CEO Selection – a Board Game

These days demanding investors, stringent regulators and scandal-hungry media are forcing companies to operate under much heightened scrutiny. Over the past couple of years boards of directors have found themselves saddled with increased responsibility for corporate performance and governance policy. Accordingly, the turnover of CEOs at large public companies has increased two fold as boards, acting on behalf of shareholders, take a closer look at financial performance and company accounts. The board’s role however should not simply be a corrective one when things go wrong. Rather, the board should be responsible for selecting the right CEO in the first place.

The departure of a CEO, for whatever reason, is always disruptive to the management of the company. In order to keep this disruption to minimum, the directors have a duty to implement an effective succession plan beforehand so that a successor is already identified and groomed to take over the CEO’s reins when the time comes. Often in the past, directors had little involvement in CEO succession as CEOs typically handpicked their desired successors. CEO input in succession planning is naturally still crucial but, as boards are given more independent authority, directors are now expected to play a much greater role in final CEO selection.

Succession planning should be a continual process, which starts shortly after the arrival of a new CEO. The board needs to task the CEO with succession planning and make it part of his or her annual performance appraisal goals. Long-term succession planning is a key means of protecting the company’s culture, mission and long-term strategy.

If the CEO is waging an effective ‘war for talent’ then he or she should already be talent managing the company’s top performers and identifying potential successors. The CEO will certainly take this task seriously if he or she knows that it will subject to discussion with the board once or twice per year.

The board should also adopt the succession plan as its plan too and share in the effort. The directors should sanction succession-planning activities and give a seal of approval to the designation of a successor. When appointing a new CEO the board directors should form a search committee and set down very specific criteria for the desired candidate. The usual buzzwords such as ‘visionary’, ‘turn-around agent’, ‘strategist’, and ‘inspirational leader’ are not enough. Each company has its own specific requirements from a CEO and these requirements vary depending on the current business environment and health of the company. The board must address these needs in its CEO profile.

Directors must exercise an independent and neutral opinion when it comes to CEO selection. Search committees should be careful not to compromise on their selection criteria in favour of an internal candidate. Looking outside the organisation can be beneficial if, for example, a new philosophy or change in direction is needed. In fact even when there is a very strong internal candidate it is advisable to also consider individuals from outside the company. Directors can then benchmark the internal preference against external candidates and ensure that he or she is the best choice at the time.

Beyond the selection of a new CEO, the search committee, and board of directors as a whole, has a responsibility to ensure that the CEO succeeds in his or her new post. Boards need to directly support incoming CEOs, stand behind them when they are doing what they were hired to do, act as sounding boards, and offer specific expertise. Just as employees further down the corporate ladder, CEOs too can benefit from having a coach and some boards appoint a director, usually a former CEO at a different company, to fulfil this role. Finally, the board should provide constructive feedback to the CEO. A lot of the issues discussed by boards behind closed doors should be fed back to the CEO for action.

In today’s corporate environment, boards have to accept greater oversight of company performance. It is therefore in their interests to hire the right CEO and to support that CEO through the various trials they will face. On the other side of course, a smart CEO will recognise and leverage the invaluable contribution a board of directors can make. By working together effectively, a board and its CEO can greatly enhance the company’s long-term success.