美版原音 The High Cost of Poor Succession Planning2

Implementing Solutions

Why are some of the world’s biggest and most powerful organizations getting CEO appointments so wrong? For five main reasons: lack of attention to succession, poor leadership development, suboptimal board composition, lazy hiring practices, and conflicted search firms. Here are some recommendations for fixing those problems.

00：30  According to PwC’s latest Strategy& “CEO Success” study, in 2018 turnover among CEOs at the world’s largest 2,500 companies reached nearly 18%—the highest rate PwC had ever tallied. A disturbing 20% of those departing CEOs were forced out, and for the first time in the study’s history, more CEOs were dismissed for ethical lapses than for financial performance or conflicts with their boards. Looking forward, we suspect that unanticipated CEO turnover will continue to rise because of the growing attention to moral issues (such as sexual harassment) and industry and market volatility.

01：15Despite this trend, boards continue to be caught off guard because they haven’t spent enough time developing talent and mapping out possible lines of succession. Some believe that having a casual “if the CEO gets hit by a bus tomorrow” plan, which picks a replacement but doesn’t prepare or vet that person or weigh alternatives, is enough. It is not. Others delegate succession planning to the CEO, which is an equally unacceptable abnegation of duty. For instance, we know of a major company, valued at hundreds of billions of dollars, with a CEO in his late sixties who has been unwilling to properly develop any potential replacements. Unfortunately, because the firm’s recent results and stock market performance have been good, board members are afraid to confront him.

02：08Succession planning should start the moment a new CEO is appointed. Take Ajay Banga, the former chief executive and current chairman of Mastercard: He began discussing when he might cede the CEO role to a successor even as he was interviewing for the job himself. The process should remain robust, with directors constantly monitoring and if need be adjusting the pipeline. If there isn’t already a potential successor among the CEO’s direct reports, the board should look to the next level and consider advancement and development opportunities that will help executives there progress. If that level is empty, directors can promote or hire high potentials into it or the C-suite. While hiring externally is usually not ideal, it’s much less risky to do it at a lower level than in the top job.

03：08By now most directors know the attributes and skills that senior executives need. At the leadership advisory firm Egon Zehnder, where one of us (Claudio) worked for three decades, the list used for CEO searches includes intelligence and values. The firm also assesses candidates on strategic orientation, market insight, results focus, and customer impact, and their competence at collaborating with and influencing others, organizational development, leading teams, and change management. Meaningful succession planning calls for finding rising managers who either have the right levels of all those capabilities or, more likely, the potential to develop them. Four critical traits—curiosity, insight, engagement, and determination—signal potential, and with the proper coaching and support, people who demonstrate them can be groomed for high-level positions. (For more on this subject, see “Turning Potential into Success: The Missing Link in Leadership Development,” HBR, November–December 2017.)

04：20One important development area for any CEO is emotional intelligence, which encompasses flexibility, adaptability, self-control, and relationship management. You might think that those soft skills would be more challenging to learn than hard ones such as calculus or coding. But as Richard Boyatzis of the Weatherhead School of Management has conclusively demonstrated, people can pick up these crucial leadership competencies even as adults.

04：49Another way for boards to help potential successors get ready is to insist that they be given challenging rotations and stretch assignments, as was common at General Electric in its glory days and is practiced with great success at Unilever and McKinsey today. When you expose your highest potentials to new geographies, businesses, situations, and functions, you can become a leadership factory.

05：25In the United States, in part because of regulatory mandates following executive malfeasance at Enron, Tyco, and other companies, most large companies’ boards have become fully independent, with the CEO as the only employee director. Faleye found that the proportion of U.S. boards set up this way exploded from about a third in 1998 to more than two-thirds in 2011. Our analysis shows that the percentage of fully independent boards has continued to increase, rising to 76% by 2018.

06：00While there are clear benefits to getting oversight and advice from outside experts, we believe independent boards are less equipped to manage CEO succession. With so little exposure to internal up-and-comers but extensive knowledge of potential external hires from their own organizations and other board experiences, directors are understandably more likely to favor outside CEO candidates or be unduly influenced by individual opinions. As one veteran director recently told us, “It’s scary to see how little insight boards have about top internal executives these days; a lot of the views are painted, either too positively or too negatively, by the sitting CEO.”

