• Thursday, July 18, 2024
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BusinessDay

CEO succession – the role of the board

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Passing the baton of leadership or picking the right replacement for a departing CEO is a critical challenge for the Board of Directors. It is oftentimes a complex decision given the interplay of corporate politics and personal emotion. As the CEO’s performance and that of the Company are so intertwined, CEO succession is a key task the Board cannot afford to get wrong. In reality, CEOs are not,  for the most part,  keen to have this discussed by the Board – perhaps because they are too preoccupied with running the Company or as is typical with all humans, “they are not eager to contemplate their professional mortality” (Harvey Seifter & Peter Economy ).

A Board’s action or inaction regarding CEO succession can have tremendous impact on the Company to which Directors owe a duty to protect. The process can indeed be laborious and contentious, but as the Board must live with the consequences of a succession process gone awry, it is in the best interest of the Board to get involved. Leaving it entirely to the CEO to choose a successor may not always be in the best interest of the Company. Acting alone, it is typical for the CEO to use largely intuitive criteria to sort through potential candidates.

A collaborative approach in which the Board acting through the Nomination (or Governance) Committee – made up predominantly of Independent Directors – actively partners with the incumbent CEO is preferable. Whilst the CEO drives the process, the Board plays an active oversight role as opposed to rubber stamping the CEO’s choice. Working with the CEO, the Committee will identify the most significant challenges the organization is facing and likely to face as well as the leadership competencies required to deal successfully with those challenges. These will entail some scenario planning, periodic review and adaptation in the context of overall corporate strategy and changes in the business environment.

The Board Committee in conjunction with the CEO will then develop a set of criteria to assess potential CEO candidates. Assessment criteria would include ability to articulate a strategic vision for the Company; intellectual capacity; technical or professional competence; inspirational and motivational leadership; ethics and values; team building skills; execution and operational excellence; focus and delegation (Building Better Boards, Nadler, Behan & Nadler). A pool of candidates is then identified and efforts should be made to ensure that the process does not zoom-in on a single candidate. It should also be recognised that the best candidates are not necessarily the most obvious. By developing a pool of potential candidates, the Board also has the opportunity to assess the capabilities of the management team, identify areas that require improvement and work with the CEO to bridge identified gaps.

This approach of course presupposes that the incumbent CEO is performing effectively and enjoys the confidence of the Board. Where she is not performing, she most certainly would not be involved in the process of appointing her successor.

On the other hand, where the CEO’s exit is unplanned and sudden – ill health leading to incapacitation, death, removal owing to ineffective performance, fraud or other situations that make it impossible for her to drive the process, the Board would have to take the lead role. Where the Board has developed a system of active involvement in the succession process on an ongoing basis, it would not be totally caught unawares in the event of sudden exit.

To achieve a successful change of guards, it is imperative to start the process early to allow time for assessment, development of identified candidates and selection. The transition must also be carefully managed by ensuring the preferred candidate transits into the CEO role in stages. As suggested by the trio of Nadler, Behan and Nadler in their book “Building Better Boards” the transition should be done in five phases – first the lead candidate is placed in a role, e.g. COO which will test her ability to lead at a more senior level. Then she is confidentially designated as the new CEO and uses this time to think through the structure of the Company and her new executive team. Then follows the official announcement and then the overlap stage in which the new CEO runs the Company with the departing CEO in the wings. The final stage sees the new CEO fully in place and the departure of the old CEO.

CEO succession should not be seen as an “event-driven” crisis as the Board should always be prepared for sudden departure which may happen anytime. The process should not be left to the “eleventh hour” and should be owned and driven by the Board working in concert with the incumbent CEO.

Adebisi Adeyemi