CEO succession Featured

8:00pm EDT October 26, 2008

CEO succession used to be a simple matter of grooming the next heir apparent to step into the shoes of a retiring CEO. However, this does not reflect the majority of the CEO succession scenarios today.

CEO turnover — and the lack of a solid succession plan — has become a problem in corporate America today. According to a survey of the largest publicly traded companies, CEO turnover has increased 59 percent from 1995 to 2006, and during that same time period, there was a staggering 300 percent increase in the number of performance-related CEO departures.

“We’re seeing an increased number of interim CEOs to fill that gap of that turnover,” says Christine Mooney, assistant professor in the College of Business at Northern Illinois University.

Smart Business spoke to Mooney about the trend of CEO succession today and if interim CEOs are the best solution to the high CEO turnover rate.

What is CEO succession like today?

There are four ways that CEOs are now picked:

 

  1. Heir apparent. This is the traditional way CEOs have been chosen, that is, an executive picked and groomed from within the ranks of a company. Twenty years ago this was the typical corporate succession plan. Though still considered the most effective, it is a much less common succession method in corporate America.
  2. Horse race. Some large companies such as GE and Procter & Gamble use this technique — successfully I might add — where two or three ‘potential heirs’ are selected. They typically become C-level executives and all are vying for the CEO position. The ‘best’ candidate wins.
  3. Outsider CEO. This is a CEO selected from the outside of a company or an executive that has worked at the company for less than two years.
  4. Interim CEO. This is an emerging method that is increasingly being used by companies. When hiring an interim CEO becomes the default succession plan for companies, this may be a red flag.

     

Is hiring an interim CEO a sign of a troubled organization?

There can be several reasons an organization hires an interim CEO: it has no succession plan in place, it is financially distraught and brings in an outsider to clean up the mess, or there has been a revolving door of CEOs because of internal trouble.

We’re seeing more interims step in when there are so-called ‘normal’ retirements, but in actuality, the CEO has likely been ousted. If the organization had a succession plan the board wouldn’t be choosing an interim, although it is hard to tell what the thought process is of a company. You could say it is choosing an interim to test the CEO or because the company is trying to make a choice between an outside and inside CEO.

Regardless, research has shown CEO succession is in a crisis mode at the moment. A recent report looking at CEO successions from January 2008 to June 2008 reveals 37 successions in the S&P 500 companies; more than half of those — 54 percent — were not planned retirements. Other studies have shown that CEOs now fail 20 percent of the time within the first 18 months on the job; CEO tenure is also down — it used to be eight to 10 years, and it is now about five.

Will we be seeing more interim CEOs populate companies?

Boards have become less patient with their CEOs and are relying more on interims when they oust the CEO because of poor performance. There appear to be a few types of interims that a company will hire: a younger executive who could bring necessary change and innovation but who needs to be tested out, a retired CEO sitting as an outside director to buy the board time to find an outside candidate, or the former CEO asked to return because the company needs a face of stability during a serious financial crisis.

Instead of using interims as a default succession plan, what would be a better solution to CEO succession?

First, get the board committed to succession planning as a priority. The board needs to manage the leadership pipeline. This doesn’t mean just selecting the next CEO but considering all C-level executives. Next, have open communication. Communicate not only throughout the leadership pipeline, but be explicit about the path up that pipeline. Motivate and evaluate employees throughout the pipeline. The current leadership needs to be fully involved in motivating and evaluating the next generation of leaders. Finally, manage the succession plan. This is not just a once every five years discussion; it should be ongoing. The entire process needs to be managed to ensure a smooth transition.

CHRISTINE MOONEY is an assistant professor in the department of management at the College of Business at Northern Illinois University (www.niu.edu). Reach her at (815) 753-6308 or chmooney@niu.edu.