Ending the CEO Succession Crisis (Harvard Business Review)
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www.hbr.org Something is seriously amiss in the business of developing Ending the CEO and hiring CEOs. Too many top leaders fail in office; too Succession Crisis many succession pipelines are bone dry. Here’s what boards should do in order to perform by Ram Charan their most important job right. Reprint R0502C Something is seriously amiss in the business of developing and hiring CEOs. Too many top leaders fail in office; too many succession pipelines are bone dry. Here’s what boards should do in order to perform their most important job right. Ending the CEO Succession Crisis by Ram Charan We talk about leadership as though leaders— porate Leadership Council (CLC), a human-re- like Tolstoy’s happy families—are all alike. But source research organization, surveyed 276 CEO leadership should be a subject apart be- large companies last year and found that only VED. cause it is unique in scope and substance and 20% of responding HR executives were satis- of incomparable importance. CEOs’ perfor- fied with their top-management succession mance determines the fates of corporations, processes. which collectively influence whole economies. That deficiency is simply inexcusable. A ALL RIGHTS RESER Our standard of living depends upon excel- CEO or board that has been in place for six or TION. lence at the very top. seven years and has not yet provided a pool of A OR Who, then, would dispute that CEO selec- qualified candidates, and a robust process for ORP tion deserves perpetual front-burner attention selecting the next leader, is a failure. Everyone from the custodians of a company’s welfare? talks about emulating such best practitioners Surely, when time or trauma ushers in change, as General Electric, but few work very hard at organizations should be ready with a clear it. OL PUBLISHING C view of current and future needs and with The result of poor succession planning is carefully tended pools of candidates. often poor performance, which translates into But they’re not. The CEO succession pro- higher turnover and corporate instability. As cess is broken in North America and is no bet- increased transparency, more vocal institu- BUSINESS SCHO D R ter in many other parts of the world. Almost tional investors, and more active boards make A V half of companies with revenue greater than greater demands, CEO tenures continue to $500 million have no meaningful CEO succes- shrink. Booz Allen Hamilton reports that the sion plan, according to the National Associa- global average is now just 7.6 years, down from tion of Corporate Directors. Even those that 9.5 years in 1995. And two out of every five have plans aren’t happy with them. The Cor- new CEOs fail in the first 18 months, as Dan Ci- OPYRIGHT © 2005 HAR C harvard business review • february 2005 page 1 Ending the CEO Succession Crisis ampa cites in his article “Almost Ready” in last public affairs firm Burson-Marsteller. Al- month’s HBR. though global data are harder to come by, the The problem isn’t just that more CEOs are worldwide trend appears to be similar. But ex- being replaced. The problem is that, in many ternal candidates are in most cases a greater cases, CEOs are being replaced badly. Too of- risk because directors and top management ten, new leaders are plucked from the well- cannot know them as well as they know their worn Rolodexes of a small recruiting oligarchy own people. and appointed by directors who have little ex- Outsiders are generally chosen because they perience hiring anyone for a position higher can do a job—turn around the company or re- than COO, vice chairman, CFO, or president of structure the portfolio. But the job is to lead a a large business unit. Hiring a CEO is simply hugely complex organization over many years different. through an unpredictable progression of shift- Coaxing former leaders out of retirement is ing markets and competitive terrains. Unfortu- another popular way to fill the void. Cele- nately, the requirements for that larger job are brated examples include Harry Stonecipher at often not well defined by the board, which Boeing, Bill Stavropoulos of Dow Chemical, may be focused on finding a savior. and Jamie Houghton at Corning. But most The results are not surprising. In North “boomerang CEOs” return for just a couple of America, 55% of outside CEOs who departed in years, long enough to restore credibility and 2003 were forced to resign by their boards, put a real succession candidate in place. They compared with 34% of insiders, Booz Allen re- are not the long-term solution. ports. In Europe, 70% of departing outsiders To increase their chances of finding a leader got the boot, compared with 55% of insiders. who will serve long and well, companies must Some outside CEOs are barely around long do three things. First, they