Board Consulting

I met last year with the Nomination Committee of a large publicly-listed company who were talking about the need to appoint a new Chief Executive. I said I thought that it was the second most important decision that a board makes. “What,” one of the Board members asked, “Is appointing a Chairman more important?” I replied that I thought that the most important decision that a board makes is to fire a Chief Executive.

Why is it difficult?

There are number of reasons that it is difficult for the Board to make the decision to change a Chief Executive. They include:

• Change is dislocating for everyone; the senior executive group, shareholders, or the stakeholders.
• It is never clear when it is the right time. Previous analysis by Booz Allen & Hamilton has suggested that the shareholder return of chief executives in the second half of the attendance is less than their first, but the open question is when is half time!
• This solution is rarely clear. Inevitably, any board needs to consider both the internal and external candidates, but rarely is there an obvious pain free solution.

Planning for Succession: A luxury or necessity?

Unfortunately, for some boards, the decision to change Chief Executive is made in desperation, a function of poor performance, investor pressure or even impropriety. For other boards, CEOs give substantial notice of their intentions to retire or leave. The first eventuality leads to a full external and internal search conducted with a relatively high degree of scrutiny. The second turns the board’s attention to the issue of Chief Executive succession: the capabilities of internal candidates, and potentially a review of external options ahead of time. Both approaches have their advantages and pitfalls, but there are some things that boards can do to maximize their chances of success.

Tips on Succession Planning

There are a number of things the board should bear in mind when considering options for longer term CEO succession planning. They include:

• Give yourself plenty of time to assess and ready the internal options. One of the few things that the Board has some control over is the development path of their internal executives. Obtaining an objective, independent assessment of the internal candidate pool, assessing strengths and weaknesses and engaging in a broad discussion about development paths well before the Chief Executive succession. This equips boards with the best information they can possibly have in relation to their internal candidate pool. We have a strong belief that an external party should be used to assess these candidates, and that ideally that party should have a very broad knowledge of the organisation, its structure and culture and its aspirations.
  
  
• Perform a meaningful external scan and keep an open mind. Inevitably the external candidate pool for a particular CEO position of scale is relatively straightforward to construct. The board should seek to build up a meaningful knowledge base on the external candidate pool through whatever sources they have at their disposal. However, it is essential that the board does not become obsessed with this list of potential candidates. Far too often, we have seen candidates dismissed by boards on the basis of a passing interaction, a cursory review of their CV or some rumour or innuendo. And yet these people have been discounted before anyone has actually engaged them in the discussion about their interest in the role, or how they might prosecute it. We would encourage boards to keep this list as long as possible, building up the information base to ensure a third party can engage with the market in the most thoughtful way possible when the time is right.
  
  
• Create a transition plan. The process affords board’s the luxury of thinking through the key issues associated with the transition of the Chief Executive on how those issues might be managed. Plans can cover a variety of different areas, including potential senior executive turnover, cultural change, integration issues of a new executive in dealing with the board and so forth.
  
  
• Be thoughtful about the development plans of internal candidates. One of the big mistakes that boards make is that they tend to have a static view of the abilities of an executive, ignoring the fact that in fact all of us develop. All of us have things that we can work on, but in this case, where there is some period of time before a decision on a new Chief Executive needs to be made, an internal candidate should be encouraged to work on their areas of development and to be given opportunity (job assignments, project exposure, mentoring, extra training) to improve their capabilities and make them a more compelling candidate for the role.

Helpful Tips on the Executive Search:

There are a number of things the board should bear in mind when considering the search process. They include:

• Have a good idea about what you are looking for. It sounds simple, but it is easy to identify an exceptional candidate if you know what makes that candidate exceptional against the job specification. A tight specification is quite difficult to define, but would normally involve a third party spending a great deal of time with both the executive and the Board in order to help scope the future strategy of the company, the competencies and experiences required, and how ideally that person should behave in order to fit in well. The resulting document should be used to evaluate all internal and external candidates in the most objective manner possible. Too often we have seen boards using candidates to define the specification, rather than the other way around.
  
  
• Be clear about internal and external biases. Whilst ideally board should look both internally and externally in order to identify the best candidate, the fact of the matter is that based on the situation, internal or external candidates can be advantaged. The board should think through this potential bias and direct the efforts of the search consultant as a consequence. Not acknowledging this bias overtly is naive, and leads to a great deal of busy work with no tangible outcome.
  
  
• Demand an objective and independent assessment of all candidates. The research would suggest that taking references from executives not named by candidates predict behaviour almost as accurately as doing a deep structured interview with the same person. Taking such references on external candidates can be difficult, but the board must insist on the same level of due diligence for all candidates involved in a search.
  
  
• Consider the market reaction, do not be obsessed by it. Some boards concentrate too much on how the market and the media will react to a given appointment, but in doing so miss the point. There are numerous examples we could quote where markets get those assessments wrong on day 1. Yet the market’s reaction to any given appointment is relatively predictable, and rather than wanting it to be positive, the board should think through how the market will respond to a particular candidate and then craft the initial message accordingly. The objective is to make the value maximising decision over the long-term, not the day or week of the announcement.
  
  
• Have a structured integration process in place. Boards are generally very bad at investing the time and effort to give structured and thoughtful feedback to the incoming Chief Executive. Best practice in CEO integration involves taking full 360° references, spending time with both the board and the executive concerned to identify potential areas which are small issues initially, but which can expand if unaddressed.

History would tell us that there is no right way to think about changing a Chief Executive. Long-term succession planning processes have as many pitfalls as has identifying a candidate through an executive search. But in both cases, the board can take number of simple practical measures to improve their chances of success. Choosing a provider in whom you have trust and confidence is a very good start, but we hope some of the points above will also help.

First published for the CEO Forum Group at http://www.ceoforum.com.au