Transcript Title goes here Subhead 32pt Arial

CEO Succession:
The Psychological Barriers
April 11, 2008
Randall S. Cheloha, Ph.D.
Presented at: Society for Industrial/Organizational Psychology
San Francisco, CA
Overview
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Context
Psychological barriers to CEO succession (and succession
planning in general)
 Organizations are tactical not strategic in orientation
 Organization DNA does not support succession
planning
 Board inertia
 Denial of death: succession and symbolism
Context
What’s Keeping Board Directors Awake at Night…
CEOs are leaving or being forced out
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just over seven years in 20062
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Of the Fortune Over 10 percent of the world’s
largest companies lost their CEOs in the first three
quarters of 2007. This departure rate amounts to a
CEO departure among the world’s largest-revenue
producing companies nearly every 5 days.1
CEO tenure continues to shorten
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CEO tenure for 2007 has declined slightly to 6.4
years from 500 companies, 11% had CEO turnover
in the last 12 months3
1
Weber Shandwick CEO Departures Study (November, 2007)
Data from Challenger, Gray & Christmas, cited by Kirdahy, M., Forbes (July 17, 2007)
3 www.forbes.com, 2007Fortune 500 list sorted by CEO with one year or less in tenure
2
Current Trends in CEO Succession Planning
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Boards indicate that succession planning is
among their top 3 leading issues, yet
nearly half (47%) indicated they were
ineffective in dealing with this issue1
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According to a survey of HR directors at
large US companies, 60% of the 1,380
respondents reported that their companies had no CEO succession plans in
place2
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In a survey of over 1,000 directors, approximately 47% of respondents
reported that they were not satisfied with their company’s succession plan3
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Less than two-thirds of the directors (63%) responded favorably when asked
to rate their boards’ effectiveness in planning for CEO succession4
1
NACD Public Company Governance Survey (2007)
Bower, J. Harvard Business Review (November, 2007)
3 The Corporate Board, citied in Journal of Business Strategy, Vol. 28 No 1 (2007)
4 Heidrick & Struggles, Board Effectiveness Study, 2006-2007)
2
Current Trends in CEO Succession Planning
(cont’d)
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Nearly 47% of companies in a 2007 sample study identified a big
mistake in planning CEO succession—they failed to include
their entire boards in the process
Approximately 43% of boards deal with CEO succession only
when they have to, rather than planning ahead
“Succession planning is often done looking at
the rear-view mirror when it should be done
looking out the front windshield.”
(Stephen Miles, Managing Partner, Heidrick & Struggles‘)
Source: Data provided by Thomson Financial Datastream in Corporate Board Member (January/February 2008 )
Issues and Challenges for Boards
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Boards are under growing pressure to execute their CEO
succession role effectively to ensure that their companies have a
solid plan in place to secure the best leadership for the future
Boards have difficulty identifying talent gaps and determining
long-term talent requirements in relation to strategy; and they’re
not close to the action
Companies find it difficult to maintain a viable pool of internal
candidates
Companies need leaders with strengths and talents that are
different from those of their previous CEO1
If the Board must turn to outsiders, external candidates need to
be at least one-and-a-half times better than internals to take on
the transition risk2
1, 2
Hymowitz, C., Wall Street Journal, November, 26, 2007
When organizations know what to do and how to do it,
but FAIL to take action,
something must be getting in the way.
What is it?
