6 Things Boards Get Wrong About CEO Succession
Courtesy of DDI

#1: Allowing Context To Be an Afterthought

Failure to sufficiently consider context is the number one mis-step in CEO succession planning.

In some ways this is understandable as boards strive to preserve stability during transitions from one CEO to the next. This can create a yesterday focused, myopic perspective on what is needed, particularly where a successful CEO has been in place for some time.
In these cases, boards may be tempted to default to a candidate who emulates the best of the incumbent CEO’s leadership approach. Other boards adopt a “best athlete” orientation to selection, built on perceptions of what “good” CEOs look like in their industry. Directors are susceptible to confirmatory bias based on past exposure or gut feel about who they want in the role versus what will be demanded of the next CEO.

But these approaches undermine the value of an ideal profile aligned to their organization’s unique context. It’s rare that what made an organization successful in the past will continue to fuel success for the future. So the question isn’t whether a candidate is ready to be CEO; it’s ready for what? And how in fact, does the next generation CEO need to be different from even the most successful predecessor?

Even the best CEOs are usually far more likely to be successful for one specific context versus another. A CEO who excels in cultural transformation might be an utter failure for a business that needs to expand into global markets. Likewise, the CEOs who excel in cost-cutting eras are likely not the visionary entrepreneurs who will lead a new phase for the company.

Ultimately CEO succession is a scenario planning exercise, in which predicted business context is the primary lens through which CEO candidates should be evaluated. Will future strategies focus on entrepreneurial organic growth through penetration of new markets or product innovation? Does the competitive landscape call for a chief executive who can spearhead market disruption or a cultural pivot, e.g. around digital transformation? Or will the organization benefit most from a CEO whose strengths lend to “double down” on strategies in core markets?

The recent growth economy had, perhaps, created complacency around evaluating candidate fitness to lead through uncertainty and strife. The pandemic offered a reminder that true leadership character will be revealed in unanticipated scenarios, like severe market downturn, a data breach, or public relations crisis.

The paradox of leadership is that some leaders are better equipped to lead in a steady state, where others soar amid challenges and turmoil. These leaders unleash the best in others, encourage self- determination, collaboration and decisive action. And they know when a personal gamble is required for the win.

For example, Abraham Lincoln was a superb wartime president, courageous and stalwart in the face of extraordinary times. Yet most historians doubt he could have been nearly as effective as a “fair weather” President. Churchill is another “war time leader” that stepped up during unique, volatile times.

Boards need to be united in agreeing about their strategic priorities for the future, and make their choices about CEO succession planning within that context. It will take a person with a specific set of leadership skills, personal attributes, and values to be in full alignment with the board’s plan for the future. Ignoring those context-specific attributes sets up the CEO and the company for failure.

#2. Favoring Intuition Over Objectivity

One board chair put it to us very simply when evaluating their CEO candidates: “We know that there are more thorough options for evaluating candidates. Those options are not for us. We prefer a more informal decision-making approach.”

This approach is part of the very long business culture of making decisions based on instinct and experience, rather than objective data. After all, directors are usually brought on because of their experience and sound decision-making. So why should their opinion not be trusted about the next CEO?

It’s simple: people are human, subject to their own unconscious biases and blind spots. In fact, that’s one of the reasons that there’s so little diversity at the top. It’s difficult to picture success in a person who doesn’t resemble the picture of success in your experiences.
Most boards are working hard to get better at this. But boards are often slow to pursue or embrace objective data to pressure test and differentiate the best CEO candidates. Why?

One reason is that directors may lean into the belief that once leaders have reached the C-suite they are beyond assessment. Candidates are deemed “strong” based on past track record, hallmark accomplishments, or reputation with the board.

Evaluation rigor may also take a back seat when a board is polarized on key decision parameters, such as the wisdom of choosing an internal vs external candidate as their next CEO. For example, we saw this emerge when the board of a global manufacturer dwelled on debate around this tradeoff, rather than seeking a data-based comparison of candidate readiness against an articulated success profile.

