Wednesday, 1 April 2009

Tomorrow Can Arrive Today

A Chief Executive’s job is dramatically complex. Background, experience, education, and talent may not prepare you for the all-encompassing, globally-pressured, quarterly-earnings-report work that comes with leadership at the top. In a world where most starry-eyed, young business graduates dream of becoming CEOs by 40, about 40% of CEOs fail within 18 months. Demands on leadership alongwith increased accountability of corporate boards have compelled many companies to place a premium on the way they plan for leadership change. A constant, collaborative process is crucial for a successful transition; and to counter the countless examples of failed successors, it must begin the first day a new CEO takes the helm. Unfortunately, many Boards allow CEO succession to be handled through an ad hoc, political process. This leaves the bigger question of what sort of long-term leadership the company truly needs unanswered.

Despite some notable examples of organisations that have succeeded in making smooth leadership transitions by investing in and nurturing internal bench strength, most boards do not take succession planning seriously as they can always fallback on external talent acquisition. A Booz Allen Hamilton study shows that home-grown CEOs deliver 1.9% more shareholder returns than externally appointed CEOs. In the face of such concrete evidence when boards decide to hire externally it sends a dangerous message to employees that they are seen as incompetent.

Promoting internally through a short list horse-race has its own pitfalls though. There is a real danger that once a candidate has risen to the top, companies can end up forfeiting talent that has been nurtured for leadership role to competitors. The ‘losers’, who no longer see a future at the company, decide to leave for greener pastures, often taking their key people and clients with them. To avoid these problems, companies that employ the horse-race succession approach successfully require ‘teamwork’ among the candidates during the trial period, testing for their ability to work collaboratively. Organisations need to find ways to recognise ‘losers’ after the transition by elevating them to senior Board-level positions.

The process of acquiring or promoting a leader must be at least as rigorous as that of acquiring a high-value asset or choosing a strategic partner. With both processes fraught with risks, whether a board considers internal or external candidates or both, the starting point should be a specification for a CEO who reflects the strategic vision of a company’s future, not its present. The specification should reflect the best characteristics of world-class leaders in the company’s business segment. This strategy requires consensus on the board about future growth and a vision of where the company should be in five years. And while we want the future CEO to embody the organisation’s future vision, the specification cannot overlook the unique history, culture, and present-day situation of the organisation. Leadership changes are not easy, nor are they stamped from a mould. A highly skilled or a highly successful leader in an organisation may end up being a complete failure in another.

In a world characterised by the scorching pace of change, the succession planning process cannot remain static and needs to be revisited ever so often by the Board to incorporate contextual change. Boards of Directors must embrace the fact that few things matter more to an organisation than having the right leaders in place today and in the wings for tomorrow - recognising that tomorrow can arrive today.

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