Why is Succession So Important?
Why should you think about succession? Why is it important? Let’s go back and talk about the evolution of CEO behaviors regarding how they engage with the company. In the beginning, you are a player, maybe only a player in the early stages of your company. But as you grow, many CEOs move from strictly player, top salesperson, top accounting person, marketing person, engineering person, and whatever happens to be your gift. So, they retain the player job and the CEO job. And that’s pretty typical. One of the critical interventions we do when we first start working with somebody is to look at their time. Specifically, whether they are doing the CEO job or are you doing the “And” job – which is CEO and whatever your original functional role was, or potentially two or three of them. A complete CEO job is where I’ve got people doing all the functional roles. I’m able to provide oversight and figure out what’s next strategy, partnerships, acquisitions, and more significant moves to change the company’s performance. Then you might envision a move to chair at some point with the CEO or president running your business. And then the ultimate evolution is to the owner, where the company is an asset in your portfolio.
How to determine the best succession candidates?
The first thing to realize when you’re contemplating succession is that the strategic context of the business dictates the best succession candidates. What does that mean? There are a couple of relevant factors. First, how is the company performing? Is it performing pretty well and growing? That’s one position. If the business is not performing well – it’s struggling, it’s got cost issues, or it’s not really where it needs to be, that’s a different issue. Or it could be that the market has shifted, and strategically, the business will have to make a step function change to be successful.
86% of all CEOs come from the inside. Odds are your successor works for you right now or will at the point you start thinking about this. They are ideal when the business is performing. In other words, if I want more of the same, get somebody from inside because they know the business, they know what we’ve been doing. They know the playbook and don’t need dramatic change. An insider will generally be better at this type of incrementalism. When things are going well, you want an insider.
Boards are risk-averse; they are going to want that inside person. They’re not looking for a dramatic change unless the business dictates it. They look for good, conservative, and appropriate options. 86% of the time, they go for an insider to carry on with what we’ve got going on. They are a low-risk option. The nature of the business will also dictate the candidate. When we talk about successors, remember that the successor should come from the company’s center. For example, if you have a low recurring revenue, meaning a lot of sales, you probably want a sales/marketing type leader in your business. However, if you’re a high recurring revenue, meaning it’s a lot about the delivery, customer retention, and so forth, you might want more of an operationally driven person leading that business.
When should succession go to outsiders?
Let’s talk about outsiders. Outsiders are about 14% of all succession. It’s generally done when there is a problem. A strategic shift is needed. The business needs to be turned around when there’s a fundamental issue or no internal candidates. If you did not do an excellent job of succession development and didn’t have anybody ready to go internally, you will need to go to outsiders.
Going to outsiders is not the best answer for all the risk factors indicated. It’s going to be a learning curve. You don’t know this person, their pluses, or their minuses. In a couple of hours of interviews, everybody can look pretty good. I can clean myself up and talk the right words for a little while, and everybody can. So the social network of the candidate and the board intersecting is essential for verifying if you’ve got a reasonable person in front of you or not. If you cannot verify, I’d be careful. It is costly and risky to bring in an outsider. So that’s why it’s only 15% because you don’t know them, they have to learn the business, particularly in a complex, diversified business. I’m going to lose the productivity of that CEO for six to 12 months before they’re decent enough to run my business.
In the case of underperformance, it dictates what kind of outsider you want. If the underperformance is revenue underperformance, you’re going to want a sales and marketing person. If the issue is operational performance or cost reduction, you want financial or operational leaders. We recommend regular talent evaluation using a nine-box methodology, not just for the CEO successors but for all sorts of director-plus levels. The 9-box grid is a personal assessment tool that evaluates an employee’s current and potential contribution level to the organization. Included in this method is an explicit conversation around the developmental needs of that person, as well as regular board or executive team conversation. If you don’t have a board, maybe you do it with your CEO peer group or your coach, but you need a third party looking at this question.
Let’s talk about how you develop that candidate. First of all, they have to be a performer in their role. They need real work experience in your business, and they need firm-specific knowledge. One of the issues we tend to run into is that the senior functional leader doesn’t have broad management exposure. The organization gets in the way of developing a full-blown GM, president, or CEO.
Then how do you get them to the other vantage points that are in the business that are relevant? One is cross-functional teaming. When you’ve got, for example, E R P deployment and it’s going to touch every department in the organization, I might take a high point, and I let them run that business. They’re going to build social capital and learn about the needs of the other parts of the business. And that’ll broaden them out. Let’s say you’ve got a salesperson who you plan on promoting, but they’re financially a little stunted. Try to rotate that person onto a financial project to give them exposure.
How does social capital affect succession?
As mentioned before, social capital and the social network of the board intersect the social network of the candidate. That’s important, and it needs to be a bit engineered. It doesn’t happen casually. The first is that their social capital within the business is essential, meaning other people view this person as a leader, not simply because they have a title. The other social capital is external social capital, which must be developed. For example, my last company was an international business. I probably had better social capital in England, Japan, China, and Europe than in America – in my local community. Nobody knew who I was. I had almost zero social capital locally because I didn’t spend any time in the local community. I didn’t meet people through networking clubs or charity events. I did that globally, but not locally. So when I shifted to this business, which has more of a national footprint, all of that global social capital I built was worth nothing.
Modeling: How does your leadership continue after you?
Modeling is one of the other elements of development. As you get a succession candidate, they will model the bosses. They’ve worked for you as a CEO if you’re the boss, but that’s limiting. If you have a bag of tricks, that’s awesome, but that’s not all the tricks in the bag. Part of what’s compelling is giving them exposure to other CEOs. This is why being on another board, particularly for a profit board, is potent. They see how another board operates and how another’s CEO operates, and if they like it, they will steal that idea and use that in their bag of tricks. A CEO peer group has the same impact. They get seven or eight other CEOs or high performers who all have their ways of doing things and thinking about things. It will develop and broaden them and make them better candidates. In the case of you as a founder, you might want to stay on as chairman of the board, but you’ll always be the owner. Think about it as an asset you own, with somebody else running it. You’re not going to be looking to dive into that business regularly. You shouldn’t. If you are, there’s a problem, either with you or the company.
The continuous process of succession in your business
The owner is a great job to have. You collect the checks, the business runs, and you have an A player running it for you. But there is another place to sit, which is on the board. Now there are positives and negatives here. Usually, a former CEO moving to the board is a reward in many companies. They thank you for good service, give you a board seat, pay you some money, and give you a little work to keep you involved. But it has an incredibly suppressing effect on the successor that is very negative. The big takeaway is that you should start now, find those high-potential candidates and invest in them.
Succession is a continuous process. Even if I’ve invested in somebody to become a succession candidate, there’s a risk that I’ve coached them up and gotten them ready, and the job hasn’t opened up yet. The current CEO is not prepared to go for whatever reason. They’re going to leave because they believe they’re ready for a CEO gig. We’ve made them ready, and we could lose them. That is a real risk. Succession is a tricky process, so that is why it needs to be planned out in advance, so you have plenty of time to make the best choice for your company.