Canadian Underwriter
News

How long before your new CEO should be planning an exit strategy?


November 5, 2019   by Jason Contant


Print this page Share

Your new CEO is just six months into the job. It’s time to start thinking about their exit strategy.

Yes, that’s right. Good CEOs start planning for their succession as soon as their onboarding is complete. They should not wait more than half a year to do this, according to a recent blog posted on Harvard Business Review last week. This can potentially save companies millions in business costs.

Smart CEOs look on their tenure as a project, wrote Stanislav Shekshnia, a professor at business school INSEAD and a senior partner at Ward Howell, a global human capital consultancy firm. Starting early is crucial. One CEO referenced in the article said they gave themselves “five to seven years and agreed with the board that, no matter what, I would step down after seven years.”

As soon as the onboarding was complete, the CEO spent 10% of their time identifying and – for internal candidates – grooming potential successors. This included starting with a relatively large slate of potential candidates, which got narrowed down as the CEO’s departure date approached.

“They take the time to get to know candidates by spending time with them, visiting their operations, speaking to their subordinates and, if possible, talking to their spouses,” wrote Shekshnia, who has spent 25 years advising boards and CEOs on leadership succession. “They will mentor and evaluate them by giving them both developmental and testing assignments. If possible, they give the most likely candidates a dry run at the job by appointing them as heads of self-contained business entities.”

Another CEO, who served two three-year terms, started working on succession immediately upon starting her second term. Two years before her designated departure, she created two managing director positions for two candidates. After 18 months, she reviewed their performance with the board and chose one of them, with the decision announced three months before her departure. Together with her successor, she convinced the second managing director to stay by giving them more responsibility and increased compensation.

Successful succession planning is crucial from a business perspective: when CEOs botch their exits, their successors and companies suffer. According to one estimate, a failed succession can reduce revenues by as much as 3% for a typical $1-billion revenue company, with hits to market cap running in the billions. This confirms early research, which puts a direct cost of failed CEO exit at the range between $12 million and $50 million, depending on the size of the corporation, and total losses to the U.S. economy of $14 billion a year.

Besides starting early, Shekshnia offers the following three additional guidelines:

  • Get help – Succession planning should not be undertaken alone. A CEO must involve the board in profiling for the job and identifying and evaluating candidates, since the board (and the rest of the company) will have to live with the successor. Board involvement is usually best managed by appointing a succession committee made up of a subset of board members who have the qualifications to contribute to the search. Should the board prefer internal or external candidates? “In general, we would recommend giving preference to internal candidates, because integrating an outsider CEO is expensive and there is a high failure rate,” Shekshnia wrote. “An outsider is preferable only if they are truly outstanding relative to the insiders or the CEO, and board feel that the successor will need to undertake a major transformation that calls for a leader who can bring a fresh perspective.” In these situations, CEOs should draft in recruitment consultants to help.
  • Have a retirement plan – Many CEOs make the fundamental mistake of considering the job the be all and end all of their careers. Shekshnia’s research into Russian companies found that CEOs who serve for over 15 years are twice as likely to have a failed succession as those who leave after a decade on the job.
  • Make the break clean – In the case of one ex-CEO, he negotiated a 24-month consulting agreement with the board to support his successor. Eighteen months into the job, the new CEO resigned, citing lack of autonomy as the main reason, and the board immediately terminated the consulting contract. Said the ex-CEO: “Get out of there the day you step down and don’t worry – your successor will call you if she really needs your advice.”