What Most Companies Get Wrong About CEO Succession

Appointing the wrong CEO carries significant costs, negatively impacting morale, productivity, reputation, culture, and the bottom line. From a financial perspective alone, unplanned CEO turnover across the globe costs shareholders $112 billion in annual returns. Despite this, CEO succession planning remains underdeveloped in many companies. A lack of external benchmarking, appointments based on short-term goals, unprepared candidates, a reliance on overconfident executives, and insufficient assessment data are the primary contributors to poor leadership appointments.

Below, we explain why these cost companies so much and why addressing these issues will help boards appoint the right CEOs.  

Failing to benchmark against the external market

In an ideal world, the CEO successor would come from inside the organization. Internal candidates possess valuable institutional knowledge, a deep understanding of the company's culture and values, offer continuity and stability, and demonstrate recognition for potential growth and leadership.

However, many companies rely solely on internal candidates, without taking into account the external market. As a result, they have nothing to benchmark against and are unable to accurately assess whether their internal talent falls below, meets, or exceeds the industry and leadership standards required for success.

Benchmarking against external candidates enables the board to identify leadership skill gaps as well as consider fresh perspectives and experiences.

It also offers the board the opportunity to compare internal candidates’ unique leadership profiles, experiences, and achievements against those of the external market. Most of all, it ensures the organization remains competitive by hiring the most qualified and experienced CEO to lead the company in a rapidly evolving business landscape – whether they come from inside or outside the organization.

Hiring based on past performance

In addition to skills, competencies, role fit, and capabilities, CEO assessment should be based on the company’s long-term strategy. In other words, they must consider the transformations the company will go through and the challenges it will face over the next three to five years, and what type of leader the CEO needs to be to drive, facilitate, and support these endeavors.

Too often, boards over-prioritize the candidate’s past achievements and experience and under-weight their ability to pivot and excel in new, complex, and ambiguous situations. As a result, the new CEO is more likely to play their greatest hits rather than respond with the agility required to adapt to and anticipate change.

Thus, a candidate’s capacity for agility, resilience in the face of change, transformative thinking, and long-term vision should be significant factors in their suitability for the position.

Lacking qualified internal candidates

Too many companies believe members of their executive team can fill a departing CEO’s shoes. In this regard, boards may assume members of their C-suite possess the requisite CEO capabilities and experiences by virtue of the fact they sit on the executive leadership team.

In fact, the opposite is often true: once executives arrive in the C-suite they believe they no longer need development and coaching.

Particularly if companies don’t consider the external market, it leaves boards with a pool of underprepared and underdeveloped candidates. Leadership development and assessment of executive members is therefore critical to differentiate between those who are ready for the top job and those who aren’t.

It’s important to turn executive assessment into a development exercise for internal candidates not selected for the CEO position. Without taking the time to provide detailed feedback, disgruntled executives can become a flight risk, leading to costly departures which could have been avoided.

Dealing with overconfident executive members

Many executive members believe they possess the capabilities for the CEO role. Succession planning that doesn’t rigorously challenge this assumption can lead to assessing functional leaders based on their achievements as a functional head rather than their suitability for a successful CEO position.

This risks appointing a ‘functional CEO’ who designs and executes the strategy through a functional lens.

They lack the systemic thinking and awareness required to address the broader, organization-level challenges and opportunities, and so become siloed.

The fallout from this approach is often the failure to win over former peers who were candidates for the CEO position, leading to a dearth of unity and collaboration within the executive team.

This is mitigated through ongoing leadership development that encourages leaders to think and act systemically as well as through incentives that reward the right behaviors. For example, executives should be rewarded on business unit success and for their achievements as an executive leader. Development should also be delivered in a way that is both supportive and constructive, including identifying and addressing gaps for both current and future roles and working with executives to create plans that accelerate their leadership.   

Using insufficient data to measure the role

Boards still frequently rely on gut feeling and intuition when selecting new CEOs. Yet, this is where selection decisions can go off the rails. The assessment process must be rigorous, methodical, and standardized, and candidates should be compared against the role, team, and organizational contexts. Adherence to such best practices ensures boards are consistently considering the best candidates.

To effectively compare candidates against the role and each other requires establishing criteria that applies uniformly to all candidates and considers both past successes and future potential in assessing suitability.

Psychometric assessments and competency-based interviews are crucial elements in this approach, 'triangulating' to provide insights into candidates' personality traits, cognitive aptitude, and leadership potential as well as weaknesses, opportunities, risks, and ‘derailing behaviors’. The resulting executive profile supports informed decision-making about each candidate’s suitability for the role.

For support in developing your organization’s CEO succession plan, contact our authors, get in touch with us here, and you can also find your local Odgers Berndtson contact here.

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