How Boards Can Set a New CEO

How Boards Can Set a New CEO Up for Success

Few people have more experience with CEO successions than Ram Charan. For more than three decades, Charan has been involved in CEO searches in the United States, China, Japan, India, Brazil, and Europe, as a director, an adviser, or a member of the selection committee. Charan recently shared best practices on CEO selections in an article for HBR, The Secrets of Great CEO Selection. In a telephone interview, edited and condensed below, Charan shared how the succession process doesn’t end the moment a new chief executive is appointed: setting your CEO up for success is as important as finding the right CEO in the first place.

MALTAWAY BOARD GOVERNANCE AND NED

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HBR: You’ve written about how directors must not assume the succession process is complete once the new executive takes over. Can you elaborate?

Charan: In almost all cases, people coming into the CEO job have not ever had the CEO experience. For most, it is a quantum leap to go from a division or function to being the CEO of an entire company. Therefore, to set a new CEO up for success, the first thing they will need is context on the big picture, perhaps with the exception of CEOs who have already been on the board, or somebody who has been a CEO of a similar, but smaller, company — these people already understand the landscape.

But for those who are coming from a divisional function, the content of the job has changed overnight. And that content needs a very wide cognitive bandwidth, because a large part of the job is dealing with externals and outside scrutiny — this is often the first time a CEO deals in a very real way with shareholders, with the board, with being a corporate representative for customers, for the government, and for international governments. The complexity of the job and the coordination activities are exponentially different. The time demands are huge. CEOs must figure out which way to take the business, which critical issues to focus on, and how to get commitment from both inside and outside the company.

People spend their entire careers preparing for this job, but until you are in the saddle, you really don’t know how well prepared you are for the task at hand.

How can new CEOs get the support they need to make this quantum leap?

CEOs need to become much more aware of what assistance, coaching, problem-solving skills, additional networks, and wisdom are necessary to move forward. Most CEOs are intelligent people with a good track record. They’re keen and ambitious. So, have some faith in them. It’s not a good idea for the board to be imposing about who should be a mentor, a consigliere, or a coach. Let the new CEO decide what he or she needs — their effectiveness will be heavily dependent on the people they surround themselves with. I have enough evidence — over 50 years’ worth — that this approach works.

You’ve written about how it’s important to accept that every CEO pick will have weaknesses, and that ensuring a CEO’s success requires acknowledging that you have to plan for their imperfections. What are some of the things boards can do to account for some of those weaknesses upfront?

There is no such thing as a perfect person. But ask yourself: What are the real skills and talents of this person, and how does this fit with the job requirements at the moment?  Then, ask what’s preventing this person from succeeding. Once you know the answer to that, there are a number of ways to work at the problem. The most effective way is to have one of the CEO’s direct reports compensate for areas of weakness. Keep in mind that this person has to be a very trusted person, whose ambition is not to create instability for the CEO.

A second option is to find a board director who is sincere, who has the right expertise, whose ego is contained, and who knows he’s not running the company, who can become a sounding board. And sometimes, you need to find a trustworthy third party who can be an unbiased sounding board.

What happens when a board begins to worry that they’ve made a mistake in hiring a CEO? How much of a grace period should a new CEO get?

 This is a major issue. And there are really two issues at play here. First, a mistake was made. Second, a change has to be made. And the board has to deal with both.

Let’s start with the mistake that’s been made. In most boards, there are usually one or two directors who are first able to detect that a mistake has been made. But they proceed cautiously and don’t talk about it in the board room until more evidence emerges. Instead, they watch for signals that the CEO’s presentations about performance don’t align with actual performance numbers. Then, they watch for the CEO to signal to the media about low performance metrics. Here, the board chairman has a huge responsibility to be a liaison to the CEO, to build a trustworthy relationship, and see how the board can help. In doing so, of course, they can find out if maybe the CEO is just not a good fit. And once this idea begins to roll in the minds of one or two directors, others will begin to see it. Most of the time, a board will want to give clearer goals to the CEO about what is expected, and wait one more years to see results, during which they begin to come to conclusions about whether to extend the contract or to let the CEO go. It takes most boards about two years to cut their losses.

Should someone on the board be raising issues with CEOs more quickly, and more directly?

Every business is complex. Boards of directors, in most cases, meet four to six times a year. They’re often not full-time directors. Many lead directors are external chairmen, and are not quite investing the time that they’re supposed to invest.  Most directors don’t know the business that well. So it takes some time to make major decisions like whether or not to let a CEO go. But the board is ultimately accountable for and responsible for these decisions.

https://hbr.org/2016/11/how-boards-can-set-a-new-ceo-up-for-success

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