06：44We believe that boards should make room for one to three executives who are potential successors to the CEO. Not only does that allow directors to see likely candidates in action, but it better prepares those individuals to take on the top job. When Faleye compared the performance of internally promoted CEOs who had prior director experience against that of insiders who lacked it, he saw that during their first two years the CEOs with board experience had an average return on assets that was 12.5 percentage points higher. Interestingly, this massive difference disappeared during year three, suggesting that while both types of executives had similar levels of competence and potential, the exposure to strategic board-level discussions as well as the relationships established with directors drastically flattened learning curves.

07：38Indra Nooyi, for example, joined PepsiCo’s board when she was the company’s CFO—five years before becoming its CEO. Watching her firsthand, the board became confident in her competence and potential and, after her appointment as CEO, was more open to her plans to radically transform the company by expanding its portfolio beyond sugary drinks and steering it toward greater social responsibility. During Nooyi’s tenure as CEO, PepsiCo’s net profit increased 122%.

08：13If you have too many directors already or too many promising potential CEO successors in your ranks, an alternative (though suboptimal) approach is to ask your rising stars to frequently attend and present at board meetings. This will improve their exposure, contributions, and development. Before the pandemic, good boards ran dedicated off-sites or group trips where directors and top executives, and even their spouses, could connect professionally and personally. As boards get back into their rhythms post-Covid, we hope that such in-person social interaction will resume. For further development, you might also encourage some of your most likely successors to selectively join other companies’ boards.

09：08The best practice is to carefully outline your ideal CEO profile and then look both inside and outside for the person who best matches that description. While we believe that every company should first master the art of spotting internal talent and create succession plans based on its current roster, we also see value in external searches for benchmarking and comprehensiveness. (And so do companies like Mastercard, PepsiCo, P&G, and American Express.) Research from the Center for Creative Leadership has consistently shown that when companies consider wide pools of insiders and outsiders, executive appointments are more successful. Whether you’re shopping for a house or for your next top executive, comparative evaluations produce better decisions.

09：59Make sure to conduct thorough assessments of all candidates, even the insiders who are well known to the board. Consider not who has performed the best until now but who is ready to meet the future challenges of the CEO role and has the potential to continue adapting in a volatile, uncertain, chaotic, and ambiguous world. Judge everyone against your job specs, grill candidates in well-structured interviews, and conduct in-depth reference checks. This is the only way to avoid appointing the wrong people to the job.

10：40Executive search firms can usually add great value to succession efforts. Consultants with the right training and experience can identify the competencies that each senior position requires, get more out of interviews and reference checks, and distinguish potentially great performers from the rest. Such consultants also tend to have trusting relationships with candidates, sources, and references.

11：07However, the search profession as a whole still probably hurts as much as it helps, owing to two blatantly perverse incentives: the contingency arrangement and the percentage fee. Most search consultants are compensated when they produce a hire, regardless of that person’s fitness for the job or origin. They make no money on inside hires, who don’t need to be found and brought in. Traditionally, search consultants are paid a third of the new executive’s annual cash compensation (salary plus bonus). As a result, whether consciously or unconsciously, many oversell high-priced outsiders and shoot down internal alternatives. The solution is to swap the percentage fee with a prearranged fixed fee that’s based on the importance of the position and the complexity of the search and to replace the contingency fee with a retainer so that the consultant is paid the same no matter who is appointed. (Of course, the retainer fee makes financial sense only if you’re planning to use the consultant for enough search and advisory work to justify the cost.)

12：17Even if you have those two things right, you should still use search consultants only in special situations—for example, if your internal candidates are unsuitable, you can’t identify or access appropriate external candidates on your own, or your company is entering a new business, region, or period of strategic change. Then approach the selection of your consultant as you would any other people decision: Ask for recommendations, consider multiple firms, and check references. Once you’ve developed a short list, meet the recruiters in person to get a read on their relevant experience, as well as their level of professionalism, candor, and concern.

12：58Companies and institutions must do a better job of getting CEO succession right—their organizations, their industries, and their market returns depend on it. We hope this article helps senior executives, directors, and investors recognize the magnitude of the problem and act accordingly. Microsoft shouldn’t have required a long and public search to conclude that Nadella was the right leader to get the company back on track after Ballmer’s years of struggle. It should have already had him—and even other potential successors—waiting in the wings. How many rising stars like Nadella do you have at your company—and what can you do tomorrow to put them on a path to becoming your next (and ideally best ever) CEO?

A version of this article appeared in the May–June 2021 issue of Harvard Business Review.