Even well-suited candidates may not even make it into the shortlist of succession—and ghSMART studied the reasons why this can happen.
By Elena Lytkina Botelho and Shoma Chatterjee**
Large companies devote plenty of attention and resources to succession planning, yet a ghSMART study finds that $112 billion in shareholder value is lost annually because companies pick the wrong people to lead them.
In our CEO transition work across a wide range of industries, we found that in more than half of the 110 cases our firm assisted with during the last two years, the “obvious” choice was not the candidate most likely to succeed in the CEO role. Nearly three-quarters of the directors responding to the National Association of Corporate Directors’ latest corporate governance survey say that maintaining the CEO pipeline is their top succession planning challenge. Yet we find that even at the most respected companies with disciplined succession processes in place, well-suited candidates may not even make it into the shortlist of succession candidates—overshadowed by “safe” or “chosen” ones. We have identified three reasons why this can happen.
The power of the apparent heir
In an orderly process to replace a respected CEO, the incumbent typically holds disproportionate influence over the choice of a successor. Successors who rise to the top in these situations are often loyal deputies who have faithfully carried out the incumbent CEO’s agenda. While it’s reasonable to assume that the incumbent CEO has deep knowledge of his or her team, it’s equally important to remember that even the best CEO can, due to her own sense of loyalty, overestimate the capabilities of trusted individuals.
Likability counts more than it should
Our 10-year CEO Genome study across 2,600 leaders found that the qualities that help one look the part and advance in corporate hierarchy are often at odds with what it actually takes to deliver results in the CEO role. This echoes the findings of Steven Kaplan at the University of Chicago, whose research shows that likable executives are more apt to get selected for C-suite roles even though they demonstrate no advantage in performance. On the other hand, we found that while highly decisive executives are 12 times more likely to excel as CEOs, they’re also more likely to ruffle feathers on their way up the ranks. These are the candidates whose performance reviews may include such assessments as “lacks enterprise view,” “doesn’t play nice in the sandbox,” and “needs to soften her approach.”
The safe choice can be irresistible
Many companies we advise have a transformational strategic agenda, but when faced with the pressures of selecting the next CEO, their boards look past candidates who break the mold and opt for a seemingly “safe choice”—which can lead to disappointing results. These boards tend to prioritize candidates who closely resemble their own backgrounds and those of the existing leadership team. As a result, both diversity and results suffer. For example, our research shows that women are 28% less likely to get selected for CEO roles and that having a significant accent made one 12 times less likely to get picked for the job. We suggest three tactics that can help avoid these costly traps and increase the odds of selecting the best candidate.
A CEO scoreboard linked to business strategy
While every company presents a unique set of challenges and opportunities that the next CEO must harness, most CEO specs list a similar set of generic qualities like “strong leader,” “sense of urgency,” and “strategic.” Before comparing candidates, it is essential to articulate five to seven top priority outcomes and key leadership capabilities required for the next CEO to deliver in the specific business and organizational context. Even the best boards often struggle with this exercise, because it requires alignment on difficult strategic trade-offs amid uncertainty. Furthermore, translating what the next CEO needs to get done into a robust, measurable set of leadership behaviors and competencies requires an analytical process far beyond the level of conversation that typically takes place in boardrooms.
A broader deeper lens on the leadership bench
Most boards focus on the shortlist of candidates identified by the incumbent CEO and get only a carefully curated view on the broader team. Even in cases when board members get to know a wide range of executives over a long period of time, this familiarity often gives directors a false sense of comfort—particularly when they don’t have access to robust data that can help predict future performance. We’ve seen a conversation on the corporate jet raise the stock of a weaker candidate and a misinterpreted remark over dinner plant doubts about an otherwise highly capable executive.
Once board members form a point of view on candidates based on casual exposure, it is often hard to change. To pre- vent this, succession planning best practice includes an objective assessment of a broad slate of leaders (often over a dozen), starting five years ahead of the likely succession and updated annually. Our CEO Genome research demonstrated that leaders who are highly decisive, adaptable, and reliable and who prioritize results over being liked are more likely to become successful CEOs, so we suggest assessing for and developing these characteristics starting well in advance of the potential succession event.
There is ample research to show that diversity, when harnessed properly, can improve corporate performance. In cases of CEO succession, a board with diversity of thought, backgrounds, and traits benefits the organization by staving off groupthink and increasing the breadth of perspectives. Constructing a quality board is about the caliber and perspective of individual directors as well as the deliberate rules of engagement that allow for productive debate and effective decision making.
One board chair, for example, led directors in examining their own pre-existing biases and preferences before launching a discussion of succession candidates. Recognizing the complex dynamics and risks involved in succession, boards increasingly engage outside experts three to five years ahead of CEO transitions to provide objective assessment and development of potential candidates, help stimulate necessary discussions, and bring external best practices.
The succession process enhancements we recommend here may be uncomfortable and time-consuming, but they help ensure that the right candidates don’t get overshadowed by the “safe” ones. As the chair of a succession committee recently reminded his board:
“We’ve worked very hard for the last few years to execute this process smoothly. It’s worth reminding ourselves that shareholders will judge us on the outcome—did we pick the right person to run this company?—not on how good we felt about our discussions to get there.”
**Elena Lytkina Botelho is a partner at ghSMART, advising leading CEOs and boards, a coauthor
of the New York Times and Wall Street Journal bestseller The CEO Next Door, and co-leader of the CEO Genome Project.
**Shoma Chatterjee Hayden heads the ghSMART’s Leadership Development and Coaching practice. She focuses on advising executives in asset management, financial services, and private equity firms on scaling their leadership impact as they take on larger roles within an organization.