CEO Succession:CEO Succession:The Psychological BarriersThe Psychological Barriers

April 11, 2008April 11, 2008 Randall S. Cheloha, Ph.D.

Presented at: Society for Industrial/Organizational Psychology

San Francisco, CA

ContextContext Psychological barriers to CEO succession Psychological barriers to CEO succession

(and succession planning in general)(and succession planning in general) Organizations are tactical not strategic in Organizations are tactical not strategic in

orientationorientation Organization DNA does not support Organization DNA does not support

succession planningsuccession planning Board inertiaBoard inertia Denial of death: succession and symbolismDenial of death: succession and symbolism

OverviewOverview

ContextContextWhat’s Keeping Board Directors Awake at What’s Keeping Board Directors Awake at

Night…Night…CEOs are leaving or being forced outCEOs are leaving or being forced out

just over seven years in 2006just over seven years in 200622

Of the Fortune Over 10 percent of the Of the Fortune Over 10 percent of the world’s largest companies lost their CEOs world’s largest companies lost their CEOs in the first three quarters of 2007. This in the first three quarters of 2007. This departure rate amounts to a CEO departure rate amounts to a CEO departure among the world’s largest-departure among the world’s largest-revenue producing companies nearly every revenue producing companies nearly every 5 days.5 days.11

CEO tenure continues to shortenCEO tenure continues to shorten

CEO tenure for 2007 has declined slightly CEO tenure for 2007 has declined slightly

to 6.4 years fromto 6.4 years from 500 companies, 11% had 500 companies, 11% had CEO turnover in the last 12 monthsCEO turnover in the last 12 months33 1 Weber 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

Current Trends in CEO Succession Current Trends in CEO Succession PlanningPlanning

Boards indicate that succession planning is Boards indicate that succession planning is among their top 3 leading issues,among their top 3 leading issues, yet yet nearly half (47%) indicated they were nearly half (47%) indicated they were ineffective in dealing with this issueineffective in dealing with this issue11

According to a survey of HR directors at According to a survey of HR directors at large US companies, large US companies, 60%60% of the 1,380 of the 1,380 respondents reported that their companies had respondents reported that their companies had no CEO no CEO succession plans in placesuccession plans in place22

In a survey of over 1,000 directors, approximately 47% of In a survey of over 1,000 directors, approximately 47% of respondents reported that they were not satisfied with respondents reported that they were not satisfied with their company’s succession plantheir company’s succession plan33

Less than two-thirds of the directors (63%) responded Less than two-thirds of the directors (63%) responded favorably when asked to rate their boards’ effectiveness in favorably when asked to rate their boards’ effectiveness in planning for CEO successionplanning for CEO succession44

1 NACD 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)

Current Trends in CEO Succession Current Trends in CEO Succession Planning (cont’d)Planning (cont’d)

Nearly 47% of companies in a 2007 sample study Nearly 47% of companies in a 2007 sample study identified a big mistake in planning CEO identified a big mistake in planning CEO succession—they failed to include their entire succession—they failed to include their entire boards in the processboards in the process

Approximately 43% of boards deal with CEO Approximately 43% of boards deal with CEO succession only when they have to, rather than succession only when they have to, rather than planning aheadplanning ahead

Source: Data provided by Thomson Financial Datastream in Corporate Board Member (January/February 2008 )

“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‘)

Issues and Challenges for BoardsIssues and Challenges for Boards

Boards are under growing pressure to execute their Boards are under growing pressure to execute their CEO succession role effectively to ensure that their CEO succession role effectively to ensure that their companies have a solid plan in place to secure the companies have a solid plan in place to secure the best leadership for the futurebest leadership for the future

Boards have difficulty identifying talent gaps and Boards have difficulty identifying talent gaps and determining long-term talent requirements in relation determining long-term talent requirements in relation to strategy; and they’re not close to the actionto strategy; and they’re not close to the action

Companies find it difficult to maintain a viable pool of Companies find it difficult to maintain a viable pool of internal candidatesinternal candidates

Companies need leaders with strengths and talents Companies need leaders with strengths and talents that are different from those of their previous CEOthat are different from those of their previous CEO11

