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Welcome to level five

  • May 2015

Welcome to level five

Why, in CEO succession, potential is more important than a candidate’s past performance and current competencies

No other role in a corporate environment can be compared with what awaits the successful candidate upon reaching the highest level. A CEO is expected to do far more than lead an organization and is frequently tasked with the ongoing transformation of the company. So the most vital variable in the equation when choosing a new CEO is an objective appreciation not of their current abilities but of their potential in relation to the new role and its challenges.

Sooner or later, every company must face up to the task of finding a successor for the corner office. Consider the following example of a major German industrial enterprise with over 100,000 employees and annual sales well into double-digit billions, where the CEO was reaching retirement age. Several years earlier, the supervisory board (in the country’s two-tier system) had already identified three potential successors. All three candidates were in senior management roles with wide-ranging responsibilities and had been with the company for many years.

Over a two-year period, the candidates were put through their paces in a carefully monitored process. In addition to their existing duties, each of them was entrusted with a large-scale strategic project – one dealing with the optimization of sales and marketing, another with outsourcing, and the third with risk management – and at the same time their line management performance was closely observed. All three were aware of what was going on and of who else was in the race. Ultimately the supervisory board selected the candidate who, decisively, they believed would have the strategic strength to redefine the enterprise over the next decade. The two others left the company a short time later and today hold leadership roles elsewhere. Interestingly, at the end of the day it was the performance of the three candidates in their ‘normal’ jobs that settled the issue, not how they fared in the special projects.

A textbook example?

At first sight it looks as if the company and its supervisory board have served up a textbook example in this particular case. There were multiple candidates for the top job in the internal pipeline, each of whom had been carefully groomed through a succession of increasingly responsible roles and their performance duly monitored. The selection process had taken place over several years and the final decision was by no means a hectic ad-hoc affair. And yet even under these circumstances a whole series of questions arise: How high were the opportunity costs given the almost inevitable self-positioning of the potential successors? To what extent were external candidates considered? How independent was the body charged with the selection process? On what criteria was its decision based? Which methods and tools were available to the members of the supervisory board? How were they used? Above all, though, what importance was assigned – along with the established capabilities and competencies of the individual candidates – to their far more important capacity to handle the new and much larger role, or in other words, to their potential? And how objectively and precisely could this be assessed?

So can the past performance of top managers simply be extrapolated into the future or does one need to factor in additional or perhaps even very different aspects here? The past performance of a top manager or the ideal match between their personality and competencies and their current job can do no more than shed light on the past and present. The decisive question when selecting a new CEO is how much potential for growth the individual candidates can still offer and whether, as in our example, they would have the strength to drive a strategic redirection of the company. Are they still curious enough to take on board new ideas and information? Can they tell what new opportunities change could open up for their company? Can they convince others of their views and gather people around their banner? And do they have the assertiveness and determination to drive through their ideas even in the face of opposition? Given the growing uncertainty, complexity, ambivalence and volatility of its business environment, the entire future development of the company will depend on being able to provide a positive answer to each of these questions when selecting the right person for the top job.

What makes CEO succession so special?

The CEO of a company ¬– be it the managing director of an SME or the chairman of a major listed corporation – is a trustee in the classical sense of the word. He or she is entrusted with responsibility for maintaining or ideally growing the market value of the business, for its sustained development over the coming decades, for the workforce, and even for anchoring the organization in its social context.

The CEO therefore bears ultimate responsibility for all important decisions and above all for the strategic decisions that shape the future course of the company. That is why they were hired. More than in any previous role, this high level of responsibility demands great stability in terms of the character and leadership skills of the CEO, and their ability to drive the company’s progress.

It is this level of responsibility that gives rise to the unique position – one might even say the loneliness – of the CEO. He or she has no peers to relate to within the company. Here in Germany, the classical model whereby responsibility is shared by the collective members of the executive board is gradually giving way to the U.S. principle of a ‘strong man at the top’ or, less frequently, a ‘first lady’, the CEO

On every previous rung of the prospective CEO’s career ladder, one of the most important core competencies was the ability to work together effectively with colleagues. For the successful CEO this particular skill need not be so pronounced. Indeed, as our own observations have shown, quite a number of successful CEOs were – in their former roles as head of division for example – not exactly masterful in this respect.

In a recent broad-based study on global top managers, we were able to document the fact that at the very highest level one encounters above-average numbers of ‘spiky leaders’ – executives who shine in a number of competencies but have marked deficits in others. So when selecting a new CEO, the supervisory board also needs to be perfectly clear about which of the candidates’ past achievements and existing competencies represent decisive qualifications for their future leadership role and which do not.

