The team effect in CEO succession

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By Marc de Leyritz, Jens-Thomas Pietralla & James Roome – Consultants at Russell Reynolds Associates

 

Managing the CEO succession process is a board’s ultimate responsibility. Beyond risk mitigation, CEO succession planning contributes to the successful governance and management of the company. It also helps inform and align the board on the development of the senior management team.

Perhaps not surprisingly, close attention to the succession process proves to be a key differentiator between best-in-class boards and others, according to Russell Reynolds Associates’ recent survey of 750 directors around the globe.

In the course of surfacing and evaluating candidates to succeed the current CEO, boards typically consider a wide array of factors: key competencies and experiences, past roles and companies, colleagues’ perceptions, vision of the future and, increasingly, psychological profiles and leadership potential.

One factor that often does not get enough attention in the succession process, however, is the impact that the new appointment will have on the rest of the organisation’s senior leadership team. This team effect is less studied and less predictable than other aspects of the CEO transition phase, yet it is an essential variable to understand.

The reality is that nearly any CEO transition is likely to have a ripple effect across the organisation’s top leadership. At one extreme, consider a new CEO who is brought in from another organisation to carry out a turnaround or transformation. In this case, it is almost a given that the new CEO will aim to clean house and start afresh with a handpicked leadership team. At the other end of the spectrum, a well-respected member of the current management team who becomes CEO may not intentionally push out colleagues, yet by default, those who were also contending for the CEO title may well decide to look elsewhere for new opportunities. In the middle, team disruption can take on any number of other flavours.

Some people leave pre-emptively because they are worried about or frustrated with the new appointee; others become obsolete in a new, severely disrupted environment. All of this turnover is compounded by the fact that decisions about the composition of the new team typically take longer than they should, creating lingering uncertainty both before and after the CEO transition.

While boards cannot completely eliminate unwanted turnover among the senior leadership team during a CEO transition, they can mitigate its downside by planning and preparing for it. To start, the existing CEO and board should pay particular attention to the quality and depth of the existing talent bench in the years leading up to a CEO transition and take steps to strengthen and retain key members. As the time to select a new CEO draws near, board members should also play out the likely turnover scenarios associated with each candidate and decide how much additional change they are comfortable catalysing. The team impact is obviously not the only factor to consider in the selection process but, like any other factor, it is essential to approach it with clarity and thoroughness. After the selection, both the board and incumbent CEO should move quickly to make and communicate team decisions to minimise the period of uncertainty.

Starting points for success

Selecting a new CEO is a complex and multifaceted process. To prepare for the next CEO transition, board members must have a deep understanding of the current organisation and leadership, but at the same time, align on a common view of the company’s long-term challenges and strategic plans. Considering the fast pace of change, the competencies and experiences a CEO needs for future success may evolve over time – meaning that the heir apparent at one point in time may not be the right person to lead the company once the transition actually occurs.

“A thoughtful, well-conducted CEO succession process comprises a certain amount of transparency that also has side benefits”

In terms of best practices, we advise clients to start the succession process as early as possible and keep it ongoing. Detailed dialogue should start at least two years in advance of an appointment to allow for two or three iterations of candidate pools, including in-depth assessments of leading candidates. One year is too short to allow for more than baseline assessments.

A thoughtful, well-conducted CEO succession process comprises a certain amount of transparency that also has side benefits. It helps the board assess the best CEO candidate and also illuminates optimal development plans for the broader executive team and potential options for organisational redesign.

These development plans allow the board to get more clarity on the depth of talent among those who currently report to the CEO and encourage measures that strengthen it well ahead of a transition.

The key starting point for any robust CEO succession process is to consider the company’s long-term strategy: what are the critical opportunities and risks that the company will be facing in the next three to 10 years? In other words, what are the organisation’s near-term needs, and what are the longer term ones? In addition to the marketplace perspectives that industry and financial analysts can provide, it is critically important for the board to ask the current CEO and senior leadership team members to reflect on the company’s future challenges. This exercise has two purposes. On one hand, current leaders can provide first-hand observations about the company’s opportunities and risks, as well as operational strengths and gaps. On the other, they provide unparalleled insight about the dynamics of the current management team and how the group is likely to react to various potential CEO candidates.

A related question is whether, in broad terms, the organisation requires a CEO who is a disrupter , who is ready to make large-scale changes, or a stabiliser who can maintain what is already in place? A third dimension relates to the team: to what extent will it be important to retain current senior leaders compared with bringing in new leaders with fresh perspective? At any point in its life, an organisation needs a different set of roles to help it evolve into the next phase of its journey, including a custom mix of impact and efficiency and of short-term and long-term perspectives.

Weighing the team

When it is time to select a new CEO, board members will weigh long-term strategy against the strengths and weaknesses of leading CEO candidates. At this point, they should also incorporate the team effect. In essence, there are four core scenarios, hinging on the extent to which the organisation must change its strategy and the extent to which it must change top leadership.