If the Board must turn to outsiders, external If the Board must turn to outsiders, external candidates need to be at least one-and-a-half times candidates need to be at least one-and-a-half times better than internals to take on the transition riskbetter than internals to take on the transition risk22

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 Barrier 1: Organizations are more

Tactical than Strategic by NatureTactical than Strategic by Nature Concrete, hands-on, applied, bottom-line, P&L, fighting Concrete, hands-on, applied, bottom-line, P&L, fighting

fires, reactive, ‘daily numbers’, day-to-day; let’s focus fires, reactive, ‘daily numbers’, day-to-day; let’s focus on the immediateon the immediate

It’s HARD to make decisions about potential; it’s It’s HARD to make decisions about potential; it’s difficult in general to make people decisions that affect difficult in general to make people decisions that affect careers; it requires discipline, focus, and datacareers; it requires discipline, focus, and data

Companies emphasize financial and strategic focus Companies emphasize financial and strategic focus rather than “skating to where the puck is going to be” rather than “skating to where the puck is going to be”

There is punishment for immediate failure, There is punishment for immediate failure, not not for for procrastinationprocrastination

Human nature is about maximizing what we have NOW, Human nature is about maximizing what we have NOW, not not investing in the future, e.g., investing in the future, e.g., ‘‘The smell brain’ (Koestler, A. The smell brain’ (Koestler, A. The Ghost in the Machine,The Ghost in the Machine, 1967) 1967) ‘‘The lizard brain’ (Clements, J., The lizard brain’ (Clements, J., WSJWSJ, October 25, 2006), October 25, 2006) How hardwired is human behavior? (Nicholson, N., How hardwired is human behavior? (Nicholson, N., HBR,HBR, 1998) 1998)

Barrier 2Barrier 2:: The Organization’s DNA does The Organization’s DNA does not Support Succession Planningnot Support Succession Planning

Everybody wants to be GE, but GE has +40 years of Everybody wants to be GE, but GE has +40 years of creating and sustaining a culture that focuses on hiring creating and sustaining a culture that focuses on hiring the best, talent development, continuous performance the best, talent development, continuous performance review, and challenging people to see if they can make it review, and challenging people to see if they can make it to the next level, e.g., Jack Welch, “More than 50% of to the next level, e.g., Jack Welch, “More than 50% of my time is spent on talent.” my time is spent on talent.”

That’s why GE always has 4-5 CEO-potential candidates That’s why GE always has 4-5 CEO-potential candidates at any one time. When a succession decision is made, at any one time. When a succession decision is made, the ‘pool’ moves on to become CEO for another the ‘pool’ moves on to become CEO for another company. Same for other strong ‘development’ company. Same for other strong ‘development’ organizations: US Army, J&J, Walgreens, Bank of organizations: US Army, J&J, Walgreens, Bank of America, Enterprise Rental, McKinsey, etc. America, Enterprise Rental, McKinsey, etc.

Lack of senior management support and encouragementLack of senior management support and encouragement The job is delegated to HR rather than LineThe job is delegated to HR rather than Line Succession planning is really replacement planningSuccession planning is really replacement planning

Barrier 3: Board of Director InertiaBarrier 3: Board of Director Inertia

If it’s not broke, don’t fix itIf it’s not broke, don’t fix it We lack experience with CEO succession and We lack experience with CEO succession and

developing senior-level talentdeveloping senior-level talent If the CEO If the CEO ISIS working out, let’s not get too involved working out, let’s not get too involved

or overly concerned…or overly concerned… If the CEO is If the CEO is NOTNOT working out, we’ve got a crisis; Do working out, we’ve got a crisis; Do

we go to the outside?…And when do we go to the we go to the outside?…And when do we go to the outside?outside?

If the status quo is acceptable (read: company stock If the status quo is acceptable (read: company stock continues to grow; favorable press; analysts are continues to grow; favorable press; analysts are positive) we lavish perks, increase compensation, and positive) we lavish perks, increase compensation, and praise our CEOpraise our CEO

Why talk to the CEO about succession? You might Why talk to the CEO about succession? You might scare him/her off or threaten them!scare him/her off or threaten them!

