One of the major headaches for the board of directors has always been putting a succession plan for the successful running of the enterprise it serves. Ensuring leadership stability by replacing an existing CEO with a capable successor is always on top of the agenda every few years.
Let’s just say the time has come to consider leadership change in the company. Perhaps it is part of a planned succession. Or, maybe the CEO is retiring, or he or she just surprised the board with a new “opportunity” (or maybe the incumbent CEO “just didn’t work out”). Let us assume that the choice of a new chief is not a done deal and that the board wants to do a proper job of the succession. That means designating a board “CEO search committee.” How good are boards in doing CEO search? Remember there have been many failed attempts even by blue chip boards. Have you forgotten Tata Sons, Infosys, and many others?
Here’s how boards can make better outcomes from CEO search committees.
For starters, designating a distinct committee of the board to manage chief executive search offers many advantages over an ad hoc or full board approach. It shows good governance – you are telling investors and employees that sound CEO succession is a board priority and that it will be handled properly. Membership can be handpicked to assure board members with time, expertise, and independence for the task. And the board can write a charter for the committee that spells out timelines, priorities, and role of the committee versus the full board (and you can set a discrete budget line item for its needs). Keep committee size compact – 3 or 4 members. A big search committee proves both political and unwieldy.
Evaluate if it is good to add the CEO succession agenda into the portfolio of an existing committee. It has its own advantages. Since the tasks and needs of the committee will overlap with executive pay setting, the compensation committee is often designated to handle CEO search. The membership will already be independent, and likely include some skills in HR and talent search. The comp committee chair is a natural for chairing the search committee, even if you have formed a separate group.
With either of the approaches, membership should be finetuned for the role at hand. The independent chair or lead director should also be a member, as should the chair of your governance or nominating committee. Many board members ask us this question: Should the incumbent CEO be a part too? We don’t think it is a good idea. The outgoing chief will have too powerful of a say, and suck all the air out of deliberation.
All this fussing over CEO search committee membership is vital because this core group is doing far more than coming up with a name. It is crucial for the committee to get a strategic focus on what success factors they should have without compromise. What strengths and weaknesses did recent CEO evaluations reveal? What new changes in the company’s strategic plan will push you to “lead the target” in identifying tomorrow’s ideal CEO? How will your top succession plans fit in with the rest of your executive talent development structures?
Since even the best CEO committee cannot do the legwork all by itself, it sets the plan and parameters and then engages specialists for the actual headhunting and vetting. Usually, this will be an outside search firm, and the search professionals we spoke to advise consulting them early in the process. Even if the committee has candidates in mind, the search pros will know what questions to ask, how to dig for a deep reference check, and what real-world, current pay and benefits packages look like.
Typically, there is never “enough” time for the CEO search, but a rushed project often leads to eventual regrets. If the current CEO announces a planned retirement, a year to 18 months is ideal to form a committee, set parameters, and strategy, work with a search firm, interview candidates, and bring a final recommendation to the full board. In a pinch, the process can be done in 6 months, but that’s far from ideal. The COVID-19 lockdown has made virtual interviewing of candidates the norm, but in some ways has actually fast-tracked the process. Now, 90 percent of CEO candidates are either internal or known to the board.
Finally, ensure that the committee members will have time to devote to the work involved – it is more time and labor-intensive than you think. Also, fill the committee with directors who will be around for a few years – definitely not someone who is soon to retire from the board. You want members with more skin in the game, who will actually have to work with the CEO they select, and not merely sticking to the assigned duty.