as the specifications it receives from the board. Also, have recruiters focus on verifying qualifications and references and developing industry benchmarks of executive quality.
 - Harvard Business Online