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Getting CEO succession right

LiveMint logoLiveMint 22-05-2014 Ravi Venkatesan

An unprecedented number of the world’s firms are undergoing or will soon witness CEO transitions. In the best of times, CEO succession is a risky affair akin to changing an engine in mid-flight. When succession happens in the midst of a performance crisis, market headwinds, technology disruption or a business model shift, the risks are exponentially higher.

How can a board reduce the risk of failure?

The most important thing is for the board to realize that selecting the CEO may be its single most important job and, because succession is a process rather than an event, this means starting at least 18 if not 24 months ahead of D-day. Good boards own and drive a disciplined process by collaborating with the existing CEO rather than abdicating the process to him. Starting early allows the board to carefully assess internal candidates and stack them up against external ones. When it comes to internal versus external candidates, the evidence is strong that if the situation is stable, it is far better to go with an insider. On average, insiders deliver 25% better returns than outsiders and the downside risks are far lower.

However, if a turnaround or transformation is essential, then an external hire is often a better choice but even so, at least half the time, this doesn’t work out. The new CEO often fails to understand the culture, is unable to build followership or productive relations with the board and ends up throwing the baby out with the bathwater. A revolving door of CEOs often follows and the company loses its way. HP or JCPenney type situations are more common than IBM under Lou Gerstner.

While it sounds obvious, it is also extremely important to be clear about the specific skills and qualities that the company will most need in its next leader. Amazingly, many boards are still fixated on industry experience and functional skills such as sales or operations.

In a CEO what you need most is leadership. Qualities such as drive, learning agility, a track record of good execution and developing talent are all necessary, but not sufficient. What matters is whether the person has the one or two defining capabilities that are most likely to be required in the next phase. What is the evidence that he can sense and seize the next big disruption in the industry? Can she drive large-scale cultural change and build new organizational capabilities? Does he understand how to grow the business through acquisitions? Notice how these are specific rather than woolly terms like visionary or strategic.

Four traits make the difference between a good versus great leader.

First, good judgment, which is the ability to sense and reach conclusions based on partial or unreliable information. Who are the people to really bet on? What trends really matter?

Second, resilience, which is the ability to deal with uncertainty, to learn from setbacks, and the tenacity to see things through. In an increasingly volatile, complex and uncertain world, resilience is critical.

Third, a higher purpose, beyond success or power, that creates a sense of mission that people want to be a part of. This is a characteristic of many founders. Bill Gates wanted to democratize computing and put a computer on every desk and every home. N.R. Narayana Murthy wanted to earn the respect of the world. Steve Jobs sought to build insanely great products that everyone would covet.

Finally and above all, courage; the courage to make difficult decisions and painful changes, the courage to do what is right rather than what is convenient, and the willingness to take personal accountability for all that happens. Courage may be the most central and least appreciated quality of leadership.

Hiring a good CEO is only half the battle. The other half is actively helping the new leader be successful. The board must put together a solid transition plan that includes clarity on how they will measure success and convey suggested priorities for the first 90, 180 and 365 days. Ideally, one or two board members must undertake the responsibility of mentoring the new CEO and these directors should be plugged into the company grapevine to pick up early warning signals. If the CEO is an outside hire, additional risk mitigation may be helpful such as pairing the external hire with an internally promoted COO. If the two can establish an effective partnership, then magic can happen. Finally, empowering, affirming and supporting the new CEO, and helping her grow in confidence is crucial.

Managing CEO succession may be a board’s single most crucial responsibility and one of the toughest to discharge well. Being thoughtful and disciplined about these issues can substantially improve the probability of success.

Ravi Venkatesan is the former chairman of Microsoft India and Cummins India, and a director on the boards of several global firms. He is author of Conquering the Chaos—Win in India, Win Everywhere.

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