CEO succession is paramount to the long-term success of any company that intends to exist beyond a single generation. Additionally, a CEO of a startup is often not the best CEO at 100M or to lead an IPO and public entity. But transitioning from one leader to another is one of the most challenging tasks a board of directors will have to undertake to ensure continuity for the company and investment in their care.
From our observations of the trends that we have seen among companies in recent years, we have discovered that many companies experience difficulty during a CEO transition. This is especially true for relatively young companies that have never had a leadership change. We aim to share our insights on creating a CEO transition plan that is guaranteed to ensure a smooth progression between the outgoing and incoming CEOs.
The Effective CEO Transition Plan
A thoughtful transformation plan is crucial to the success of not only the incoming CEO, but materially impacts the key executives (or openings) on his/her team. The process does not just begin after the new CEO is appointed. In our experience, the best transition plans cover three phases: anticipation, execution, and ingestion of the transition.
Phase 1: Anticipating the Transition
Our experience and the experiences of other companies have taught us that the most successful CEO successions begin early in the incumbent CEO’s tenure. Yet, succession planning can seem like a waste of time when the transition is not even in view.
The first issue is whether the successor will be promoted from within the enterprise, or if an external talent will be hired instead. While decisions on this matter should be as unbiased as possible, it is important to note that both options come with advantages and disadvantages. Choosing the new CEO from within may be the most convenient option, but an internal candidate may not be the best choice. Selecting an external candidate can add a “positive disruption” of necessary infusion in new ideas and acceleration. Selecting the internal candidate might add too little disruption and maintain status quo (rarely a succession plan objective) whereas hiring an external candidate might add too much disruption and stifle many of the positive existing culture, characteristics, and assets. There’s risk either way so mitigating risk should be a primary objective of any leadership transition plan, but especially the CEO.
Ensuring that the best possible talent is chosen to lead the company into the future depends heavily on the board, and evaluating potential candidates at the time of the actual succession can be a very risky move. During this phase, it would be better for the board to sit down with the incumbent CEO, CHRO, and the nominative committee to discuss how they can identify and develop the best internal candidates (this might only be 1 or 2 people if any). They can simultaneously make a list of excellent external potential CEOs, get to know them over time, and benchmark their internal candidates against them to better understand the areas where the candidates need the most development.
Another approach would be to use the services of an executive development firm to help develop every member of the executive team instead of just developing two or three potential candidates for the succession. This approach has benefits beyond having a wider range of options for the CEO’s successor.
Another common factor is the need for discretion. It’s very possible the board has made a decision to replace the sitting CEO because of performance or some other necessity. In these scenarios, rigid confidentiality is necessary and a highly professional and sensitive approach to identifying internal or external candidates becomes critical. If word leaks out to the existing CEO, it could cause disruption. If word leaks out among the company as a whole, it could cause unsettling concern and hurt productivity. In these sensitive scenarios, it’s typically best to hire a highly respected third-party retained search firm, who already has access to top operators, and can recruit confidentially while still being effective.
During this phase, the board or the nominating committee needs to formally assess the strongest candidates. The candidates should be asked to present their thoughts concerning the present situation of the company and what its future might look like to them. If a trusted firm has been hired to help with the selection of the best candidate, it should be involved in this step, too. It is often beneficial if the outgoing CEO is not involved in this procedure so that the candidates can speak their minds freely.
Eventually, the time will come for the sitting CEO to exit while the new leader assumes the role he or she has been prepared for. And that leads us to the second phase.
Phase 2: Executing the Transition
Formal transition and the handing over of the baton to the incoming leader doesn’t begin on the official transition date; it starts much earlier than that, sometimes going as far back as 12 months or more. Although there is no universal approach to CEO transition, we firmly believe that the incoming and outgoing CEOs should build the transition plan alongside the key lieutenants or “shepherd” (CHRO, COO, or whoever would be championing the transition), and review the plan with the board.
In this phase, the board and the nominating committee should pay great attention to communication to ensure all parties involved are briefed as often as needed. Informing the selected candidate of his or her appointment is typically easy since the news is good. However, informing the rest of the candidates where they stand is not so easy, but it’s the professional move. Many companies choose not to address them at all, but we think communicating directly with every nominated candidate is not only humane but also an intelligent move.
The CHRO and/or CMO, in conjunction with the Board, should develop a strategy concerning the announcement of the departure of the incumbent CEO and the appointment of the new leader. This strategy should provide a clear message that will be shared with the public and the rest of the organization. This should include publishing press releases and news articles detailing the new CEO’s appointment and what this means for the company moving forward. The goal here is to spread the word as much as possible so that stakeholders and clients will be aware of the change.
In a CEO transition where the new leader is promoted from within the company, there is no need for onboarding since the new CEO is already familiar with the company’s cultural practices. But when the new leader is hired from outside, introducing the new CEO to the company’s culture and making him or her feel welcomed is necessary. However, to prevent a prolonged transition period, there should be an agreed plan of action, and each activity should be allocated a specific time frame.
Another element that is part of every successful CEO transition plan is that the role of the exiting CEO is clearly defined so there will be no confusion among the staff as to who is boss. In case of retirement, the outgoing CEO will most likely act as a coach/mentor to the incoming CEO. Of course, there will be some awkward moments, especially at staff meetings where both the new and exiting CEO are present. Sometimes it’s best to simply avoid these possibilities and make a clean break.
Phase 3: Ingestion of the Transition
During this phase, the board must not be too distant from the incoming leader. The board of directors or its representative must be available to assist the new CEO whenever the need arises, but they also must not be too overbearing. Finding the right balance between both is vital. Being too distant from the new leader may hurt the relationship with the members of the board while being too overbearing may make him or her feel less in control.
Another important thing here is that the outgoing CEO should not be allowed to interact with the staff concerning any problems employees may have with the new CEO. In fact, it is best if the outgoing CEO stays out of the picture as much as possible, even if he or she remains on the board of directors.
We cannot designate a CEO transition as successful until the new CEO is completely settled and comfortable in the new role. This might take several weeks or even months. During this time, the executive team and CHRO have much to do to ensure that the CEO’s relationship is smooth with the staff as well as with the board members. Most importantly, the CEO should be skilled and well-prepared to adapt and learn where necessary, while also instituting positive changes designed to take the company and culture forward.
A CEO transition is not easy, yet it is inevitable. At some point, a company will need to replace its CEO for one reason or another. But as stressful as CEO transitions are, having a solid CEO plan in place that covers each of the transition phases effectively will make the conversion as smooth as possible. This can be the difference between a CEO, and a company, who succeeds and one who fails.