Vanishing Act In The Corner Office

With tenure at the top growing ever shorter, preparing for unexpected succession has become a board imperative.

When the board fired McDonald’s CEO Steve Easterbrook in November over his rule-breaking personal relationship with an employee, directors had a successor ready in Chris Kempczinski. It wasn’t just luck that enabled the board to elevate its president of U.S. operations to the company’s top job immediately upon the sudden end of Easterbrook’s four-year stint as CEO. After 15 years of dealing with a jarring series of unforeseen departures by leaders, the fast-food giant’s board was well-versed in handling unexpectedly short-tenured CEOs.

“McDonald’s is a poster company for emergency CEO succession,” says Paul Winum, co-head of board and CEO services at leadership development firm RHR International. “They’re so planned and thoughtful about it.”

That should be the case with every board these days. Corporate America is burning through CEOs at a record pace. Nearly 18 percent of CEOs turned over in 2018, according to PwC, the highest rate recorded in the 19 years of its annual study of the world’s largest 2,500 companies.

Twenty years ago, a CEO could expect to remain in office for eight or more years on average, but that number has plummeted to just five years during the past decade. Ditto for accelerated turnover elsewhere in the C-Suite.

The reasons are many. Companies and entire markets are being disrupted as never before. Shareholder activists are scoring more CEO pelts. Yet, some chiefs have missed the memo, continuing to focus too narrowly on traditional imperatives, such as financial targets, and neglect new-era problems, such as culture. Errant personal behavior also has become a big factor in the era of #MeToo and corporate transparency. Easterbrook’s transgression made him only the latest high-profile CEO to resign over romantic entanglements with employees, following Intel CEO Brian Krzanich in 2018, Best Buy CEO Brian Dunn in 2012 and Boeing CEO Harry Stonecipher in 2005, among others.

In a sense, every CEO departure is a one-off, with unique circumstances, preludes and consequences. But no matter how the CEO exits, boards should be ready to respond effectively and quickly, mitigating the problem if possible—and responding better when they can’t.

Some ideas on how to get ready:

Nail your succession plan. Boards must elevate succession planning to a regular exercise, says Allison Handy, partner with the Perkins Coie law firm. And it should include “next-generation co-development experiences for high-capacity talent,” advises Susan Chambers, a director of USA Truck who participated in such drills annually while she was human resources chief at Walmart. Erin Lantz, a Zillow Group executive and a director of Washington Federal, says that directors will “struggle to find a board that has succession planning 100 percent locked down, but you need to always aspire to do better and always keep it top of mind.”

Know what you need—before you need it. In February, AutoNation, America’s largest chain of car dealerships, hired industry outsider Carl Liebert to replace longtime chief Mike Jackson—only to determine by July that the former insurance executive was simply too far outside his element. They booted Liebert in favor of the company’s CFO, Cheryl Miller, the other CEO finalist in their February search. “Second-best isn’t good enough,” says Marc Hodak, partner at Farient Advisors. “The best thing boards can do is have the right person on the bus in the first place, and that’s a question of strategy, the right match and compensation.”

Shawn Oglesbee, a founding partner of the ON Partners executive-search firm, says directors should also “learn to better use qualitative assessment techniques for leader selection as a committee and replace the instinctive selection guided by a few of the loudest voices on the board— the ‘gut feel’ approach that has often failed such selection now for a generation of leaders.” Nowadays, Chambers says, making the right call probably involves emphasizing technology experience over, say, international chops, which was previously in vogue.

Go deep on internal candidates. Shrinking CEO tenures place a new premium on having people inside a company who are ready to step up to the top job. This should include excavation into executive and managerial levels below the C-Suite. “If a board member doesn’t know at least 10 people in the company, they’re not doing their job,” says board member and former CEO Peter van Oppen.

Mining inside the company may be especially important in the case of a long-serving CEO. “Are viable successors willing to wait in the wings? Or could they be poached?” says Dayna Harris, also a Farient Advisors partner. “Boards must identify these people and let them know they’re valued and they’re in line for succession, so they know they don’t need to go elsewhere for an opening.”

Scout for talent. That said, don’t assume that the heir apparent who has long been in place still aligns with the needs of the business, which can change quickly these days. Boards must develop pools of potential CEO candidates on the outside as well as inside, especially of individuals representing diversity, such as women. “Develop relationships with external talent, and not just on paper,” Chambers advises. “Developing your own [next CEOs] is the first prize, but you need to have a pretty good idea of who’s out there.”

Conduct dry runs. Boards should regularly rehearse a surprise CEO departure as if it’s a disaster-preparedness exercise, with directors carrying out mock assignments for dealing with shareholders, media and employees in the wake of a pretend event. Of course, directors should let the CEO know it’s coming. “It’s painful, but on the other side of it, you’re glad you did it,” says Chambers. “There’s nothing like being put through it and believing, at least for a moment, that it’s true.”

For the right CEO, do what you have to do. When it’s time to hire, landing the right person may, for instance, involve offering much more compensation than the investment community would like to see or making it much less contingent. It took Wells Fargo six months to lure Charles Scharf as its new CEO after a few troubled years for the banking giant, and the BNY Mellon executive garnered $26 million “just to get him to walk away” from the company, as Hodak puts it. “And yet [BNY Mellon] probably didn’t see that $26 million as savings for itself because its stock price immediately dropped by 5 percent.”

Set clear expectations. Once hired, boards should spell out their expectations about how the CEO will create value. “Is the board expecting the new CEO to turn the ship around, improve performance, change the culture? They need to communicate their expectations,” says Martha Turner, a principal for PwC. CEOs should also be evaluated more regularly.

“It’s shocking to me how often senior executives have not received a performance review in years before being offered the top job,” says Doug Lind, founding partner at Clearwater Business Advisers.

Go faster. Don’t give CEOs a typical “bye” of the first few quarters. Instead, telescope strategic timetables from the typical five-year plan to, say, three years. “Transforming companies takes time, but you don’t have that time now,” says board adviser Lars Sudmann. “CEOs must take only two to four years to do that now and, yet, also show short-term results, and that’s a skill set that is challenging and new.”

Get them help. Andrew Chastain, president and CEO of WittKieffer, suggests that boards add a chief of staff with no direct reports whose only job is to help a new CEO “arrange their new agenda.” Directors also must insist on being more consultative and collaborative with new CEOs than in the past. “What can boards do to be supportive of the new CEO coming in?” says Perkin Coie’s Handy. “That’s really important. That’s how you get a CEO who lasts a good four to five years.”

Look at the bright side. Turner notes that PwC research shows total shareholder returns for long-serving CEOs, surprisingly, are not in the top quartile but in the second quartile. “They’re good,” she says. “But not great.” Also, more companies are succeeding with the approach of bringing in a series of CEOs to “do certain jobs, such as cutting costs, building our brand or expanding overseas,” says former Silicon Valley CEO Donald Maruska. “Those are three very different job descriptions, and you need different profiles. And the switch in what’s needed at a particular time is happening more quickly.”

Van Oppen concludes that “lots of great CEOs actually can be replaced; they’re not uniquely capable. And at some point, a board may need enough self-confidence to recognize that if a CEO is going to bail, there are three to four other people who can do the job.”