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5.1 CEO Selection: A Key Board Responsibility

Selecting a new chief executive arguably is a board’s most important responsibility. Yet, record CEO turnover points to distinct deficits in board performance in this area. The results of the 2007 Spencer Stuart Board Survey of the Standard & Poor’s 500 companies provide important clues:

  • CEO succession is on the board’s discussion agenda annually at 62% of responding companies and more than once a year at 34%.

    • Still, a quarter of the survey respondents said they do not have an emergency succession plan.
  • Primary board responsibility for succession planningIdeally, a process of continuous leadership ’optimization” with the goal to identify and develop a pool of talent with the skills, attributes, and experiences to fill key leadership positions. This process should include plans for coaching a chosen candidate, as well as how the chosen candidate will be evaluated in the future. is split nearly evenly between the nominating and governance committee (41%) and the compensation committee (40%). The remaining survey respondents cited a variety of players, including the full board, all independent directors and management development consultants.

    • Remarkably, when asked how the board involves the CEO in the succession-planning process, half of the respondents said that the current CEO leads the process, while a quarter said that he or she is involved at the same level as all other directors.
    • Fifty-eight percent said that the CEO suggests internal candidates to the board or committee handling succession and contributes to their evaluation.
  • Of the 53% of boards that use a formal review process to assess potential successors, 44% said the process includes benchmarking of internal candidates against external ones.
  • Another study by Mercer Delta Consulting (2006) revealed that almost half of corporate directors surveyed were dissatisfied with their involvement in the succession-planning process.Mercer Delta (2006), Governance Surveys. Time pressures play an important role. Large majorities reported devoting many more hours to more immediate concerns, such as monitoring accounting, the Sarbanes-Oxley Act, risk, and financial performance. They also said they spent less time interacting with and preparing potential successors than on any other activity. This is unfortunate because the board’s role in CEO succession is critical to effective governance; choose the right CEO, and all subsequent decisions become easier.

The list of high-profile failures is impressive: Gil Amelio of Apple, Durk Jager of Procter & Gamble, Doug Ivester of Coca-Cola, Jill Barad of Mattel, and, most recently, Robert Nardelli of Home Deport, just to name a few. All these former CEOs of major corporations have two things in common: They are talented, intelligent individuals with strong track records as managers and leaders, yet they all failed as CEOs. Some had been promoted from within to the CEO position, whereas others had been recruited from the outside following an extensive search. Some left on their own, whereas others were forced out.

The broader statistics are equally sobering; global CEO turnover set a new record in 2005, with more than one in seven of the world’s largest companies making a change in leadership, according to Booz Allen Hamilton’s most recent annual study of chief executive succession at the world’s 2,500 largest public companies. Fewer than half of the outgoing CEOs left their office willingly, the vast majority left because of poor performance.Lucier, Kocourek, and Habbel (2006).

What accounts for this high failure rate? Clearly, the job of being a CEO has become much more difficult in recent years, which, in part, accounts for their shorter tenures. In recognition of this fact, firms increasingly are splitting the function through a separate, nonexecutive chairman who deals with outside constituencies, such as customers, as Intel’s Andy Grove did, or with the financial community, as is the practice of U.K. firms. The model of the imperial CEO who commanded from the executive suite has long given way to the team leader model. In this model, CEOs are no less powerful, but the nature of power and influence has changed. Today’s CEOs can only succeed if they enable others around them to succeed. Trust is the new leadership currency. In a world of instant communication, CEOs cannot be everywhere; therefore, they are compelled to rely on others as never before, and others will, in turn, rely only on those with similar core values.

One problem is that the vast majority of board members have little or no experience with CEO selection and succession planning. As a result, search committees often approach their task with only the broadest of requirements rather than with a well-thought out list of a company’s real needs. The sociology of the selection process comes into play as well. As they screen candidates, directors may be seduced by reputation, when dealing with a Wall Street or media favorite, for example, or be blinded by charisma. However such inexperience manifests itself, the result is the same: Directors become so focused on what candidates are like that they fail to discover what candidates can and cannot do.