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CEO Succession: The Psychological Barriers

CEO Succession: The Psychological Barriers. April 11, 2008. Randall S. Cheloha, Ph.D. Presented at: Society for Industrial/Organizational Psychology San Francisco, CA. Overview. Context Psychological barriers to CEO succession (and succession planning in general)

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CEO Succession: The Psychological Barriers

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  1. CEO Succession:The Psychological Barriers April 11, 2008 Randall S. Cheloha, Ph.D. Presented at: Society for Industrial/Organizational Psychology San Francisco, CA

  2. Overview • 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

  3. ContextWhat’s Keeping Board Directors Awake at Night… CEOs are leaving or being forced out • just over seven years in 20062 • 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 • CEO tenure for 2007 has declined slightly to 6.4 years from500 companies, 11% had CEO turnover in the last 12 months3 1Weber Shandwick CEO Departures Study (November, 2007) 2 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

  4. Current Trends in CEO Succession Planning • 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 • 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 • In a survey of over 1,000 directors, approximately 47% of respondents reported that they were not satisfied with their company’s succession plan3 • Less than two-thirds of the directors (63%) responded favorably when asked to rate their boards’ effectiveness in planning for CEO succession4 1NACD Public Company Governance Survey (2007) 2 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)

  5. Current Trends in CEO Succession Planning (cont’d) • 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 )

  6. Issues and Challenges for Boards • 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

  7. 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?

  8. Psychological Barriers to Succession Planning

  9. Barrier 1: Organizations are more Tactical than Strategic by Nature • 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., • ‘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)

  10. Barrier 2:The Organization’s DNA does not Support Succession Planning • 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

  11. Barrier 3: Board of Director Inertia • If it’s not broke, don’t fix it • We lack experience with CEO succession and developing senior-level 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!

  12. Barrier 4: The Denial of Death • 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., • 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.

  13. Practical Action Steps: Before • 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 re-focused 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?

  14. 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?

  15. Practical Action Steps: During • 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

  16. Questions/Discussion/Suggestions

  17. Cheloha Consulting Group Randall S. Cheloha, Ph.D. 610-896-9494 www.chelohaconsulting.com

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