In addition, directors can have surprising anxiety over what assessment data might reveal. They worry that a favorite candidate may not perform well. Or they worry that it may challenge their decision-making process if they want to go against the data.

Finally, we can’t ignore the role of hubris. The ability to spot executive potential can be a point of pride for many CEOs and board members. They know the business well, and they may have observed internal candidates during committee collaborations, analyst calls, or informal executive team dinners and events. Likewise, incumbent CEOs also reveal hubris, often favoring an ally or a kindred leader they believe will protect their legacy.

The reality is that the very same personal experiences that may make you think you “know” a candidate may be what creates blind spots. A long or friendly relationship with a candidate can cause you to turn a blind eye to their personal flaws. Meanwhile, a candidate you’ve rarely interacted with may seem unexciting, despite having incredible potential.

#3: Assuming Experience Equals Competence

Boards place a high premium on experience. Probably too high. It’s not surprising, as directors are commonly nominated for their experience-driven insight. We’re not saying experience is unimportant. It is. But experience can be a limiting filter, weeding out those with powerful potential and falsely elevating poor leaders with rich experience.

Directors with deep financial backgrounds will naturally look for commercial acumen. Other directors may be focused on strategy, digitization, markets, and so on. And indeed candidate experience can be an important differentiator. The danger is when the value placed on experience becomes so dominant that it clouds leadership considerations.

So what, exactly, are the skills that boards should be evaluating in CEO candidates? As one CEO put it, “I’ve worked with these leaders [succession candidates] for years, but I’m still not sure how they’ll handle this job.” Like an athlete in an amateur league or a performer in a small town, the skills needed to stretch to the top level can be difficult to imagine. Deep insight into how leaders behave in action is essential.

How do they gather, synthesize, and use information to make decisions? How do they behave interpersonally when communicating controversial messages to large groups, or when presented with inflammatory accusations by a media reporter? How do they prepare for and handle analyst calls, or board meetings? What is the dynamic between the leader and his/her team? What might it be like for a senior executive to be coached by him/her? And how do they do all these things when under extreme pressure?

Too often accomplishments are viewed as proxy for these complex CEO leadership skills. Having managed a profitable P&L in Europe doesn’t, by itself, confirm that the candidate has the business acumen to penetrate new markets. Candidate experience may also, at times, be a limiter, diminishing openness to new ideas or challenges around long held convictions.

Even when competence is considered, it is not a given that behaviors demonstrated in earlier roles (e.g. leading teams, business savvy) will transcend into the CEO role with equal impact.

#4: Valuing Knowledge over Personality

Boards of directors are human, and it’s easy for them to miss what they cannot see. As a result, they prioritize what they can see – knowledge – over what they can’t see, personality. But personality, especially in the CEO role, has a tremendous impact on the organization, especially under pressure.

Consider a CEO like Dennis Muilenberg of Boeing. With a background in aerospace engineering and decades of experience at the company, there was never a question about his depth of knowledge to lead Boeing. But where he struggled was under the stress of a crisis following two fatal crashes of the 737 Max.

Muilenberg’s overly optimistic outlook, downplaying of concerns, and desire for a quick fix after the first crash meant the company didn’t ground the plane, leading to a tragic second crash. His continued hopefulness about the timeline to repair the aircraft also eroded the company’s relationship with suppliers, buyers, and regulators as the company missed deadline after deadline.

Personal tendencies, such as risk-taking, arrogance, imperceptiveness, etc. significantly affect a CEO’s leadership approach. But most people hesitate to speculate about others’ personalities, and they often get it wrong. Time and again, boards inaccurately assess how personality will factor into the success, or more often, failure of CEOs. While board members diligently seek industry, organizational and cultural “fit,” they routinely mischaracterize the dispositional “fitness” to navigate the CEO role.

