Succession planning in the C-suite is the single most important decision facing boards of directors today. That’s according to David Larcker and Brian Tayan of the Corporate Governance Research Initiative at the Stanford Graduate School of Business, and Stephen Miles of The Miles Group. The threesome recently collaborated on myths around CEO succession.
While selection of the CEO is the foremost decision directors can make, the authors say that turmoil around these decisions at the top “have called into question the reliability of the process that companies use to identify and develop future leaders.”
The researchers found that less than half (46 percent) of respondents have a formal process for developing successor candidates for key executive positions. In addition, only 25 percent of respondents agreed that there was an adequate pool of ready successor candidates for the CEO position at their companies.
“These findings are surprising given the importance that strong leadership has on the long-term performance of organizations,” says Larcker. In fact, related research shows a negative relation between the length of the succession period and the future operating results of a company. But there are also common misconceptions about succession, which are outlined below:
Myth #1: Companies know who the next CEO will be. “The longer the succession period from one CEO to the next, the worse the company will perform relative to its peers,” says Larcker. “But, shockingly, nearly 40 percent of companies claim they have no viable internal candidate available to immediately fill the shoes of the CEO if he or she left tomorrow.”
Myth #2: There is one best model for succession. “There are several different paths companies can take to naming a successor—including internal and external approaches,” says Miles.
Myth #3: The CEO should pick a successor. “Sitting CEOs have a vested interest in the current strategy of a company and its continuance, and they may have ‘favorites’ they want to see follow them,” says Larcker. “Boards, however, must determine the future needs of the company, and what kind of successor will best match the direction the company is headed.”
Myth #4: Succession is primarily a “risk management” issue. “While a failure to plan adequately certainly exposes an organization to downside risk, boards should understand that succession planning is primarily about building shareholder value,” says Miles. “Succession planning is as much success-oriented as it is risk-oriented.”
Myth #5: Boards know how to evaluate CEO talent. “Our 2013 survey found that CEO performance evaluations place considerable weight on financial performance (such as accounting, operating, and stock price results) and not enough weight on the nonfinancial metrics (such as employee satisfaction, customer service, innovation, and talent development) that have proven correlation with the long-term success of organizations,” says Larcker.
Myth #6: Boards prefer internal candidates. “While, ultimately, three quarters of newly appointed CEOs are internal executives, external candidates still hold a strong appeal for boards—especially at the start of a search,” says Miles.
Myth #7: Boards want a female or minority CEO. “The numbers speak for themselves,” says Larcker. “‘Diversity’ ranks high on the list of attributes that board members formally look for in CEO candidates, and yet female and ethnic minorities continue to have low representation among actual CEOs. We continue to see that boards select CEOs with leadership styles they perceive to be similar to their own, and the fact is that boards today are still highly non-diverse when it comes to gender and ethnic backgrounds.”
In addition to directors, a separate report recently pointed out that shareholders are more often weighing in on succession. Behind the findings is the concern that shareholders bear regarding long-term futures of companies.
Succession and other important topics important to boards will be explored at the upcoming SuperConference, which will give attendees an opportunity to hear from senior legal executives on ways to effectively manage the expectation of their company and board executives, as well as gain a better understanding on ways to create a successful relationship. Speakers include: Lee Cheng, chief legal officer, senior vice president of corporate development, corporate secretary of NewEgg; Jan Stern Reed, corporate vice president and deputy general counsel of Walgreens; and Karen Klein, general counsel of Hoteltonight.com.