By Tom Johnson – Chief Executive Officer, Abernathy MacGregor
In today’s governance world, a corporate board’s duties are increasingly diverse. From helping determine the strategic course of the company to setting compensation policies to engaging with shareholders, board members are taking on more visible and active roles in managing and protecting a company’s reputation.
As their list of responsibilities continues to grow in size and importance, it is at times surprising that many boards are failing to focus on one of the tasks traditionally regarded as perhaps their most essential duty: CEO succession planning. Succession continues to be a topic of discussion in the boardroom, but how advanced those discussions are can vary greatly and often companies are still unprepared when the top leadership role is vacated.
Few events represent a more critical moment for a company than the announcement of a new CEO. Virtually every single stakeholder – from investors to employees to customers to regulators – will watch the announcement closely and make quick value judgements based on both the choice of leader and how they are introduced. Early mistakes are often hard to recover from and any uncertainty only heightens the level of risk across the enterprise.
Plan well and stakeholders will adapt quickly, allowing the company to focus forward. Even in the case of a sudden and unexpected transition, boards that have planned ahead and chosen the right successor have successfully been able to mollify nervous shareholders, motivate valuable employees and secure customers. Plan poorly and chaos may reign.
So, what separates a successful transition from a poor one? There are a few attributes to consider, but it all begins with purposeful planning.
Yogi Berra once famously said: “If you don’t know where you are going, you’ll end up someplace else.” Modern-day boards are properly meticulous about many things. They challenge strategy. They dig deep into financial results. They walk the factory and headquarters floors to see for themselves what might be working and what is not. They think about talent, but sometimes unevenly. It’s difficult to introduce the concept of developing CEO-level talent when the CEO is also present. Who wants to talk openly about possible replacements for the person in the room?
This can be particularly true when there’s no obvious or immediate need for a change. For example, during periods where a CEO has just been appointed, or a company has a young, dynamic CEO with a seemingly long road in front of them, or when an established CEO with a successful track record is at the helm and the business is performing well. Who wants to think about serious succession planning then?
But that is exactly when the conversation needs to happen. A good board isn’t afraid to both recognise and publicly advocate for the development of top-level talent and a good CEO isn’t threatened by a succession plan being put into place. High-performing talent is an increasingly important commodity and one that can effectively separate one competitor from another. To properly nourish that talent, rising star employees need to know the company not only values them but is also cultivating them for leadership. Not every employee will get the top job, but recognising and rewarding talent fosters creativity, ensures stability and leaves boards with sometimes multiple good potential candidates to choose from.
I work with one board that successfully executed a seamless transition a few years ago. The longtime CEO stepped aside and ceded control to a trusted lieutenant whose internal and external profile had been gradually increasing over the previous couple of years. Investors were excited because the new CEO brought new energy and ideas after a few years of lacklustre growth and employees were excited to see one of their own moved into the top seat. But the new CEO and the board were savvy enough to realise they had a problem: the bench behind the new CEO was thin and unknown. So, the board, with the new CEO’s support, immediately embarked on a methodical programme to evaluate and promote talent across the organisation. Now, at each board meeting two to three executives present updates on their business plans to the board, many of them for the first time. Each executive is offered access to outside consultants to learn how to think and speak about their roles strategically and, ultimately, prepare to present to the board. The CEO spends time with each of them, pushing them on strategy, and the board likewise works hard to have dinners and other less formal meetings to get to know them all better. The result has been not only enhanced board awareness about the level of talent within the organisation, but increased confidence among a growing group of rising executives who know they are an important part of the company’s future.
Know where you are going, and you will end up where you want to be
Any sophisticated board member knows; however, it is not that simple. Planned transitions are one thing. When a successful CEO decides it is time to step aside, it is usually done with an extraordinary amount of advance thought and planning. Each constituency can be contemplated and planned for and expected questions can be proactively addressed and answered. There are always surprises along the way, of course, but it is easier to react when you are working with a known commodity.
‘Whether because of death, illness or unexpected tragedy, poor performance, or because a CEO suddenly jumps ship for another opportunity, abruptly removing a known quantity for a mostly unknown one can be a traumatic event for everyone involved’
Many CEO transitions, however, are not quite that simple. The sudden CEO departure is the most difficult. Whether because of death, illness or unexpected tragedy, poor performance, or because a CEO suddenly jumps ship for another opportunity, abruptly removing a known quantity for a mostly unknown one can be a traumatic event for everyone involved. Strategies, priorities and results can all change unexpectedly and quickly. Suddenly, expectations need to be reset. Financial metrics that seemed all but certain before may now be in question. A strategy that had resonated internally and externally may now be in flux. And the image of a company may now need to be rebuilt. Ultimately, those all may prove to be positive changes, but in a moment where they are relative unknowns, risk and uncertainty can rule the day. When investors, employees and customers have bought into a certain person and strategy, which then suddenly disappear without a pre-ordained plan in place, confidence, valuation and results usually wane.
The good news is many board members are increasingly acutely aware of these factors and effective succession planning is once again becoming a top priority in many boardrooms of companies I advise. One factor that is helping as well is the modern board member is actively engaged in overseeing the operations of the companies in which they serve. For instance, one direct result of increased shareholder, employee and even customer engagement at the board level is that board members have the opportunity to personally uncover a problem with leadership that then can be evaluated and discussed at an early stage. These insights can help identify weaknesses or holes in the management chain and even at the CEO level, which can lead to effective remediation programmes or, in some cases, even a surprise transition, if deemed necessary.
