Why CEO succession is crucial to business development

Written by
Anthony J. Nyberg

28 Jun 2016

28 Jun 2016 • by Anthony J. Nyberg

CEO succession is one of a board of directors’ most important governance responsibilities, and mistakes in this area are extremely costly in terms of finances, time, competitiveness and morale.

The 2015 HR@Moore report, soon to be released by the Center for Executive Succession at the University of South Carolina’s Darla Moore School of Business shows that C-suite mistakes are far more frequent and expensive than commonly reported. For instance, some estimate that CEO succession failures in large firms can cost more than $50 million U.S. in direct costs.

This does not include lost competitiveness, reduced customer confidence, the required additional time and energy necessary to identify, select and onboard a replacement, and other costs. Additionally, the wrong CEO likely means a substantial decline in employee morale. Yet, few firms systematically use all of the practices that lead to selecting the best CEO candidates.

As reported by the Center for Executive Succession, the largest mistakes in hiring senior executives result not from a new hire’s technical deficiencies, but rather from personality and fit issues. These problems, however, are difficult to identify in many current selection processes, as senior executives and board members rarely have the training designed to identify such issues. Further, board members and senior executives may subconsciously take it easy on potential candidates to find a reason to hire, rather than to reject him or her as a candidate. 

What are the mistakes?

The 2014 HR@Moore survey finds that the most frequent mistake that boards make involve assuming that prior performance is both a good predictor of future performance and a good predictor of the type of performance that will be required. For internal promotions, this means the board fail to accurately ascertain whether the person is capable of appropriately scaling or what personality changes will arise with much more power – remembering “power corrupts.”

Elevation to the CEO role results in a tremendous change in the level of complexity in which the individual is required to operate. Within the organisation, CEOs may need to understand an array of businesses in which the candidate lacks experience, located in diverse industries or dispersed across a large number of geographic regions. Externally, they must deal with a larger and more varied set of stakeholders, including shareholders, analysts and the news media.
The primary mistakes identified for external hires were bringing in people who had too many “overlapping rather than complimentary skills” and who found the change in businesses or company or cultural fit to be challenging. Executives brought in from the external marketplace will be unable to radically change an organisation’s culture in the short term and attempts (intentional or otherwise) to do so will often result in employee revolt. Additionally, as with internal hires, not all skills translate across businesses.
The most surprising results of this study stem from the relatively low use of formal, professionally developed   and relatively objective tests for both internal and external candidates – tests that have long been validated for employees throughout the organisation. Only 51% of companies use personality testing for external candidates, and only 42% for internal candidates. 

Cognitive ability testing, psychological interviews and assessment centers were more likely to be used to assess external candidates than internal, but these were still used by less than half of firms. Additionally, few firms use work sample/simulations (less than 30% for both internal and external) or business simulations (15%). In short, processes for selecting both internal and external candidates often fail to optimise recommended selection techniques.

How can we work to avoid these mistakes?

1.    Slow down
2.    Use best practices
3.    Be systematic

Based on decades of personnel assessment research, it is clear that firms can reduce the risks identified here by incorporating existing selection techniques such as personality testing or psychological assessments to evaluate adaptability, and development strategies that include assessment centers or business simulation aimed specifically at the requirements in the CEO role. This is one area where HR can add significant value. The ability to develop an appropriate capability profile and create assessments (either internally or in conjunction with third-party assessment services) to test candidates against that profile will create firm value. Given that many executives fail due to personality or culture clashes, HR can serve as a trusted adviser to the board to provide information regarding candidate fit with both the position and the company. 

Potential candidates must be able to adapt to both the technical and personal skills required by the position. HR can play a crucial role in helping boards understand the multidimensional nature of these jobs, within the firm’s context, and the skills that are required to be successful.

Are you?

So what?

The risks inherent in making poor executive succession decisions show that such mistakes can be disastrous for organisations. Focusing exclusively on the past is cognitively easy, but leads to missing critical information regarding the capability and potential of successor candidates. Further, prior performance may not be an indication of how a person will do in tomorrow’s competitive environment. Like many things, however, making the right decision requires investing time and effort into systematically collecting and analysing the right information.