Dec. 2, 2019
CEO succession planning is vital to business success and longevity, yet many companies get it wrong. Three Moore School management professors have gathered valuable evidence to compile an aggregate set of data that companies can use to plan their next CEO hire.
The team, which included management assistant professor and principal researcher Donald Schepker; management professor Anthony Nyberg; management professor Patrick Wright, the Thomas C. Vandiver Bicentennial Chair and director for the Center for Executive Succession; and Michael Ulrich, a Ph.D. student, now an assistant professor at Utah State University, surveyed more than 100 chief human resource officers from many of the largest U.S. companies to better understand their succession planning activities. Research based on these surveys was published in the Academy of Management Journal last year.
Selecting a new CEO is one of the board of directors most important, if not the most important, responsibilities, but boards face significant challenges in making decisions.
“Really it is about information processing. The first challenge is getting appropriate information, and the second is working together as a group,” Schepker said.
Having the familiarity with the company to be able to select the most appropriate person to lead it and the trials that they are likely to face in the future is a difficult proposition. This difficulty is exacerbated by the fact that boards of directors typically spend very little time together, and they often don’t spend a great deal of time with the company.
Schepker and his colleagues think their research shows that boards need to employ a “procedurally rational process” to succession planning where systematic, analytical processes are used to gather and provide directors with more accurate and reliable information.
To supplement this research, they interviewed 22 members of boards of directors at some of the United States’ largest companies who, in total, had been part of almost 100 CEO hires.
They asked the board members to describe the most successful and least successful CEO successions they had been part of and to provide details regarding the process with each. Their interviews and survey data provided some recurring themes.
First, boards should consider a more comprehensive pool of candidates. Having a larger pool of candidates can give the company better quality candidates for the next CEO and provide greater flexibility. A larger pool also means the board is less likely to become fixated on a single individual.
Second, boards need to own the process and not allow the current CEO to unfairly manage it. For instance, the current CEO can limit the number of candidates the board sees. In addition, the CEO can try to control the information the board gets about candidates. Finally, CEOs may not want to have ready successors because that may make it easier for the board to push them out.
Third, boards may want to use an outside consultant to help them in the CEO hiring process. Such consultants can ensure that the firm uses a sounder process, and they can relay information to the board that is hard for the CEO to influence.
“Our research has uncovered a number of best practices that should be used by boards in choosing their next CEO, as well as a number of the potential pitfall boards face in the process,” Schepker said. “Our hope is that boards will use this research to increase their probability of making the right CEO successor decision.”
-C. Grant Jackson