New employees regularly go through the process of onboarding. This formal process is vital to their success and is a task that companies focus on completing well. However, hiring and integrating a new CEO into an organization is an often ambiguous process fraught with potential problems. Assumptions on the part of a new CEO or the Board can easily undermine the process.
There is no right way to transition from one CEO to the next. Every company, CEO, and situation is unique. Unfortunately, most companies do not have a transition plan and those that do often discontinue it prematurely. The formal announcement that the title of CEO has transferred from one person to another does not signal the end of the switch. The finish line is achieved when the new CEO has won the respect and loyalty of the Board and other key organizational leaders.
Table of Contents
What is CEO transition?
CEO succession is often viewed as the process of replacing one CEO with a successor chosen internally or recruited from outside the organization. However, thinking about the process as two distinct steps may be more accurate. The first step is recruitment, encompassing evaluating both internal and external candidates for the position.
Executive recruiting companies can assist in identifying and vetting candidates that are a good fit for your organization. Recruiting the best candidate can be a lengthy process, lasting months and consisting of both formal and informal interactions. When the recruiting phase ends, you make your offer, and the candidate accepts, the recruitment phase ends, but CEO succession is far from over.
The following months spent integrating your CEO into the leadership and operations of your organization is the CEO transition. This period is more challenging. The transition requires the new CEO to understand existing opinions, emotions, habits, and egos and learn how to mesh those with her own.
According to the Corporate Executive Board, 50-70% of executives fail during their first 18 months in a new role regardless of whether they were promoted internally or an external hire. This high failure rate costs companies millions in time and money devoted to recruitment. Additionally, a significant percentage of investors make their decisions based on the leadership of a company. A failed CEO can be a red flag costing the organization investment capital. Stock prices can also suffer when the leadership appears unstable.
Getting it Right
Companies hoping to transition from one CEO to another successfully take deliberate steps to ensure they have the necessary knowledge and build key relationships to carry them through more than just the first few months.
How you plan to carry out your CEO transition can depend greatly on the underlying reasons behind the change. In the case of a CEO forced out by the Board for poor performance, the transition period may begin abruptly, and the new leader may need to hit the ground running. However, if the outgoing CEO plans to retire, there is an opportunity to leverage their skills, knowledge, and connections for a smoother change.
Developing a plan to transfer their intimate knowledge of the company and its culture to the new CEO is vital. Communicating this plan to the board, as well as top managers, can help to avoid confusion, provide stability, and keep operations moving forward during a potentially unsettling period.
Successful CEOs have a relationship with and understanding of the individual directors on the board. Developing these relationships requires an investment of time. Meeting one-on-one with each on multiple occasions allows a new executive to identify and gain an appreciation for the talents and abilities of each and the way they do business. Misunderstandings and personal conflicts can be avoided if personalities and opinions are voiced upfront rather than challenging them in public.
Every executive has a different leadership style. While some companies recruit a new CEO to be an instrument of change, change is inevitable in CEO transition. To operate effectively and implement new programs and initiatives, a new CEO needs a firm grasp of the company culture in which they are operating. What are the unspoken rules and traditions? How are things done? How resistant are employees to change? An outgoing CEO can offer a wealth of knowledge regarding who the key influencers in the organization are and what ideas should not be challenged.
Is an Executive Chairman Beneficial?
An analysis performed by Russell Reynolds of Fortune 250 companies found that 84% of executives acting as both CEO and Chairman retained the latter title after the company hired another CEO. While most executive Chairmen act in that capacity for less than a year, the benefits of retaining an outgoing CEO for a period of time are significant.
Because of their experience as the acting CEO, an executive Chairman is in a unique position to advise the incoming CEO. They can help transition responsibilities and relationships from themselves to the new executive. They also provide a sense of continuity to the board and employees, who may be concerned about changes coming on the heels of a CEO transition.
In some cases, the drawbacks may be greater than the benefits. In family-owned businesses or those where the outgoing CEO is the founder, the outgoing CEO may struggle to hand over the reins to their successor. Their actions and opinions may undermine efforts to make necessary changes. Employees may also continue to view them as the true head of the company, limiting the authority of the new CEO.
The duties and responsibilities of an executive Chairman should be defined and limited in scope and duration. Limitations provide a path to leadership for the new CEO and eliminate ambiguity around task and relationship ownership. There is less probability of a ball getting dropped because ownership of the task was unclear.
Transitioning ownership and leadership to a new CEO presents challenges for companies nationwide. Those who successfully navigate this change do so deliberately and methodically, transferring knowledge, information, and tools that help their new leader successfully lead the company.