The things that really count

Today’s CEOs need to do much more than just lead their organization. They are almost invariably called upon to transform the company and not only in times of crisis but also as a proactive response to an ever-changing business environment. This calls for an apparently self-contradictory blend of personal and emotional properties – a personality oscillating between empathy, enthusiasm, strong self-confidence, and assertiveness, coupled with the ability to think and act in terms of systems. As no other role in the company can be compared with what awaits the successful candidate upon reaching the top – or ‘level five’, as the renowned U.S. organizational expert Jim Collins calls it – the most vital variable in the equation when choosing a new CEO is an objective appreciation of their potential in relation to the new role and its specific challenges. To master those challenges, he or she will above all need the following attributes:

  • The drive to engage in the ongoing and autonomous development of his/her leadership skills and in the active pursuit of new ideas, information, and food for thought.
  • The ability to recognize and understand complexity. This calls for the ability to shape a framework within which the company can generate the best possible response to the diversity prescribed by its operating environment (market, customers, competition, regulatory backdrop, etc.) often involving contradictory trends.
  • The capacity to involve and inspire all of the company’s stakeholders. This includes the ability to identify the creative potential of employees as a source of innovation and transformation, to foster and network that potential and channel it to serve the company’s interests; the ability to assign change programs a significant role in the ‘corporate story’ so that employees can identify emotionally with the tasks facing them; and the ability to embed the company’s strategic dimension into its political and social context and engage in dialogue with this environment.
  • And finally, the determination to stand by decisions even in difficult circumstances and against firm opposition, without stubbornly sticking to an established position for its own sake, and without compromising their personal energy reserves and commitment to the role.

The main challenge for the selection committee is to identify the right blend of these attributes for the specific needs of the company in question. While many of these elements are of great importance at lower levels of management, this particular combination is only encountered in the role of CEO. This makes not only choosing the right candidate but also preparing the chosen candidate for their new role extremely demanding.

In the best-case scenario, the chair of the supervisory board will at all times be fully aware of who the key players are in the company’s second and third tier of management. This is where the potential CEOs of the future take shape. It is not just a question of being able to put names to faces when it comes to talented candidates, but of being well informed about their performance, capabilities, and upside potential. Just how often this scenario is encountered in practice must be open to question. In our experience, large family firms are the most likely to match up to these expectations.

Preparing the ground

So when you have identified a potential successor, how can you prepare them appropriately for their new role? Acquiring specialist knowledge is no problem, but when it comes to management competencies things get more complicated. Strategic competency, for example, which is precisely what a CEO is supposed to possess, is only based in very small part on a knowledge of methods and far more on a blend of analytical and combinatory skills, which means it is closely linked with intelligence and intuition. And of those two, only intuition can mature over time. More important still is the question of whether or not potential can be developed or expanded.

For anyone who has spent several years in charge of a corporate body, perhaps as managing director of a group subsidiary, the role of CEO will not be entirely virgin territory. Another preparatory measure that makes sense is to expand the horizons of a prospective CEO by giving them responsibility for a demanding strategic project. Here the aspiring company leader can strengthen their ability to deploy other highly qualified staff within a complex stakeholder process.

The single common denominator of all truly effective preparatory measures, however, is that they take years. This again confirms how essential it for not only the supervisory board to think about a potential successor to the CEO, but for a newly appointed CEO him- or herself to do so as early as possible. Why? Because it is up to the CEO to shape a corporate culture and put structures in place within which new potential CEOs can be fostered and thrive.

The statistics tell us that around 80 percent of all CEO positions are filled internally. And indeed, measured by shareholder return, the performance of internally recruited CEOs is somewhat higher on average – but only on average. In certain change scenarios, externally appointed CEOs can meet with less resistance because their environment has already accepted the fact that a new era has begun. For their part, internal candidates are more familiar with the force fields in play at the company and may be able to adopt a more targeted approach in a crisis, unless they prove to be caught up in the system themselves.

The most successful CEO succession systems invariably analyze both internal and external options. This will involve a thorough assessment of internal and external candidates, or at the very least benchmarking the internal candidates against their external counterparts. The credibility and legitimation of an internal candidate will be substantially enhanced by having triumphed over external alternatives.

Regardless of how carefully prepared a change at the top may be, it will always mean a high level of discontinuity for the organization as a whole. The complex system that a company represents must recalibrate itself when a new CEO takes office. So it is particularly important in those first few days for the new incumbent to obtain the kind of open, honest feedback that will enable them to align their activities with their new environment. Often, however, due to the lonely nature of the role and exacerbated by the level of responsibility that goes with it, the customary channels of feedback or even coaching are closed to the CEO. The new boss has to find their own points of reference at the new company and identify their own deficits without their staff addressing them directly. The vital role of coach, companion, and objective advisor in this integration phase falls above all to the chairman of the board or supervisory board. But the crucial ingredient in this process is time. As a result, the true measure of success of a new CEO is not the first hundred days in office but more like the first three years. By which time, many a CEO has already left through the ever-revolving door.

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