Selecting the CEO: Best Practices in CEO Succession

The Single Most Important Duty

Of the many responsibilities assumed by every Board of Directors, which one stands above the others as any Board’s highest priority?

In the wake of financial malfeasance at several high-profile public companies, many shareholders and regulators might emphasize “getting the numbers right” or “establishing a code of ethics and a culture of accountability.” Others might say “establishing a long-term strategy,” “executive compensation,” or “regulatory compliance.”

But all of these responsibilities rise or fall on the quality of executive leadership, particularly the CEO. Consider what Board members, CEOs, and others say: “Absolutely the most important thing that Board members do is pick the CEO,” says Tom Holloran, who has served on the boards of Medtronic, Dain Rauscher, ADC Telecommunications, and others.

Corporate attorney L. Edward Shaw writes that selecting a CEO is “perhaps the single most important duty of any Board of Directors.”

“Leadership is at the top of all the lists,” says Jim Campbell, former CEO of Wells Fargo.

The importance of CEO succession has increased in recent years. The role of the CEO today involves more money, more scrutiny by shareholders and regulators, increased public skepticism, a greater risk of liability (civil and sometimes even criminal), and—not surprisingly—more turnover. A study in the Harvard Business Review reports that two out of every five new CEOs fail in the first 18 months2 (Charan, 2005). “The speed of the whole experience has ratcheted up dramatically over the past ten to fifteen years,” says Campbell.

The burnout time is a lot shorter because of the pace and speed of how things work.” For this increasingly demanding role, CEOs are demanding—and getting—handsome compensation packages. According to a 2005 survey conducted by the Institute for Policy Studies, the average CEO made 431 times more than the average worker in 2004—up from 107 times more than average workers’ compensation in 1990. As a result, the stakes are high with regard to CEO selection and succession. Shareholders, analysts, rating agencies, regulators, and the media are scrutinizing CEO leadership and using CEO succession plans (or lack of them) to demand change and punish failures. Analyst Tony Green of Northland Securities cites the example of a medical device company whose CEOannounced without warning that he would be leaving the company, without naming a successor. The announcement came on the heels of a blockbuster quarter, with no surprises in the company’s revenue or earnings. Nonetheless, “the stock just fell out ofbed,” Green says. In this environment, it is hard to think of a more important responsibilityfor any Board of Directors than to plan and execute an effective CEO search when the time comes to make a change.

Are Boards Ready and Well-Prepared?

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