Board interviews alone are notoriously unreliable for detecting potential leadership derailers. Nor do they accurately discern positive, differentiating candidate attributes, like resilience or consistency. Interviewsavvy candidates may share positives around “bias for action,” without dwelling on darker tendencies, like poor listening or missing interpersonal nuance across broader, less familiar constituencies. These tendencies risk creating distance or dysfunction towards those they need most as CEO.

#5: Allowing Politics to Force Compromise

Differing priorities and power dynamics can sow division with boards on how to determine the next CEO. In some cases, the quest for compromise can dilute rigorous, courageous decision making.

These dynamics emerge when board members occupy different strategic camps. For example, some may believe in pursuing aggressive growth through acquisition, while others believe the path forward is conservative growth through operational excellence. Unresolved perspective on the road ahead will, by definition, create differing opinions on the success profile for the future CEO.

In addition, there can be politics about who is a favorite for succession. When different board members are rooting for specific candidates, it can become a game of politics rather than choosing the best possible candidate.

As a result, it can be tempting to compromise. That may mean appeasing the majority of board members who agree on a candidate, or simply accepting that the “heir apparent” will take the CEO position. Other boards try to circumvent these politics by advocating for external candidates.

These outside candidates may seem like “bright and shiny” alternatives, an outside savior who can turn things around. And because external candidates are naturally selective about how they share their track record with the board, boards may gloss over weaknesses that might be known about internal candidates. And they often have credible headhunters aggressively advocating their strengths as well.

When it comes down to it, compromising on candidates to solve board disagreement often ends up meaning that the council settles on the least controversial candidate, rather than the person who will truly be the right fit for the CEO.

#6: Overlooking Culture and Brand

While many CEOs could once stay in the boardroom and out of the limelight, that’s rarely the case in today’s hyper-transparent environment. The public will not hesitate to demand the termination of a CEO who is known for setting a poor culture or who makes mistakes in the media.

A prime example of this is what happened under the leadership of CEO John Stumpf at Wells Fargo. For more than a century, the bank had a pristine reputation, attracting the favor of industry big-shots like Warren Buffett. But after Stumpf took the helm, there was a major shift in culture that soon led to scandal.

Under Stumpf’s leadership, Wells Fargo developed a culture of extreme pressure to sell at any cost. That led to an erosion of ethics to meet sales goals, and some employees felt encouraged to open multiple accounts for customers without their consent. Some even used their own contact information to prevent the customers from finding out.

When the scandal erupted, Stumpf deflected blame to lower-level employees. Eventually, he was fired, and banned from the industry. The bank is still facing billions in legal fees.

The public and shareholders are now demanding that companies put high value on environmental, social, and governance (ESG) issues. Those that fail to do so will suffer in the court of public opinion – as well as in actual courtrooms.

In fact, market analyst and investor guidance are increasingly tied to all important Environmental, Sustainability and Governance (ESG) considerations. Newer valuation priorities include sustainability factors like succession, corporate brand, people, and culture. Yet the importance of CEO as cultural and brand ambassador often still gets short shrift.

Public scrutiny on organizational performance has soared along with the rise of social media and the ethos of social responsibility and sustainability. This heightens requirements for CEO communication, emotional intelligence and ethics, offering both new risk and opportunity to amplify outreach and messages.

Unfortunately, predictions around leadership integrity are at best, inexact. Still boards can seek lead indicators of CEO judgment and credibility under public glare, including personality traits associated with self-management, behavioral consistency, and social confidence.

All of this creates a new pressure on boards to pay attention to what they’ve often written off as “the soft stuff” when looking at their next CEO candidate. Boards do not have the option to prioritize candidates that achieve bottom line business results at the cost of the culture and brand. Indeed, culture and brand are often now the driving force behind business value.

For our next article, we will show you the Five Practices Your Board Needs to Adopt Now.

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.