By Dale S. Rose, Ph.D., President & Co-Founder
This post is the fourth of a five-part series on best practices in CEO succession. The purpose of the series is to share some of the insights I’ve gained while helping companies manage the messy, sometimes confusing terrain of CEO succession.
Question 4: How Transparent is the Succession Process?
With CEO succession—as in most aspects of life—transparency is very important. The tricky part is how soon to be transparent about which information. For example, I am working with a client whose board members found out their CEO was leaving one hour before a shareholder meeting. Technically, this is information the shareholders should know, but one hour was clearly not enough time to communicate with the entire board, make all the decisions necessary, and then craft a clear, confident message.
The responsible course of action was to wait, formulate a plan, and then share it publicly. In this case it took almost a week, in some cases it could be faster.
100% real time transparency is not needed, but it is important to be as transparent as possible. What kinds of things should be transparent?
For starters, critical stakeholders such as large customers, shareholders, and senior management need to know there is a plan for succession. Knowing the board and CEO are being thoughtful about succession can only reassure stakeholders. Though not requiring any formal filings (so far), even the SEC has provided guidance suggesting that many public companies should respond to shareholder requests about CEO succession.
Second, each of the internal candidates should know they are expected to be focused on their development as leaders—and that the executive development process will inform succession decisions (to CEO and other roles). Third, when they ask (be worried if they don’t), senior executives should know what criteria are used and what steps are needed for them to get to the next rung on the ladder (including the CEO role). Lastly, the CEO and the board should have an ongoing, open, healthy dialogue about internal leadership bench strength and what the CEO is doing to make it stronger.
The biggest risk associated with transparency is the possibility that information about who is being considered and the timing for CEO succession will lead to rumors and create the effect of an unhealthy “horse race” between the presumed candidates. While in some rare organizational cultures this can work well, generally it is wise to avoid horse races. In 2001, one of the most visible and high stakes of these races happened at GE with the succession of Jack Welch by Jeffrey Immelt. Within seven days of being announced as the runners up, Bob Nardelli became CEO at Home Depot and Jim McNerney went to 3M. Though this was Jack Welch’s intention at the time, the loss of qualified runners up is a significant risk when succession is cast as a race. The other thing about horse races is, there tends to be a lot of mud flung about (including among lower level managers), and these competitions can be very distracting for the organization. Succession by horse race tends to take on a life of its own, with executives focusing on impressions more than results, ignoring opportunities to collaborate, and competing harder against each other than the company’s competitors.
Frequently, board members start out very reluctant to be open about CEO succession. The topic feels too sensitive, too uncertain, and too strategically important to share widely. If transparency seems unsettling, consider this: Shouldn’t a solid CEO succession process be a strength to highlight, not a weakness to diminish? A recent report from the Conference Board suggested that as many as 39% of financial services companies disclose their CEO succession practices to shareholders (though the number drops to 18% for manufacturing). Of course, names and dates may not be public until it is appropriate. Still, it can only help to let people know there is a plan, that internal talent is being prepared, and that the board conducts a careful review of options on an annual basis.
I would love to hear about readers’ experience on Question 4. What information would you NOT share? What else can you be transparent about that I didn’t mention?
Read the series …