A lot of CEOs are being shown the door lately. In the apparel industry alone, we’ve just seen the end of American Apparel’s Dov Charney and the ouster of Lululemon Athletica founder Chip Wilson – plus the installation of interim CEOs at Target and JC Penney following their previous leaders’ firings. These companies are in trouble, and their boards must select new CEOs under highly charged circumstances.
At least some of them are bound to make the mistake we’ve seen so many times: pushing ahead with a sense of urgency around their new CEO selection, and allowing their deliberations to be overtaken by strong wills and unexamined emotions.
Here’s what they should do instead. First: take the time to arrive collectively at a short list, not of candidates but, first, of criteria. An open and rigorous debate over CEO criteria is the most important step a board can take with succession. Then: commit to a process by which the potential leaders they consider will be honestly, consistently assessed against those criteria and a winner will emerge.
Why is the early narrowing of criteria so important? From the outset, it reinforces the reality that no CEO candidate is perfect. All of the available options will have noticeable strengths and weaknesses. The board’s challenge is to decide what deficits it can live with (usually because they can be compensated for by the rest of the leadership team), and which two or three criteria are non-negotiable must-haves.
The alternative, and unfortunately the usual route, is to compile a laundry list of laudable qualities. While none of them is easy to argue against, collectively they have no power, because the list doesn’t allow the best candidates to emerge. Worse, a list that calls for everything gives every director something to point to as they lobby for their own favorite. Someone prevails and others, eager to wrap up this sensitive and time-consuming process, capitulate. From the outside the process might look like solid work, following best practice. But the board has essentially abdicated its most important responsibility.
Consider the case of a specialty retailer whose CEO was retiring after a long, successful run. The retiring leader advocated strongly for an executive he had groomed for the job, in his own image. But the board recognized that the company’s environment was changing dramatically, thanks to global expansion, greater online competition, and customers’ evolving expectations of their shopping experience. Diligently, the board drew up all the criteria it felt it should consider.
Clearly it was time for a CEO who could handle omni-channel complexity, but on the board’s wish list, that was just one item among many. Among the others was merchandising experience, which the heir apparent, like his mentor, had in spades. Reluctant to oppose a leader who had dramatically increased shareholder value, the board folded under pressure and ratified the CEO’s pick. The result was disastrous, as the company suffered numerous missteps in rolling out new channel strategies and overhauling back-end systems.
When a board never engages in open debate over which attributes matter most, not only does it fail to connect succession to what the company most needs; it neglects to give the incoming CEO guidance about where to focus his or her own efforts and in what areas it might be best to delegate.
Boards, and companies’ governance processes, are idiosyncratic; exactly how to focus on what’s really needed in the next CEO will depend on the firm. But, at a high level, it is a three-part process: Start with an exploration of likely scenarios for the company in the next several years. Get input from executives, high-potentials, and outside stakeholders on how those conditions will most challenge and create opportunities for the company. Then develop a profile limited to a few must-haves. This process is usually enhanced with the departing CEO’s involvement, as long as the board shows leadership.
Greater focus brings better results. A global energy company was struggling and seemed unlikely to survive the industry’s looming consolidation. With its CEO preparing to retire with a mixed legacy, the board at first generated a list of fifteen things at which the new leader should excel, ranging from expanding into new markets, to driving a Six Sigma-based culture of operational excellence, to getting a major facility project back on track. Rather than work from this list, however, the urgency of the company’s situation drove the board and CEO to debate which goals were most important. They narrowed the list to three: defining a visionary strategy to survive consolidation, driving a culture of accountability so the company could deliver on promises to investors, and developing a strong bench of executive talent. They consciously left out operational goals, because most directors agreed the CEO could rely on the existing business unit heads, and a capable COO could also be hired from outside.
That effectively ruled out the heir apparent, despite the fact that some directors had felt he was “owed” the job. While his strengths were significant, it was undeniable that the three key areas of need were weaknesses for him. The board hired an external candidate, who over the next few years made some transformational acquisitions, kept the company independent, and greatly boosted the stock price.
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