No job of the board is more important to the creation of long-term value than selecting the CEO and the leadership team. Their capabilities must align with both where the company is today and where it is headed. The CEO does more than run the business. The CEO is your long-term visionary. As former WSFS Financial Corp. chair and CEO Mark Turner says, “The CEO is developing into not just a leader of the organization but a leader of leaders—an external champion and explorer for the organization and a serial disrupter.”
Disrupt the Process
But, first, boards must disrupt the old way of choosing the CEO. Gone are the days when the board could simply nod through the incumbent’s pick for the job, perpetuating yesterday’s rule. In choosing the CEO, whether from inside or outside the company, the board must focus relentlessly on the long-term needs of the company.
To meet these needs, the board can start by deepening its understanding of the company’s talent pool. It should also determine the qualities the CEO will need in the years ahead based on emerging trends in the marketplace. The board must take into account the vagaries of succession, ranging from a planned retirement to a sudden departure. Among the questions the board should ask:
- What is the second-generation pool?
- What is the generation below that group?
- Will the company have three or four candidates ready in five or 10 years?
This sort of strategic thinking is key to managing for the long term. Throughout the process of evaluation, boards should look forward, not backward, which means letting go of assumptions about the candidates they are trying to assess. A lot of boards fall into the trap of confusing familiarity with actual assessment of a candidate. It’s ironic that at a time of so much transformation in business, boards don’t challenge themselves to look at transformational CEO candidates wherever they happen to come from. Elena Botelho, senior partner at leadership advisory firm ghSMART, says, “When you see a board making the wrong decision, it’s typically because they thought they were making a ‘safe choice.’”
Familiarity is not data. To move in the right direction, start by jettisoning the old system of internal assessments. From where we sit, the board has too often simply taken the recommendation of the outgoing CEO without getting data on up-and-comers. Enlisting the help of an outside consultant can give you more perspective on future needs.
Link to Strategy
The boards that succeed at CEO succession link their requirements to strategies. They step back and take a fact-based, analytical view on a broad range of candidates. Often the best candidate for succession turns out to be an outlier instead of the obvious choice. Data-driven analysis of company needs will encourage greater objectivity and let boards come to a reckoning with their unspoken assumptions before an outsider forces the issue.
Some companies are using simulations to test how a candidate would act when presented with scenarios that a CEO might face on the job. Simulations also let companies benchmark candidates against one another. Humana, for instance, used simulations before appointing Bruce Broussard CEO in 2013. Doing so gave the outgoing CEO and the board a window on how the various candidates would respond to different challenges, based on hard data beyond interviews alone.
To make a choice for the long term, consult the team below the CEO, which often knows a lot more about the candidate pool than the CEO does. Inevitably, the CEO wants their lieutenant to be the successor. The board has a fiduciary responsibility to understand who out there might be a better pick.
Field-testing CEO candidates has become a hallmark of long-term planning. Any venture that lets board members see candidates in a live environment is invaluable. How do the potential leaders deal with stress? How do they perform with the full weight of responsibility on their shoulders? Only then will you be able to see if they can act calmly and thoughtfully when the shells are exploding around them.
Keeping the CEO on Track
In its role of overseeing CEO performance, the board must be predictive, watching for signs of faltering leadership, especially short-termism. CEOs are good at looking forward and back six months. That is not long-term thinking. How to check this from the boardroom? Look for anomalies in the operating statements. Did management shift marketing expenses from one quarter to the next to help meet its numbers for analysts? Or book sales from the next quarter to this one? Or forgo investment necessary to build for the future? Or fail to face up to the need to remove a high-level person, or contemplate a questionable acquisition? These are all red flags.
Those are the moments for the board to sense what is happening, step in, and advise—say, by encouraging the CEO to tell the truth if execution has failed or if the company has borrowed from next year. Roger Ferguson, CEO of insurance services provider TIAA, says, “The board is rethinking its function to serve more as coach, with more engagement below the CEO, more informal communications between meetings and more data.”
Ignore Other Factors
Don’t base decisions about the CEO’s future on factors unrelated to performance. For example, boards are also social organizations, which can complicate efforts to replace the CEO. As a result, often an amiable but mediocre performer is allowed to stay in the post. If the CEO and the board members are friends, and the CEO has treated the directors well, making a change will be very difficult foar the board and require a lot of fortitude.
The board mustn’t shrink from the hard choice or make a new appointment out of fear. Michele Hooper, CEO of the Directors’ Council and board member at PPG and UnitedHealth Group, says, “There’s always a leap of faith when you select somebody to sit in the CEO chair. But you have done enough homework, and you keep your fingers crossed that over time your decision proves correct.”
Reprinted by permission of Harvard Business Review Press. Excerpted from Talent, Strategy, Risk: How Investors and Boards Are Redefining TSR by Bill McNabb, Ram Charan, and Dennis Carey. Copyright 2021 Harvard Business School Publishing Corporation. All rights reserved.
Bill McNabb is former Chairman and CEO of Vanguard.
Ram Charan is a world-renowned adviser who has spent the past 40 years working with the CEOs and boards of top companies. He is the author or coauthor of 32 books.
Dennis Carey is Vice Chairman of Korn Ferry.