Handled poorly, CEO transitions are costly. Boards of publicly-traded companies know the risk of poorly managed CEO transitions – a time when stock prices can drop dramatically if the board does not show strong leadership. But private and family-owned companies also face the risk of huge losses in enterprise value – including loss of key talent, loss of operational efficiency, and loss of customers should the transition between CEOs be handled poorly. Not for profit organizations face similar risks: including the loss of credibility with the community they serve, and potentially the loss of grant funding or community donations.
Boards must be prepared to deal with CEO transitions. CEO retirements, resignations and terminations are coming at a more rapid pace. According to the 2012 edition of CEO Succession Practices published by the Conference Board, the average tenure of a CEO declined to 8.4 years in 2011 from approximately 10 years in 2000. The American College of College Executives reported the hospital CEO turn-over rate at 18% for 2014. Nationally, more than 75 percent of community college presidents are expected to retire within the next 10 years, with 40 percent retiring within the next five years. As the Baby Boom population reaches retirement age, two-thirds of not-for-profit organizations are expecting to feel the impact of CEO transitions over the next five years. In Washington State, more than one-third of sitting bank presidents are at retirement age. In short, boards of organizations across all industries must be prepared to provide strong leadership in face of CEO transitions that will occur.
Succession planning is critical but not the Board’s only responsibility with respect to CEO transitions. While Boards increasingly are recognizing their role in succession planning and cultivating talent from within, statistics on Board leadership and preparedness remain startling. Boards on average spend only two hours a year on succession planning, and half of all boards cannot name a CEO successor in the event of an emergency transition, with 40 percent having no viable internal candidates in development programs. In the case of family businesses, the concept of an internal vs. external candidate becomes even more complex.
Notwithstanding the need for Boards to up their game on succession planning, there may simply be no readily available candidates when the CEO announces an impeding resignation or retirement or is terminated by the Board. The solution seems easy – Boards can find ample assistance from top notch recruiting firms to identify and place the right candidate if no internal successor is in sight. But even hiring the right recruitment firm is does not address the extent of Board responsibility – or the opportunities a transition presents.
A CEO transition offers the opportunity to face the future head on. In hiring a new CEO, the board is seeking a leader to address the challenges and opportunities of the future – not the past. Many Boards rush into appointing the next CEO in order to avoid even a temporary vacuum in leadership or the appearance of disorganization; when in fact, they need to take the time required to truly assess the needs of the organization for the future. This may require the appointment of an interim CEO to lead the organization while the Board identifies what type of leader is needed. Preferably the interim will not be a not a potential candidate for the more permanent position.
CEO transitions offer significant opportunities to truly identify what an organization needs from its top leader, and to create stakeholder engagement in a smooth transition and the success of the new CEO and the organization. The Board needs to take the time to truly vet the organization’s strengths and weaknesses, challenges and opportunities, and critical priorities.
During the transition planning, there is a natural ability for the Board to assess how well it has been supporting the organization, and to identify areas to strengthen governance, optimize strategic visioning and risk management. As the Board discusses and concurs upon the leadership needs for the organization and envisions the future under new leadership, it is likely there will be lively discussion, improved board relationships, and greater consistency regarding organizational priorities. As the Board interacts with stakeholders on the development of the presidential profile and transition plan, there is an opportunity to learn about the organization from different perspectives, perhaps offering different insight than before.
Five Recommendations for Successful CEO Transitions
By driving the CEO transition process, the Board can ensure the needs of the organization, its stakeholders and both its departing and incoming CEOs are met. Based on first-hand experience, research and observation, we recommend the Board take the following steps:
- Create an organized process where stakeholders feel listened to and believe the Board is driving the CEO transition process with a positive impact for the future.
- Develop a state of organizational readiness to accept and support a new CEO, creating clarity of purpose and optimizing future performance;
- Minimize and mitigate risk of organizational credibility during the CEO transition through strategic communication outreach to all stakeholder groups;
- Leverage the opportunity to create strong relationships among board members; and stronger practices for governance;
- Ease the organizational impact of change by being sensitive to the needs of individuals throughout the organization: ensuring the retiring CEO is celebrated for the legacy left behind; while setting and managing the expectations of the leadership team and the organization as to what will occur under new CEO leadership.
Turning Risk into Enterprise Value. While Boards often dread CEO transitions due to commitment of time and risk associated with such transitions, CEO transitions should be viewed as an opportunity which can result in increased enterprise value and positive realignment for the future. Given the aging of our population and the myriad of issues causing CEO turn-over, it is important to realize that such transitions will occur and should be managed as any other high impact process. Even if the departing CEO is a rock star who will be greatly missed, the transition offers the opportunity to:
- Ensure the Board and the stakeholders are on the same page with respect to organizational strengths and weaknesses, challenges, opportunities;
- Create a stronger organization through stakeholder communication and engagement;
- Reduce organizational resistance to change through a positive change experience in which the needs of the organization and its stakeholders have been understood.
Edgewater Advising offers guidance to organizations seeking to elevate performance. Founder & Managing Partner Debbie Ahl draws from experience in publicly traded, private for-profit and not-for-profit organizations, as a CEO, C-Suite executive and board Director. Her approach is one of collaboration and communication, identifying stakeholders’ needs and perspectives, and skillfully managing the change process.