Two out of five chief executive officers fail in the role within their first 18 months and cost, on average, $6 million to $18 million to replace. Yet, nearly 39 percent of companies have zero viable internal candidates for the role.
Clearly, the selection of a chief executive is one of the most important decisions a board of directors makes. Not only does the CEO have tremendous impact on the performance and future of the company, but the way in which a new leader is chosen also has enormous influence on the way employees, investors, and other stakeholders view the company and its leadership. In fact, recent research suggests that investors are highly sensitive to perceptions of leadership integrity and may divest of stock when a company’s CEO and succession strategy are called into question.
The high-profile horror stories are familiar. For instance, in 2011, Yahoo fired CEO Carol Bartz, named chief financial officer Tim Morse interim CEO, and held a secret external search for a new chief executive. Four months later, the company hired former PayPal executive Scott Thompson, who was then let go within weeks as investors questioned his academic credentials and suitability.
Because of its importance, the best-in-class succession planning is a partnership between the incumbent CEO and the board to not only identify a CEO successor, but also to ensure that there is a pipeline of talent throughout the organization.
What is top of mind for CEOs and board members? Last year, Ferguson Partners conducted a series of interviews with CEOs and board members across the real estate industry. For CEOs, the goal was to understand the pathway to becoming a CEO and the inherent pros and cons of promoting from within versus hiring from the outside. For board members, the goal was to understand the characteristics that contribute to successful board leadership.
Although the goals were distinct, it was found time and again that the interviews centered on the issue of CEO succession. It became clear that the relationship and interplay between the CEO and the board is very important—particularly in succession scenarios. What follows are key themes that emerged from these conversations.
1. Start Early and Review Often
The issue of CEO succession is increasingly becoming a high priority that is addressed early in a chief executive’s tenure.
Historically, the process of identifying and developing successors began once a departure date was known. More recently, however, many CEOs and boards are not only starting this process years before a chief executive’s departure, but even at the very start of a new CEO’s tenure. As the CEO of one real estate investment trust (REIT) said, “When I first became CEO and successor, the board said, ‘You need to put in an immediate plan.’”
Further, boards and CEOs are finding that a major benefit of starting the succession process early is having a concrete short-term succession plan in place for unanticipated events such as the early departure of the CEO. In addition, by starting the process earlier, the board and CEO are able to identify a number of potential successor candidates and learn their strengths and developmental needs.
Starting early also ensures that candidates receive the right experiences so they are ready to assume CEO responsibilities when the time comes. Another benefit of starting early is being able to move the succession identification process down through additional levels in the organization.
One board member noted how his organization’s succession planning has evolved into a formal process that continually reviews multiple succession plans for business-critical roles. “We wanted to prepare for [the CEO succession] earlier than we had in the past,” the board member said.
“First, we determined we have someone who, if brought along properly, could be a very suitable successor. But we also had one or two others that weren’t as far advanced but might have the potential to get to that kind of a position.
Then, we reviewed succession for a whole array of senior executives. If someone is hit by a car or someone walks away, do we have a person in a position to step in or not? That discussion has become a formal process that is reviewed with the board on a regular basis.”
2. Do Not Let the Topic Become Taboo
Many of those interviewed noted that allowing the topic of succession to become too sensitive, or even taboo, can in itself become a significant barrier to establishing a plan. Further, they suggested this may be a key reason why succession planning efforts do not begin early enough to create a robust, long-term plan.
The departure of a CEO and choice of a successor is a very personal event and a decision that affects not only the CEO, but also the wider business. From the board’s perspective, it can be difficult to broach the topic without the unintended consequence of seemingly pressuring the CEO to depart, or worse, appearing to call his or her performance into question. Conversely, the CEO may be concerned that bringing up succession planning to the board signals a desire to leave the organization.
One REIT board member suggested that CEOs bring up the topic early in order to dispel the taboo and engage the board in a collaborative effort. “It’s a very touchy subject, and nobody wants to tell the CEO that it’s time to start contemplating the world after you,” the board member said. “So the good CEO at some point needs to invite that [with the board].”
Indeed, this idea was supported by the acts of one REIT chief executive. “Sometimes the timeline for the current CEO may not be the same timeline as the people that you have as candidates coming along,” the CEO said. “That’s why I think it’s a really important thing for the board to think about succession in advance. I started these discussions when I first became CEO. I laid out a plan to the board in one of my first board meetings.”
3. Make Developing Talent Not Just the CEO’s Job
The leaders interviewed are challenging the notion that the CEO is solely responsible for developing his or her successor. A majority of the board members interviewed are becoming increasingly involved in the development of not only the CEO’s potential successors, but also of the wider executive team. This necessitates that board members become active participants in talent development as an organizational strategy.