Recently, I worked with a company that was producing solid, but not spectacular results. The CEO was a known commodity and particularly well liked among the regulators who played a heavy hand in overseeing the industry. But within the shareholder base, there was a growing unease. The CEO’s stated strategy was somewhat unusual and starting to show cracks. Concerns about risk were beginning to seep through. Top talent had been allowed to leave and a potential acquisition candidate had walked away, in part because the other company’s board was uncomfortable about putting their company under the CEO’s domain. Our board quickly realised a change needed to be made, but its options were limited. There was no time or ability to quietly recruit from the outside, but the internal candidate pool had also decidedly thinned. The board also recognised that any transition would signal to employees a significant change in strategy, requiring a good deal of patience and dedication. During their deliberations, the board lamented having let so many strong candidates leave the company at times when that didn’t seem like a crisis.
The board had a vigorous debate around several possible solutions, ranging from hiring an executive coach to seeking a merger partner, but ultimately settled on a CEO switch because the business still, at its core, held a lot of promise. Without the conversations they were having with various stakeholders, the issues that led to the change likely would not have boiled to the surface until a real problem occurred. The transition was not entirely seamless; a board member with solid industry experience was temporarily put at the helm while a search firm was hired to find a permanent CEO and there were questions for a while as to what the strategy would be and whether some remaining critical talent would stay. But the board’s decisive action encouraged investors and customers and employees likewise expressed relief in the change, allowing the company to get through a bumpy few weeks. Today, the board, with the new CEO’s cooperation, is developing strategies to not only build a bench of talent underneath the CEO, but also find ways to showcase that management depth.
Talent development is standard practice in any organisation and is a critical component to succession planning, but many organisations lose sight of the importance of highlighting that talent not just internally but externally, too. Finding ways to showcase the bench behind the CEO can not only provide further confidence in a corporation’s ability to execute on its strategic plan, but it can greatly smooth a CEO transition when the time comes, even with external candidates. If investors, customers, employees and regulators have faith in the talent at the company and that they are remaining in place and supporting the new CEO, the anxiety and risk that often occurs around these transitions can drop significantly.
There are many ways to showcase that talent, among them conferences, investor calls and meetings, investor day presentations and media interviews. Any strategy to do so should be well thought through and regularly evaluated to measure effectiveness. There likewise needs to be a feedback loop with core audiences to make sure the talent is getting recognised and to pick up on any concerns they have early. There are risks, of course. When promoted talent leaves, it can cause some concerns. But having a deep bench means there is always someone to fill the void. Knowing that talent will stay in place and continue to execute has become a core to success in any CEO transition, so boards should work constantly to make sure that talent is in place and being properly developed.
The succession planning programme can lead to some interesting debates in the boardroom. Is the company effectively recruiting and cultivating diverse talent across the organisation, which many stakeholders are now demanding to see? What areas of the business should future leaders be exposed to for them to continue to ascend within the organisation? How can a company effectively guard against talent bleed? After all, it’s one thing to run an effective talent development programme, with all the time, energy and resources that requires, but if top executives keep leaving to take the top job elsewhere, is that the desired result?
This is where companies and the boards grappling with these issues need to understand and stay true to the company’s culture. It is one thing to set up programmes to develop talent and it is another to truly be engaged in them as a board. Top talent seeks out challenges and opportunities.
‘Knowing that talent will stay in place and continue to execute has become a core to success in any CEO transition, so boards should work constantly to make sure that talent is in place and being properly developed’
Promising executives want to work in organisations where their skills are not only respected, but where they are challenged to help make the enterprise better. That kind of culture can keep talent in place and create a dynamic environment where CEO succession planning is encouraged and is not a taboo topic. Everyone is driving toward the same goal – helping the organisation succeed. To get there, you need to challenge assumptions and introduce new ways of thinking. The risk of not doing so can oftentimes be damaging but done properly organisations will continue to thrive and grow, even when a new leader takes the helm.
About the Author:
Tom Johnson is Chief Executive Officer of Abernathy MacGregor (AMG), where he is shaping a growth strategy that builds upon AMG’s powerful heritage as a trusted partner to leading organizations in times of change. Tom counsels CEOs, executive teams and Boards of Directors on all strategic communications matters, with a particular focus on special situations such as transactions, activist investors, crises, management changes and governance matters. In line with the firm’s tradition of long-lasting client relationships, Tom has advised leading global public and private companies through a number of critical situations including; CBS Corp., Comcast, Carlyle Group, GCM Grosvenor, Hershey’s, JAB Holdings, Keurig, Mylan, T-Mobile, TPG, Sanofi, SunTrust, Starwood Capital and Vodafone. He also has a particular expertise in M&A and activist defense situations, having advised companies on a wide variety of complex and high-profile transactions and activist situations over the past several years.
As a recognized leader in communications, he is frequently asked to speak at events and has been a guest speaker at the Tulane Corporate Law Institute, the Garrett Corporate and Securities Law Institute, the Equilar Board Leadership Forum and 13D Monitor’s Activism conference, among others.