Once upon a time, CEOs were tasked with handpicking their successors but that time has long since gone; that said, the role of the CEO remains important to a successful plan for succession. That includes the nurturing of in-house talents who have the potential to take on the role and bringing the accomplishments of those individuals to the Board’s attention. That said when it comes to actually choosing a successor, the role of the about-to-depart CEO should be strictly “of counsel.”
Many Boards Aren't Prepared for Succession
While it’s hard to understate the role of the CEO, nonetheless a report filed by the Harvard Law School Forum on Corporate Governance, stated bluntly that “Many boards aren’t fully prepared for CEO departures despite their succession planning being one of their primary responsibilities.” And the cost of not planning isn’t cheap. According to a 2021 piece in The Harvard Business Review, authors Claudio Fernandez-Aráoz, Gregory Nagel, and Carrie Green note that badly managed CEO transitions in the S & P 1500 wiped out close to one trillion dollars in market value in one year!
It’s not just lack of preparedness but flaws in the process about thinking about succession. Several studies note that while 10 to 15 percent of CEOs need to be replaced yearly—for various and sundry reasons including underperformance, ill health, or just a decision to step down—only 54 percent of Boards were actually grooming a specific successor and an astonishing 39 percent had no viable candidates in-house who could step into the role if need be.
There is no one-size-fits-all solution, especially when it comes to the question of whether the search for a successor should be conducted from the inside or whether the answer lies in the recruitment of outside talent. In their research, Fernandez-Aráoz, Gregory Nagel, and Carrie Green sought to answer this very question and what they found is both interesting and counterintuitive.
When companies are performing well, inside picks are the way to go, leading to the observation that companies should only look to the outside when they need a turnaround or a shift in corporate culture. (Again, this seems to be true except when it isn’t; Bob Iger’s handpicked successor at Disney, Bob Chapek, was an insider. Then again, no crystal ball alerted anyone of the 2020 pandemic and the political firestorm in Florida.) A Wharton study also noted that outside talent might look better on paper—better education, fancier histories—but also tend to cost more, tend to underperform inside hires, and exit the premises more readily.
All of those observations coexist with the fact that 26 percent of CEOS of S & P 1500 companies are outside hires. Again, Fernandez-Aráoz, Gregory Nagel, and Carrie Green assert that the chances of their outperforming inside hires are very slim indeed.