“We’ve strengthened our talent identification process, and we’ve taken it further down into the firm so we can identify possible successors three levels down,” one board member said. “We have specifically identified the areas of development that the current CEO and the board want to see with respect to any of our several CEO candidates. We’re now being quite deliberate about how we are grooming potential successors.”
In addition to incorporating greater structure and involvement of the board in succession planning as a talent strategy, board members note there is greater emphasis by both the board and the CEO on having a combined, intimate understanding of the next generation of leaders. This includes CEOs creating more opportunities for the executive team to receive greater exposure to board meetings, for board members to serve as informal mentors to senior leaders, and for the board to be made aware of the organization’s leadership bench strength—all to positive effect.
“I’m a big advocate of that very thing—intermingling with the senior talent and really getting to know them,” one REIT board member said.
Similarly, another REIT board member emphasized the importance of succession planning not becoming myopically focused on the CEO, but instead becoming a broader talent initiative. “It’s important to not only look at the CEO, but all of the executives at the top,” the board member said. “The most important thing successors are doing is developing the talent below them—building a ‘talent bridge.’ Getting a view down two levels into the organization is critical and desirable.”
4. Avoid the Horse Race
A tricky issue to navigate is how, when, and to what degree the succession plan is communicated to potential successors and the rest of the organization. This is a complicated decision with no clear right or wrong answer.
Informing potential successor candidates that they are being considered and invested in can increase their commitment to the organization and motivation to succeed and ultimately help in retention efforts of people with high potential. Doing so also offers candidates an opportunity to remove themselves from the process. For example, during a recent CEO succession engagement in which Ferguson Partners was involved, a successor candidate removed himself from the process after reading the required responsibilities, skills, abilities, and expectations of the future CEO. This allowed the organization to turn its attention to the identification and development of candidates who were a better fit for the role.
Yet, the reality is that only one candidate will move into an open role. Many of those interviewed caution against turning the succession process into an overly competitive horse race among candidates. This might send the unintended message that the organization encourages in-fighting, leading to a lack of collaboration among members of the executive team.
“What you don’t want is a [domino effect] of people leaving because they didn’t get the job they wanted,” one board member said. “They leave, then somebody has to take their place, then somebody else doesn’t get that job and they leave. . . . It becomes a waterfall.”
Although loss of high-potential employees can never be entirely avoided, it can be planned for and mitigated.
5. Make Succession Come Alive
One CEO described the succession plan as not a one-off, static decision, but rather as a living, breathing document.
“We have an ongoing succession plan that we keep updated for each of the 12 senior positions,” the CEO said. “We’ve come up with the attributes that are necessary for that position and the skill sets needed to do the job successfully. We then track each potential candidate for these critical roles to identify their greatest strengths and weaknesses, and what they need to accomplish from a development perspective to advance into that position.
“Then, [we think through] what changes to the organizational structure would have to take place to support a candidate’s individual weaknesses. This whole process is a living document. It’s about 30 pages long, and I update it quarterly. I have a copy, the chair of the board has a copy, and the head of human resources has a copy.”
Ferguson Partners, and many of the other CEOs and board members interviewed, agree. Each succession plan should continually evolve to meet the needs of the business—now and in the immediate and long-term future—to ensure the sustainability of the organization.
In sum, both the real estate industry CEOs and board members we spoke with are placing a premium on deliberate, comprehensive, and thoughtful succession planning. We certainly agree with their recommendations.
William J. Ferguson is chairman and chief executive officer of Ferguson Partners; Angela Castellani is senior managing director for leadership consulting at the firm; and Camille Lee is vice president for leadership consulting.
The authors would like to thank the following interview participants: William C. Bayless, American Campus Communities; Kenneth F. Bernstein, Acadia Realty Trust; H. Eric Bolton Jr., Mid-America Apartment Communities; Trevor Bond, formerly of W.P. Carey & Company; Richard J. Campo, Camden Property Trust; James L. Donald, formerly of Extended Stay America; Philip L. Hawkins, DCT Industrial Trust; Stephen P. Joyce, Choice Hotels International; David L. Nunes, Rayonier; Dennis D. Oklak, Duke Realty; Thomas M. Ray, formerly of CoreSite Realty; Stephen G. Schmitz, formerly of American Residential Properties; Robert E. Sulentic, CBRE Group; Owen D. Thomas, Boston Properties; and Roger A. Waesche Jr., formerly of Corporate Office Properties Trust.