Psychological Barriers to Succession
Planning
Barrier 1: Organizations are more Tactical than
Strategic by Nature
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Concrete, hands-on, applied, bottom-line, P&L, fighting fires,
reactive, ‘daily numbers’, day-to-day; let’s focus on the immediate
It’s HARD to make decisions about potential; it’s difficult in
general to make people decisions that affect careers; it requires
discipline, focus, and data
Companies emphasize financial and strategic focus rather than
“skating to where the puck is going to be”
There is punishment for immediate failure, not for
procrastination
Human nature is about maximizing what we have NOW, not
investing in the future, e.g.,
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‘The smell brain’ (Koestler, A. The Ghost in the Machine, 1967)
‘The lizard brain’ (Clements, J., WSJ, October 25, 2006)
How hardwired is human behavior? (Nicholson, N., HBR, 1998)
Barrier 2: The Organization’s DNA does not Support
Succession Planning
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Everybody wants to be GE, but GE has +40 years of creating
and sustaining a culture that focuses on hiring the best, talent
development, continuous performance review, and challenging
people to see if they can make it to the next level, e.g., Jack
Welch, “More than 50% of my time is spent on talent.”
That’s why GE always has 4-5 CEO-potential candidates at any
one time. When a succession decision is made, the ‘pool’ moves
on to become CEO for another company. Same for other strong
‘development’ organizations: US Army, J&J, Walgreens, Bank of
America, Enterprise Rental, McKinsey, etc.
Lack of senior management support and encouragement
The job is delegated to HR rather than Line
Succession planning is really replacement planning
Barrier 3: Board of Director Inertia
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If it’s not broke, don’t fix it
We lack experience with CEO succession and developing seniorlevel talent
If the CEO IS working out, let’s not get too involved or overly
concerned…
If the CEO is NOT working out, we’ve got a crisis; Do we go
to the outside?…And when do we go to the outside?
If the status quo is acceptable (read: company stock continues to
grow; favorable press; analysts are positive) we lavish perks,
increase compensation, and praise our CEO
Why talk to the CEO about succession? You might scare
him/her off or threaten them!
Barrier 4: The Denial of Death
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Middle age and the denial of death1
Power of the CEO (and other senior managers) to set/control the agenda
Planning for your own succession makes you anxious, very, very anxious…
(whether conscious or unconscious)
The transition of “handing over the reins’ results in conflicts around power
and authority at the top leading to senior casualties, palace coups, and churn
It is difficult to make ‘life and death’ decisions about a person’s potential,
readiness for promotion, and career path; so let’s avoid it…This is why
outside agents and data are useful
How do action-oriented and driven executives deal with anxiety? With
psychological defense mechanisms, e.g.,
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Denial
Manic activity
Procrastinate
Rationalization
Depression (do nothing)
Repression/aggression
Source: Jaques, E. Death and the Mid-Life Crisis, International Journal of Psychoanalysis, 1965,
46, 502-514.
Practical Action Steps: Before
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It’s not for lack of knowing what to do! The literature has been
clear about the need and “how to’s” of succession planning since
the early 80’s.
Does your organization have the DNA/culture to support and
sustain succession planning?
What’s the business case for developing a talent pipeline? Should
valuable selection, training, and development dollars be refocused further up-stream?
Do people in their 30’s and early 40’s get responsibility?
Recognition? Performance-based compensation? Development?
How much does the Line respect HR? How much power does
HR have?
What’s your model for the future? What does it look like?
When organizations know what to do and how to
do it,
but FAIL to take action,
Something must be getting in the way.
What is it?
Practical Action Steps: During
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Make it as simple and uncomplicated a process as possible
(paper-free?)
Determine your high-po’s early, engage them, and keep them
Re-focus training/development dollars for earlier in the
manager’s career
“Test” your people earlier in their careers; can they handle the
stress/pressure/responsibility of delivery?
Re-organize the company so there are smaller SBU’s with P&L’s
that serve as training and testing grounds (e.g., J&J, GE, Pepsi)
Hire consultants to hand-hold, coax, and coach (and deal with
the rational and irrational discomfort, fear, and anxiety)
The Board’s 1st discussion with the new CEO should be about
planning for his/her succession. There’s no time like the present.
The Board should become engaged further down in the
organization reviewing talent and high potentials
Questions/Discussion/Suggestions
Cheloha Consulting Group
Randall S. Cheloha, Ph.D.
610-896-9494
www.chelohaconsulting.com