Two inescapable realities of business life – that every successful organization has a qualified leader at the top and that no leader lasts forever – should be forcing corporate boards to ask if they have the bench strength to ensure effective leadership in the C-suite and thus ongoing competitive advantage.
Seventy 70 per cent of companies today think a CEO successor needs to be ready immediately but only ten per cent actually invest in developing high-potential leaders (this according to Stanford University’s Center for Corporate Governance). A study by Heidrick and Struggles tells us most companies can’t name a CEO successor should the need arise. And a ten-year worldwide study by Booz & Co. confirms the tenure of CEOs is about half what it was in the 1990’s, while being much more complex and intense, with a lower margin for error or underperformance. Indeed, 40 per cent of CEOs flame out within the first 18 months.
Not planning for leadership transitions leaves an organization vulnerable to unexpected changes in what may be the most globally hyper-competitive era in history. The fact the average board spends just two hours per year on CEO succession planning constitutes a failure in risk management. But this oversight must be shared – a CEO who can’t look around the executive table and see at least one potential replacement is a CEO who has failed to execute the critical responsibility of ensuring the future success of the enterprise.
Internal candidates last longer in the CEO role for obvious reasons, not least of which is their superior knowledge of the organization’s culture. But developing and retaining the best and brightest can be difficult. This spring, the Harvard Business Review reported that 25 per cent of the highest potential leaders in any given company plan to jump ship within a year. Never forget that those competent enough to succeed you are competent enough to lead elsewhere.
To keep this leadership talent, organizations must first identify them, then retain and nurture them for advancement. These future leaders need stimulating work, lots of recognition, involvement in decisions that matter and the chance to prosper. They must be tested in real-world situations and mentored by those who clearly understand the role. Otherwise, they become disenchanted and start looking elsewhere.
That’s not to say the next CEO should always come from within. If the strategic intent behind a change of leadership is to fundamentally refocus the organization, external candidates are advisable. Alan Mulally, an outsider from a different industry, proved to be Ford’s greatest asset in turning around the company. He was able to do things Bill Ford and his predecessors – all Ford lifers – could not easily do, like changing the mindset of upper management.
Regardless of whether the CEO comes from inside or outside, boards need to ensure that “the next one” to lead knows how to lead, particularly in dealing with the new marketplace realities and difficult global challenges that define the innovation economy. That requires a much different set of skills than what was needed in past. They must be change masters, if only to keep the organization alert and agile. And they especially need to better understand the blind spots and land mines that can derail even the most qualified leader.
Boards and CEOs have to do more than just have a plan for succession at the top. They must also ensure their qualified candidates, whether internal or external, have what it takes to stay in the office longer than the current average tenure which, depending on the industry, is somewhere between 2.5 and five years. Leaving aside the expense of recruitment and the inestimable cost of hiring the wrong person, the organization can only tolerate so many changes in leadership before it is seen by its primary stakeholders as rudderless.
Beyond issues of underperformance or a failure to meet increasingly high expectations, seniors and boomers are leaving the C-suite in unprecedented numbers, in some cases because they no longer value the perks of office or because they are being assaulted by constituency pressures to relinquish the grind. Without a well-conceived succession strategy, this spells extreme risk. With a sound plan in place, and a knowledge of the right questions to ask the candidates, the opportunities for sustained growth or renewal are limitless.
This article was developed for and appeared in The National Post, August 10, 2010.
A noted architect of leadership programs, Dr. Jim Murray’s new course – Becoming a CEO (and staying there) – will debut in November for the Institute of Chartered Accountants of Ontario.