How Boards Manage Risk During CEO Succession

Indra Nooyi, CEO succession
Seismic shifts in business are making CEO successions tougher—as a lot of boards are discovering right now. Here’s how some boards are dealing with the change.

When Indra Nooyi retired after 12 years as CEO of PepsiCo, directors of the beverage giant had a big decision to make. And part of their succession discussion was this: Whether insider or outsider, do we want a new CEO whose background and skill sets are decidedly like Nooyi’s—or decidedly unlike them?

PepsiCo directors ended up naming Ramon Laguarta, who was president of the company’s U.S. operation and, like Nooyi, an immigrant with a globalist mindset. He wants to continue her gradual transformation of a corporation that has struggled with consumers’ turn away from soft drinks and carb-heavy snack chips. The 62-year-old Nooyi called Laguarta “exactly the right person to build on our success.”

“PepsiCo could have brought in someone who’s a big-time risk taker, who could create lightning, instead of someone who makes for a relatively cozy succession,” says Tom Pirko, president of Bevmark Consulting, who has worked closely with PepsiCo CEOs and board members over the decades. “But that’s not where we are at right now with this company. The directors turned to someone a lot like [Nooyi] who they believed could finish baking the cake.”

The question of how much the next CEO resembles the current one is timely for more boards as they deal with ever-accelerating turnover in the ranks of company chiefs and with fast-rising challenges in a quickly evolving global economy. Thirty-seven of the CEOs of the 100 biggest companies in the consumer packaged goods business, for instance, and 12 chiefs of the top 50 retailers, have turned over in the last two years.

Plus, new factors increasingly encroach on nearly every succession decision, ranging from disruptive industry dynamics to technological imperatives, from changing notions of a CEO’s public role to a greater demand to find out about the true character of the next chief.

The Replication Trap

Actually, the place for boards to start is where they see the company headed in the next five years, not where it was or where it is now—or whether or not the current CEO did a good job. “You start with where you are going,” says Susan Chambers, who is a director of USA Truck and the former executive vice president and chief human resources officer of Walmart, where she helped boards execute succession for the last two CEOs. “Then you ensure that your candidate can fulfill that, not fulfill where you’ve already been.”

“That’s because most boards are thinking years in advance and about the skills they will need in a CEO five years ahead or more—versus in the rear-view mirror.”

This starting point may well lead a board to conclude, as PepsiCo’s did, that it wants a successor cut from the same cloth as the current CEO. “If a company is performing well, then usually a thoughtful board will understand what’s driving the business and, generally speaking, [the directors] are going to want to perpetuate that, so they look for someone who can continue and build on that momentum,” says Ken Harris, former chairman of startup Enjoy Life Foods, former CEO of Kantar Retail Americas and now managing partner of Cadent Consulting.

At the same time, that approach can be a trap into which many boards stumble: The incumbent CEO has done a great job, so let’s just find another person like him or her,” says Peter Theis, president of the River Group, a leadership management consulting firm. “That’s a mistake.”

The philosophy has limitations, agrees Constantine Alexandrakis, head of the U.S. practice of executive search firm Russell Reynolds. “They may do great in the first 18 months and be good at capturing the low-hanging fruit,” as he puts it, such as cutting costs or shedding operations. “But what they won’t be able to do—and this typically comes at the 18-month or two-year mark—is break through with new strategies or directions or attack new and unforeseen challenges the company is experiencing.”

Idalene Kesner is a director of Evansville, Indiana-based Berry Plastics Group and of Lincoln, Nebraska-based Lincoln Industries. She agrees that boards “rarely look for someone exactly identical” to the current CEO. “That’s because most boards are thinking years in advance and about the skills they will need in a CEO five years ahead or more—versus in the rear-view mirror,” says Kesner, who also is dean of the Indiana University business school.

Curating Candidates

Looking several years out, directors will want to consider their growth strategy and “whether they anticipate the need to drive a major business-model shift in a very disruptive market,” says Audrey Smith, senior vice president of global practices for the consulting company DDI. “Or maybe they’re looking at a huge digital transformation and at interfacing with new customers and new competitors. That would inform a certain kind of successor profile. Or is it about globalization or driving a turnaround where cost containment or manufacturing modernization is a lever they have to pull?”

Chambers recently helped lead the succession process that led to the selection of James Reed as CEO of USA Truck, He was the CFO of the Van Buren, Arkansas-based outfit. In curating candidates, Chambers says it’s important to “be agnostic about where the talent is coming from. Then you compare your internal talent against that as you also search on the outside.”