SELECTING A NEW CEO – Board members can help their organisation prepare better for leadership team turnover

If the organisation is in need of a new strategic direction to succeed, and the current executive team capabilities match the short-term turnaround and longer term transformation capabilities required, the best choice would be to strive to hire a CEO whose personality and sense of culture fits into that team. While some turnover will be inevitable, a CEO who fits in can minimise it.

However, if the executive team capabilities are not aligned with the needs of the new strategic direction, and reshuffling the team is a requirement,the new CEO should be someone who is more disruptive. He or she should be comfortable and ready to select a new team that can radically change the company in the ensuing three to five years.

If there is no need for a drastic change in the strategic direction of the company, and the current executive team’s capabilities, culture and results are strong, then it is best to select a CEO who can fit into the team and help retain and develop existing leaders.

If the strategy is strong, but current executive team members are not well suited to deliver it, the new CEO should be a disrupter, ready to change the team while selectively retaining members for continuity (see table below).

Regardless of the desired direction for the company and leadership team, it is essential to manage the transition to a new CEO with integrity. On one hand, creating a formal onboarding or transition process for the new CEO that involves multiple stakeholders across the organisation will help smooth the path and increase the odds of success. On the other, the board can minimise the risk of excess turnover by ensuring that other team members (including unsuccessful CEO candidates) get rapid and robust feedback about their near-term opportunities and where they fit into future succession plans. In the absence of clarity, many executives assume the worst – or make unrealistic assumptions about what is possible for them to achieve. By encouraging the new CEO to move quickly on team decisions – even ahead of officially taking the role – boards can help minimise the possibility of unwanted turnover or mismatched expectations.

Toward a broader view of succession planning

Team fit is a fairly uncommon selection criterion for new CEOs today but, when used properly, it can be a powerful one. Board members cannot prevent leadership team turnover, but they can help the organisation prepare for it. Part of preparing may involve forecasting who will leave and how best to fill their spots, rethinking organisational structure and casting a net for strong external and internal candidates who could bring fresh perspectives. In addition, as part of the ongoing leadership development process, the board can and should also strategise with the incoming CEO about alternate roles and development opportunities for leaders that the organisation would like to retain.

The team effect is just one of many broader variables a board should consider beyond past experiences and proven competencies when selecting a new CEO. By investing the appropriate amount of time and thought in the succession process, board members can look beyond the obvious choices and optimise CEO selection as well as the benefits of the process to the organisation.

 

About the Authors:

Marc de Leyritz is a member of the firm’s global Board & CEO Advisory Partners. He is a veteran in executive search and has an extensive background advising global leaders on CEO search and succession, leadership development, organisational transformation and board effectiveness. Marc is based in Paris. Prior to joining the firm, Marc spent 17 years with another leading search firm and led business development initiatives and high level search projects. He played a leading role in the firm’s transformational leadership and CEO succession work. He has successfully counseled CEOs for some of the largest public and private companies, as well as private equity and family controlled organizations. Earlier in his career, Marc served as Vice President for JP Morgan and was an investment banker with Lazard, specializing in mergers and acquisitions for global clients.

 

Jens-Thomas Pietralla is a leader of the firm’s Board & CEO Advisory Partners in Europe and serves as Global Head of the Industrial & Natural Resources Sector. In this capacity, he leads the firm’s business with clients in Aerospace & Defense, Automotive, Capital & Electrical Goods, Chemicals, Energy and Industrial Services. Jens-Thomas helps companies build superior boards and advises his clients on leadership matters, succession planning and strategy. Recent work includes a number of CEO, CFO and other CxO positions, as well as chairman and non-executive director roles for listed and private equity-owned companies around the globe. He is based in Munich. Jens-Thomas joined Russell Reynolds Associates after four years as President and CEO of private equity-owned Navico Holding, a global market leader in marine electronics with 2,500 staff on three continents. He was responsible for establishing the company through multiple acquisitions, defining strategy and creating a family of brands under the Navico umbrella, resulting in enhanced management, operations, and product offerings to develop the most profitable, globally-integrated player in the industry.

 

James Roome is the firm’s Country Manager for the United Kingdom and serves on the Global Executive Committee. He formerly co-led the Technology Sector.  James is a core member of the firm’s Board & CEO Advisory Partners and the Digital Practice. He leads succession projects for CEOs and board members in technology, and across other industries facing technology transformation. His recently completed assignments include CEO of a global telecoms operator; CEO of a PE-backed technology infrastructure company; and the establishment of a Board in preparation for an IPO. He works with large-scale global market leaders and fast-growth private companies. James is Vice Chair of the Prince’s Trust’s Technology Leadership Group. The Group supports disadvantaged young people through partnerships with leading technology companies. Prior to joining Russell Reynolds Associates, James was a management consultant with Ernst and Young. He specialized in transformation design delivery across multiple industry sectors. Prior to that, James was a project manager with British Airways’ Airport Operations group.