How Boards Manage Risk During CEO Succession

Indra Nooyi
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.

Consider the microphone: Given rising public expectations these days that CEOs and companies will take stands on social and political issues and the ease with which they can fire off missives, boards must assess what issues are important to their stakeholders and then evaluate potential successors on their ability to articulate the company’s approach to them.

“Whether a leader is naturally able to do that or will just accept the training to get there, it’s probably a skill set that will continue to be in demand,” BPI group’s Gallagher says.

But that doesn’t mean boards should be looking for a new CEO who easily mounts the soapbox. “Boards want strong communicators,” Russell Reynolds’s Alexandrakis says. “That doesn’t necessarily mean being an outspoken or passionate individual around certain social causes. It means being a level- headed and smart leader who knows how best to represent the interests of the company and shareholders, whatever those may be.”

Cadent Consulting’s Harris believes directors should prefer CEO candidates who don’t come with an agenda in regard to political and social issues, apart from stances that directly benefit the company. “But can they handle a situation where this becomes an issue? Some companies have a corporate ethos that is activist, but for most companies, directors shouldn’t allow the CEO to make the position a bully pulpit. It should be, ‘Shut up and do your job.’ They’re being charged with running a company and boosting value for shareholders.”

Deep dive on character: A number of CEOs have abruptly been swept out on the basis of allegations about their personal behavior toward employees or others, revealing sexual harassment or other incidents of poor judgment that may have occurred many years ago—but which nevertheless are telling.

Time was when “there was a tendency by boards to be slow to act on things they suspected or knew about if they were dealing with a top business performer,” says Chambers, the USA Truck director. But that’s no longer the case, changed both by righteous expectations by employees and the public as well as the transparency created by social media.

It’s therefore more critical than ever for directors to do more to vet the moral and ethical core of CEO candidates by probing more deeply than before. “Unfortunately,” says Harris, “In today’s #MeToo era, you can’t afford to just talk with references, or you will get handpicked people who think the CEO walks on water.” Executive search firms, predictive software and psychological assessments can help on this front, and more and more boards are also intensifying background-checking efforts.

Reckon with disruption: Business leaders say the biggest new force in their world is the possibilities unleashed by digital technologies ranging from artificial intelligence to blockchain, so incoming CEOs must be more than up to speed on them.

“The CEO and other leaders have to be aware of that disruption and how it might come about,” Willis Towers Watson’s Ungemah says. “It’s been coming from places that no one ever anticipated before: Could you have imagined taxis on the forefront of technological disruption?”

In fact, competence in this area has become table stakes. “If you’re talking about large and certainly public organizations, CEOs are going to be adept at this—they just are,” Harris says. “And if a CEO can’t do that, there is probably a bunch of other stuff [he or she] can’t do.”

Alexandrakis believes that “almost all CEO candidates today are going to have to have some level of adeptness at managing through, leveraging and exploiting technology disruption in their business.” Ultimately, that inevitability of change is why directors must be willing to move on from the CEO who got them to the current threshold. “Directors need to think ahead to the next phase from where they’ve been,” River Group’s Theis says. “What got you here may not get you there. Don’t fall into that trap.”