How boards appoint CEOs

Candidates for a CEO position experience the selection process from just one perspective – their own. Yet the board’s experience of CEO succession and selection is quite different to that of the CEO or CEO-in-waiting. An experienced board will start thinking about the next CEO as soon as the incumbent starts. It is critically important work: the cost of getting it wrong is great – as is the reward for getting it right.

Selecting a new CEO is critical because so much rides on a positive outcome. Here are 10 principles to guide executives and directors through the executive-succession process. It’s a perspectice CEOs-in-waiting don’t often experience, yet it offers valuable insight into the process they are part of.

10 principles for executives and directors to guide the executive-succession process

1. Remember that people set strategy. Incomplete strategies and ineffectual leadership generally go hand in hand, and directors and executives who know where the company should be going will be best equipped to guide it there.
2. Implement an evaluation methodology. Use an evaluation system that links the company’s strategic requirements with the prospects’ individual capacities and performance, with the latter focusing on their integrity and ethics, team-building, execution excellence, shareholder return and personal gravitas — and ability to work in the boardroom.
3. Include an assessment in the current CEO’s evaluation of how well the company is building a succession plan for the next generation of company leaders. Most major companies don’t have a coherent system in place to evaluate and compensate the CEO’s succession performance, or the reward system is too weak to effectively guide the CEO’s actions.
4. Place the board leader in charge. By tackling the job in partnership with a still-effective chief executive, the board leader can help root the process deeply in the company’s management development, preventing succession from becoming an event-driven crisis. Consider both short-term disaster scenarios and long-term outcomes.
5. Retain a high-performing chief executive. But also work to keep capable successors. Offer incentives to these potential chief executives to retain their presence as CEOs-in-waiting, while still supporting the incumbent.
6. Seek candid comparative data on inside CEO candidates from those who have worked with all of them. Strive for comprehensive assessments including views of all company executives who have worked with finalists, to provide crucial comparative data that elucidates the strongest leaders. These assessments should be administered by either a trusted insider or a third party.
7. Make direct contact with both sources and candidates to verify information. Even when engaging a third party, directors will want to personally check on referencing. A few trusted sources can yield far more useful data than a large number of less-certain sources. In the absence of a trusted relationship, references can sometimes reveal limited inside, and even false, information.
8. Review outside consultants carefully to prevent conflicts of interest. Intentionally or not, executive search consultants who are hired to help with a CEO search can sometimes offer an overly optimistic view of a candidate they have sourced, or an overly skeptical view of one they have not had a hand in finding.
9. Maintain confidentiality. We have seen stellar CEO candidates drop out of consideration when their identity is inadvertently revealed, especially if they are serving as a chief executive elsewhere. Communicating orally and avoiding media contact can help preserve confidentially. One way to prevent a damaging revelation is to ask outside references for guidance on a candidate — not for a CEO position, but rather for a board seat to gain a veiled but useful appraisal of CEO-related competencies.
10. Embed succession planning in corporate culture. Creating a culture entails many steps, including performance incentives for executives to build the system; a development capability that repeatedly reaches large numbers of managers; coaching and mentoring by directors and executives; and an openness to both inside and outside candidates. Above all, it requires an active partnering between the directors and the chief executive to ensure that their pipeline is full and its occupants are developing in an upward direction.

Finally, when determining a CEO’s suitibility, companies will want to remind themselves that no candidate is perfect. The goal is to understand the relative trade-offs among the candidates’ strengths and weaknesses, and to ensure that the prospects’ deficits are not in areas that are especially critical for company performance. The fate of the enterprise depends upon it.