should have avail- enough to see their photographs hung in the able a deep pool of internal candidates kept headquarters lobby. Gil Amelio left Apple 17 well stocked by a leadership development pro- months after he arrived from National Semi- cess that reaches from the bottom to the top. conductor. Ex-IBMer Richard Thoman was out Second, boards should create, then continually of the top spot at Xerox after 13 months. David update and refine, a succession plan and have Siegel gave up the wheel at Avis Rent A Car for in place a thoughtful process for making deci- US Airways but departed two years later. sions about candidates. Finally, directors con- Even under the best circumstances, CEO se- sidering outside candidates should be exacting, lection is something of a batting average: Com- informed drivers of the executive search pro- panies will not hit successfully every time. But cess, leading recruiters rather than being led two or more consecutive outsider outs can by them. have a devastating effect on employees, part- In my 35 years advising corporations, I have ners, and strategic position. New leaders im- participated in dozens of CEO selections and port new teams and management styles. Conti- have closely monitored numerous executive nuity and momentum collapse, the energy to pipelines. Drawing on that experience, I will in execute dwindles, and morale plummets as these pages first explain why companies make employees obsess about who will get the next poor appointments and then suggest what pink slip. Rather than focus on the competi- they can instead do to make good ones. Using tion, companies starts to look inward. Bad ex- these guidelines, organizations can ensure that ternal appointments are also expensive, since all participants—directors, executive recruit- even poor performance is rewarded with rich ers, and sitting CEOs—perform wisely and ap- severance packages. propriately when it comes time to choose their Ram Charan has been advising CEOs next leader. The Trouble with Insiders and boards of directors for more than On the other hand, sometimes an external three decades. His most recent books The Trouble with Outsiders candidate exists who is, very simply, the best are Boards That Deliver (Jossey-Bass, When companies lack the culture or the pro- available choice. A skillful, diligent board may 2005) and Confronting Reality: Doing cesses to grow their own heirs apparent, they discover an outstanding fit between an out- What Matters to Get Things Right have no choice but to look outside. More than sider and the job at hand. Lou Gerstner and (Crown Business, 2004), coauthored a third (37%) of the Fortune 1,000 companies IBM spring to mind. And boards must remem- with Larry Bossidy. are run by external recruits, according to the ber that just as outsiders are not uniformly harvard business review • february 2005 page 2 Ending the CEO Succession Crisis bad choices, insiders are not uniformly good The Trouble with CEO Development ones. In certain situations, internal candidates Many organizations do a decent job nurturing actually present the greater risk. middle managers, but meaningful leadership Some concerns about insiders, ironically, development stops well below the apex. The emerge from their very closeness to the com- problem manifests itself as a dearth of senior pany. For example, as “known quantities,” they managers, for which companies must increas- may sail through a lax due-diligence process. ingly shop in other neighborhoods. Almost Or their social networks and psychological ties half of respondents to the CLC survey had may complicate efforts to change the culture. hired a third or more of their senior executive Some will not have had the right experience or teams from outside, but only 22% of those did been tested in the right ways. Individuals from so because they considered external candi- functional areas may not be up to the task of dates irresistibly appealing. Rather, 45% of all leading the entire business. Or a shift in the in- respondents judged that it would take too dustry or market landscape may render care- long or be too expensive to develop successors fully nurtured skills irrelevant. In some cases, internally. the credibility of the outgoing CEO or manage- It’s easy to understand why they feel that ment team may be so sullied that only a new way. Even where strong development pro- broom can sweep the company clean. grams exist, very few leaders will ever be quali- What’s more, companies that have no ongo- fied to run the company. Very few. A $25 billion ing senior management development pro- corporation with 70,000 employees, for in- gram (currently more the rule than the excep- stance, may have 3,000 leaders, perhaps 50 to tion) will in all probability need to look 100 of whom would qualify for one of the ten outside, maybe for as long as the next ten to 20 jobs just below the top.