Despite their best intentions, executives fall prey to cognitive and organizational biases that get in the way of good decision making. In this series, we highlight some of them and offer a few effective ways to address them.
Our topic this time?
Next in line? A structured approach to succession planning
The dilemma
When the founder CEO at one midsize oil and gas company originally announced his retirement, operations were solid, health and safety metrics were good, and the business was profitable. More recently, there were signs of decline in all those areas, and at least one of the newer members of the board viewed the CEO’s retirement as an opportunity to right the ship. A formal CEO search could bring fresh ideas and leadership into the organization just when it needed them the most, she thought.
But the CEO had already chosen his successor: a senior executive whose career path and leadership style mirrored those of the outgoing CEO. The board didn’t see the point in engaging in a long, drawn-out process when there was a viable, hand-picked internal candidate in the picture. Instead, directors voted unanimously to confirm the retiring CEO’s pick to lead the company.
Nine months later, amid cratering investor confidence, the board reconvened—this time to vote the new CEO out.
The research
One of a board’s most important tasks is to ensure the successful transition of power from one CEO to the next. Yet McKinsey analysis has shown that between 27 and 46 percent of executive transitions are viewed as failures or disappointments after two years.
To succeed with succession planning, boards must recognize and address their—and potentially, the outgoing CEO’s—tendencies toward similarity bias. This occurs when individuals are inclined to evaluate more favorably or behave in a more positive manner toward people they perceive as sharing their own identities or other characteristics. Research has shown, for instance, that venture capitalists are more likely to evaluate an investment opportunity favorably if they believe the founding entrepreneur thinks in a way similar to their own.
The departing oil and gas CEO wanted to replace himself with someone who had similar priorities and philosophies, even if they weren’t what the company needed right then or might need in the future. Meanwhile the board of directors reflexively deferred to the founder CEO’s vision of what was required for success in the CEO role. They were exhibiting the representativeness heuristic rather than seizing an opportunity for organizational renewal.
In the end, the oil and gas company managed to stabilize its performance, but only after installing an interim CEO to manage the company through a full CEO search and transition process—an incredibly disruptive and expensive course correction.
The remedy
A good old-fashioned task force, established by the board long before any executive departures are announced or even considered, can help depersonalize the succession-planning process. In this way, companies and boards can ensure that they’re getting or building the leadership talent that they need to keep up with their industry.
In the case of the oil and gas company, forward-thinking board directors could have invited the CEO to join with other C-suite, business unit, and HR leaders to form a succession-planning committee. The committee members could have met regularly to review the CEO’s criteria for the ideal successor and mapped them against others’ criteria for identifying and selecting the most appropriate candidates (internal and external). They could have provided regular succession-planning updates to the full board. The CEO would still have had significant input in the process, but there would have been room for others, like the newly joined board member, to consider who might be the best leader for the organization given current and future business needs—and to suggest their own candidates.
The task force could also have suggested possible development opportunities for likely internal candidates—job rotations, stretch assignments, and mentoring, for instance. All of this would have been less costly and less time consuming than simply going with the comfortable candidate.
Rather than fear the inevitable CEO departures and having to start from scratch, companies and boards should be thinking about the next CEO as soon as the current one is hired.