Barrier 4: The Denial of DeathBarrier 4: The Denial of Death

Middle age and the denial of deathMiddle age and the denial of death11 Power of the CEO (and other senior managers) to set/control the agendaPower of the CEO (and other senior managers) to set/control the agenda Planning for your own succession makes you anxious, very, very Planning for your own succession makes you anxious, very, very

anxious… (whether conscious or unconscious)anxious… (whether conscious or unconscious) The transition of “handing over the reins’ results in conflicts around The transition of “handing over the reins’ results in conflicts around

power and authority at the top leading to senior casualties, palace power and authority at the top leading to senior casualties, palace coups, and churncoups, and churn

It is difficult to make ‘life and death’ decisions about a person’s 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…potential, readiness for promotion, and career path; so let’s avoid it…This is why outside agents and data are usefulThis is why outside agents and data are useful

How do action-oriented and driven executives deal with anxiety? With How do action-oriented and driven executives deal with anxiety? With psychological defense mechanisms, e.g., psychological defense mechanisms, e.g., DenialDenial Manic activityManic activity ProcrastinateProcrastinate RationalizationRationalization Depression (do nothing)Depression (do nothing) Repression/aggressionRepression/aggression

Source: Jaques, E. Death and the Mid-Life Crisis, Source: Jaques, E. Death and the Mid-Life Crisis, International Journal of International Journal of PsychoanalysisPsychoanalysis, 1965, , 1965, 46,46, 502-514. 502-514.

Practical Action Steps: BeforePractical Action Steps: Before

It’s not for lack of knowing what to do! The literature It’s not for lack of knowing what to do! The literature has been clear about the need and “how to’s” of has been clear about the need and “how to’s” of succession planning since the early 80’s. succession planning since the early 80’s.

Does your organization have the DNA/culture to Does your organization have the DNA/culture to support and sustain succession planning?support and sustain succession planning?

What’s the business case for developing a talent What’s the business case for developing a talent pipeline? Should valuable selection, training, and pipeline? Should valuable selection, training, and development dollars be re-focused further up-stream?development dollars be re-focused further up-stream?

Do people in their 30’s and early 40’s get Do people in their 30’s and early 40’s get responsibility? Recognition? Performance-based responsibility? Recognition? Performance-based compensation? Development?compensation? Development?

How much does the Line respect HR? How much How much does the Line respect HR? How much power does HR have?power does HR have?

What’s your model for the future? What does it look What’s your model for the future? What does it look like? 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: DuringPractical Action Steps: During

Make it as simple and uncomplicated a process as possible Make it as simple and uncomplicated a process as possible (paper-free?)(paper-free?)

Determine your high-po’s early, engage them, and keep themDetermine your high-po’s early, engage them, and keep them Re-focus training/development dollars for earlier in the Re-focus training/development dollars for earlier in the

manager’s careermanager’s career ““Test” your people earlier in their careers; can they handle Test” your people earlier in their careers; can they handle

the stress/pressure/responsibility of delivery?the stress/pressure/responsibility of delivery? Re-organize the company so there are smaller SBU’s with 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, P&L’s that serve as training and testing grounds (e.g., J&J, GE, Pepsi)GE, Pepsi)

Hire consultants to hand-hold, coax, and coach (and deal Hire consultants to hand-hold, coax, and coach (and deal with the rational and irrational discomfort, fear, and anxiety)with the rational and irrational discomfort, fear, and anxiety)

The Board’s 1The Board’s 1stst discussion with the new CEO should be about discussion with the new CEO should be about planning for his/her succession. There’s no time like the planning for his/her succession. There’s no time like the present.present.

The Board should become engaged further down in the The Board should become engaged further down in the organization reviewing talent and high potentialsorganization reviewing talent and high potentials

Questions/Discussion/SuggestionsQuestions/Discussion/Suggestions

Cheloha Consulting Group

Randall S. Cheloha, Ph.D.

610-896-9494

www.chelohaconsulting.com