The CEO Churn Ahead: What boards must face NOW about CEO succession planning

Courtesy of  DDI

A Mass CEO Exodus Is Coming

In one of the most unstable social, political, economic, and health environments the world has ever seen, it seems insane to say that we’re in the calm before the storm.

But in the C-suite, that’s exactly where we are. Because a mass exodus of CEOs and other C-suite members is coming.

Why? Because it was already happening. And, the pandemic has disrupted markets and industries so dramatically that significant changes in leadership are inevitable. It’s just a matter of time.

The Stage Was Already Set

Over the past 25 years, CEO turnover has skyrocketed. Starting with the advance of the digital age and the dot-com bubble, CEO turnover rose 50% between 1995 and 2001, according to a study by Booz Allen Hamilton. And then, it kept rising.

As Challenger, Gray, & Christmas began tracking CEO departures in 2003, they saw numbers steadily climb.

In fact, 2019 marked the highest year on record for CEO departures, outpacing turnover even during the depths of the recession in 2008 and 2009.

The rising rates in recent years weren’t just caused as retiring Baby Boomers (who held off on retiring during the recession) began to experience investment portfolio gains. Rather, about half of departing CEOs are fired, even if the official public statement reads that they stepped down or left for personal reasons, according to Exechange, a firm which tracks executive turnover. That’s a significant increase since 2006, when only about a third of CEO exits were involuntary.

As 2020 began, January saw record CEO departures, setting the tone for an even more disruptive year. But as the pandemic and economic fallout began, CEOs stayed put. CEO departure rates plummeted to the lowest rates in more than a decade. But if the past is prelude, the lull will be temporary.

We are now moving with force toward a new business landscape. And it’s going to take the C-suite and its bench with it.

COVID Will Clear the Bench

The boards who have held off on replacing their CEO during this crisis are likely biding their time until there’s increased stability. So the stream of CEO departures planned for early 2020 will happen – just on a delayed timeline.

But the larger wave will likely come from businesses adapting to the “next normal.” Market and business model shifts are unfolding with stunning pace. Certainly many of these shifts were overdue. Even so, new business realities have accelerated strategic focus, simplification, e-commerce, digitization, and greater fiscal prudence to name a few.

Even the most successful CEOs may struggle to perform as their organizations morph. Furthermore, the viable bench of CEO hopefuls will change as well. Prospective CEO successors who were likely fits in the recent past may suddenly lack what it takes to reinvent, reshape, or reenergize their organizations. And there will be little forgiveness for senior executives who hold onto past mindsets while competitors innovate, sharpen focus and drive efficiency to capitalize on the moment.

Likewise, opportunity will be plentiful for those that step up to lead their businesses through turbulence. Those leaders will be sought by both their own and other organizations to shape new futures. And unplanned turnover will rise as some senior executives conclude that turnaround cycles and transformation strategies will not yield a timely payday, leading them to question, “Is it worth it to stay? Or is it time to look elsewhere, or even call it quits entirely?”

As the churn of top executives sets in, investors, boards, CEOs, CHROs and business executives will all be asking one question: Who will lead our company next?

How organizations approach and answer that question stands to be one of the defining competitive markers of this moment in history.

Context Is the Key to Success

In our experience, context is the number one reason CEOs fail. After all, most of these people earned their positions by being exceptional executives. For example, it’s very common for founder CEOs such as Uber’s Travis Kalanick to be exceptional at launching and growing a company, but struggle to create the corporate and cultural rigor needed to grow and expand the company once established.

Outside a company’s internal struggles, major financial and socio-political events may abruptly change the business landscape. For example, major worldwide triggers for CEO changes across the board included things like the Enron fraud and elevation of corporate governance; the bursting of the dot.com bubble; 9-11 and the war on terror; the emergence of China and India as world powers; natural disasters like Katrina, Harvey and the Japanese tsunami; the subprime housing crisis, the 2009 global recession, and the European Union vs Brexit vote.

For many organizations these events exposed a lack of preparedness for sudden business change, including the leadership fallout associated with hairpin turns. Each disruptive event re-framed the strategic context for which executives were chosen to lead. It also imperiled the relevance of established succession plans. This was because succession plans (where they exist), are typically based on known leadership requirements. Rarely are they elastic enough to respond to revolutionary shifts that challenge every assumption.

The COVID-19 pandemic will be exactly one of these world-altering context changes. And it will expose the vulnerability of companies without a succession plan in place.

The Surprising Resistance to Succession Planning

“I literally wrote our succession plan on the back of a napkin over a drink with the chairman.”
— one CEO shared with us.

Surprisingly, that approach isn’t that uncommon, particularly among private companies. In fact, the National Association of Corporate Directors reports that 20 percent of public companies have absolutely no succession plan for their CEO. And nearly one-third of private companies don’t have one.

Why? Often, the board members and CEOs would prefer their succession plans to be private and informal. After all, they’ve been chosen for their positions because of their seasoned executive judgment. They believe they know what’s right for the business, and the time and resources required for more formal, rigorous succession planning may be subordinated to other more pressing business concerns. If it weren’t for increased shareholder demands for transparency, it’s likely the number of companies with no formal plan would rise even further.

Ironically, more than a few CEOs have shared stories of how they had to urge and educate their boards to prepare for their replacement. Because things were going well currently, the boards were reluctant to make it a priority. According to one of these former CEOs, “it seemed like they really didn’t take my interest in retiring seriously!”

It’s a surprisingly vulnerability, given most boards’ focus on reducing risk. And it has serious consequences. As more and more CEOs are ousted, companies are forced to look to outside candidates. When decision time arrives, even organizations with designated successor pools face the reality that internal candidates are not ready to assume the CEO mantle.

In fact, in 2019, 56% of companies turned to external replacements for their CEOs. This heightens the risk to for a process already laden with uncertainty, as failures rate for external CEO’s are far higher than for CEOs successfully grown from within.

Whether boards anticipate CEO succession needs or are scrambling to fill the role after an unexpected departure, few have strong processes in place to vet CEO candidates. Consequently, they resort to traditional or subjective methods for evaluating CEOs—methods that often result in the wrong person being selected. To state the obvious, this leaves their organization vulnerable to future CEO departures.

Let’s see more about 6 Things Boards Get Wrong About CEO Succession in our next month article.

Audrey Smith, Ph.D., is a Principal Partner for DDI’s Executive Services. An avidpractitioner, thought-leader, and architect for DDI’s C-suite and senior executive offerings, she has partnered for over two decades with boards, CEOs, and executive teams striving for high performance, business transformation, and growth. Known for leading executives to unique personal and business insights, Audrey is also a prolific author and speaker, and has written and collaborated on numerous books, research studies and articles across a spectrum of leadership topics.

Matthew Paese, Ph.D., is Senior Vice President of DDI’s Executive Services. He and his team help CEOs, boards, senior teams, and executives enhance leadership to grow business, cultural, and personal success. With over 25 years of experience working with executives through all sorts of business challenges, Matthew brings countless stories of C-level success and failure, and insight from comparative data and research to help boards, CEOs, and senior teams carve pathways to success.