Despite the increasing number of external CEO appointments in recent years, 60-70 percent of CEOs are still appointed from within an organization. Yet, one undeniable challenge is that many companies do not have a strong bench of internal candidates. As a result, the board of directors may be ill positioned to identify the candidate that best fits the strategic situation of the company and the required mandate, and therefore appointments are left to luck, which can become the reason why many such appointments end in failure. Without a rooster of both internal and external candidates, boards cannot benchmark candidates as thoroughly, and the risk of hiring a poorly fitting candidate therefore increases substantially.
These findings show how the development of internal candidates is a quintessential task for an organization, and it is an area where HR in particular can play a crucial role. However, confidentiality and internal political issues can make creating a strong bench of candidates challenging. And therefore identifying strong internal candidates to be prepared for a broad range of strategic situations and mandates is often very complex and often fails.
To be able to carry out such a critical and complex exercise, a systematic succession management approach is required, and the CHRO needs to acquire a stronger position in the organization. Developing a strong succession pipeline that can produce CEO candidates for different situations and mandates requires that the HR function is seen as a peer to the CEO, and the CHRO needs to become a true partner for the stakeholders involved in the succession process. Without the CHRO and its function having such a high standing, the entire process of identification and development of candidates for future CEO succession will be jeopardized.
Succession management – Creating and developing a bench of candidates
Succession management is much more than creating a plan of who can step-in if the CEO leaves unexpectedly or retires in the foreseeable future. Modern succession management is an integrated process run by the board of directors and supported by the CEO, HR and the management at large. It identifies leadership talent throughout the organization at different career stages and systematically develops this talent to create internal candidates that can eventually step into the CEO role, depending upon the situation the company faces and the mandate the board defines for the next CEO.
Defining the needed skills and capabilities
CEO succession management starts out from identifying and regularly updating the skills and capabilities needed for a CEO in the organization. CEO skills and capabilities include generic leadership skills but there are also firm and industry specific skills and capabilities that change over time. This task is further complicated because the mandates of a CEO can vary substantially from continuing along a well-trodden strategic path, which focuses on implementation over evolving the strategy, to full-blown organizational transformation or turnaround under financial duress. Such differing mandates require candidates with very different skills and capabilities. In companies such as Shell, ABB, or Siemens, this process is carried out regularly by the board supported by the CHRO to be then integrated into the talent development activities run by the HR function.
Identifying leadership talent early
Developing the skills needed to run a company requires systematic long-term talent development that may run for the better part of a decade or even longer. Therefore, the HR function plays an important role by working with the various senior leaders to identify leadership talent at different career stages, map their skills and capabilities and design career paths that foster the needed skill development. Also in external mid-career recruitment, when recruiting for important senior leadership positions, the possible fit with the succession requirements should be an important hiring criterion.
Developing talent systematically
To develop future CEO candidates, talented leaders should be rotated through assignments and career steps that allow them to develop the skills needed for leading the organization and responding to different strategic situations. Candidates should also get to know the key parts of the business to develop a broad understanding of all the businesses the company operates in and create relational assets throughout the organization.
Leadership talent should be exposed to top management and the board to gauge their potential and provide the board with early visibility of internal candidates. For instance, companies like ABB, Hilti, or Shell, have the board get to know at least the first two levels of management. A systematic talent development process should also include regular external benchmarking and selective external hiring to ensure a continuously improving level and to avoid stagnation.
Selecting the next CEO.
While a strong succession pipeline is important to produce credible internal CEO candidates, and in many instances the continuation of a strong existing strategy or its evolution is best managed by an internal CEO successor, the selection of an internal candidate should not be a forgone conclusion. For instance, when Volkswagen named an internal successor in the midst of the Diesel scandal in 2015, an external CEO may have been a stronger and more credible signal of change.
Selecting the CEO is the task of the board and our research shows that the role of the CHRO at this stage is, in most cases, limited to providing information about the quality of internal candidates. Ideally, boards should start from the strategic situation of the organization and define the mandate and profile of the next CEO. Then they should map both internal and external candidates against these objective needs. For some situations and mandates, such as strategic transformations or turnarounds, external candidates may be the better choice.
An example of how such an integrated succession management process can produce a strong leadership bench is the US Oil and gas giant Halliburton. In Halliburton, high-potential leadership talent is being identified by HR and senior management and subsequently rotated through a number of assignments and positions. This exposes the leaders to different product lines, functions, global operations, strategic mandates and increasingly senior positions. Naturally, as the candidates progress to more senior positions, the number of candidates is reduced as those candidates not being selected either remain in management positions or go on to leadership positions outside the company. For instance, the current CEO of Halliburton, Jeffrey A. Miller emerged from this process while the remaining contender, Jonathan Lewis, went on the lead British firms AMECFosterWheeler and Capita.
Key stakeholders in the succession management
A succession management system as described above can only succeed if HR, and in particular the CHRO, become the sparring partner and trusted advisor of multiple stakeholders throughout the organization.
HR and the board
In CEO succession, the board should be in the driver’s seat. However, the CHRO should support the board in identifying and regularly updating the needed skills and capabilities for future CEOs and then to create a succession management process that systematically develops candidates with these skills.
HR and the CEO
The most important stakeholder in succession management is the leaving CEO, because systematic succession management cannot succeed against the will and without support of the CEO. When this support is absent, if the CEO perceives strong candidates as a threat or is not emotionally ready to leave the role, for instance, CEO succession management is bound to fail, and a strong bench of internal candidates is unlikely to emerge. CHROs therefore need to work closely with the CEO, gain the CEO’s trust as an advisor in talent development and jointly chart talent development paths with the CEO.
HR and the Executives
Executives within the organization play a dual role in the succession management process. On the one hand they need to collaborate with HR to identify and develop talent; on the other hand, some executives (in particular the CFO and those executives with profit and loss responsibility) might be candidates for the CEO succession. This dual role may create tensions that HR needs to carefully manage.
Limits to succession management
Like any management process, also succession management has limitations. Systematic development of multiple candidates for CEO succession requires a certain size of organization, and smaller organizations may need to rely more on external talent. Even the largest companies with highly developed talent management approaches may need to go beyond the internal bench of candidates when a fundamental reorientation of the firm is necessary. For instance, ABB has implemented a very sophisticated talent development process that implements much of the recommendations above. Yet, the fundamental strategic transformation of the company currently under way, required the board under the leadership of board chair Peter Voser to go for an external candidate, Björn Rosengren, who joined ABB from the Swedish Sandvik Group as the new CEO in 2020.
CEO succession management is one of the fields with an untapped opportunity for CHRO to become the trusted advisor and sparring partner of the board and the CEO. Both the development of internal candidates for a future CEO and the internal partnering for the identification of external candidates for the role have the potential to turn HR into a central player in one of the most important firm processes.
Thomas Keil and Marianna Zangrillo are the co-authors of new book, The Next CEO: Board and CEO Perspectives for Successful CEO Succession