The Conference Board Governance Center Blog

May
13
2014

CEO Succession: A conversation with Richard Beyer

By Jason Schloetzer, Assistant Professor, Georgetown University McDonough School of Business

Recently, The Conference Board published the 2014 CEO Succession Practices Report. As a follow-up to that report, which I co-authored with Melissa Aguilar and Matteo Tonello of The Conference Board, I spoke with Richard Beyer, former Chairman and CEO of Freescale Semiconductor and a director on three public company boards, about his thoughts on CEO succession and the role of the board. Below is a highlight of our discussion. You can listen to our full conversation below.

Play

Jason Schloetzer: What are the characteristics of a successful CEO succession?

Richard Beyer: There are two scenarios that a board has to deal with in terms of CEO succession. The first is when a company is on a successful track and there’s a logical reason for a CEO succession. The second is when the company is really struggling or the CEO, on an emergency basis, is going to be leaving the company. The situations are similar, but not identical.

If the company is on the successful track, ideally, you develop a candidate internally. That candidate knows the company, its culture, and is succeeding in that culture. The process should be short, three to four months. You will want to candidate to be appreciated by the various constituencies. And the transition should be calm and not disruptive at all.

In the second scenario, the characteristics are somewhat different. It could be that an internal candidate is considered, but it is equally likely that external candidates will be considered. The process should still be short. A long process causes disruption in the organization and in the marketplace because it is very difficult to conduct a CEO search with external candidates that stays quiet. All constituencies should view the candidate as someone that can put the company back on track. In this case, if the company is not on the right path, you need a change agent. Therefore, there will probably be more disruption and will be a more challenging process for the board.

JS: Let’s build on the board’s ability to identify an underperforming CEO. What are some examples of particular signals that the board might see that suggests the CEO is failing the company as opposed to something broader like poor corporate strategy or a competitive marketplace?

RB: A board really has a great responsibility to shareholders and other constituents to understand not only how the company is doing, but why the company is succeeding or disappointing. This is a part of every board meeting. It really is a constant requirement on the part of the board to understand how the business is doing; what it’s doing well and what is causing it to do well. It could be that some of the subordinates are superb. It could be that some of the product families introduced are superb. It could be that the strategy is right. But also what’s not working and digging in to what is not working. The board needs to do this with the CEO, but also with members of the senior management team in the reviews that we typically have. So it really is a significant part of the board’s responsibilities to understand the plans, how the company is performing against those plans, and to be looking with a critical eye to ensure that the company stays on track.

JS: It sounds like whether or not it’s a smooth transition or a transition that may require some board intervention, it’s likely that the board has developed a profile of what the board would like to see in the next CEO. Can you give some insight into how those profiles are developed, how often they are reviewed, and who really drives the discussion around the development of that profile?

RB: One of the best practices for boards is to have a discussion of succession planning for the CEO and all of the CEOs direct reports. It is important for the CEO to describe, often with HR in the room, the characteristics of the person who would succeed the CEO. Who is it that could step into the role on either an interim or permanent basis? Why is that individual right? This is a very fair conversation to have and gives the board a sense of what are those characteristics and who has those characteristics. At the same time, the board is looking at each of the direct reports of the CEO and getting a sense of the characteristics of each of those individuals. This is a process that should happen once a year unless there is an extraneous event which changes things dramatically.

At the same time, in parallel, the board really needs to understand the strategy, how it may be changing, and the implications of a changing strategy on the characteristics of the CEO. One example might be a company that historically has grown through internal development. There may come a point where senior management and the board feel that there needs to be more M&A to augment the growth. This would require an individual that is open and able to lead that process.

JS: You mentioned that this should be a fluid dialogue between the board and the CEO and that you felt that this dialogue is fair. Do you have experience with incorporating succession planning into the CEOs annual bonus contract?

RB: It is the responsibility of the CEO to be developing the necessary skills on his team to succeed himself or herself. There may be circumstances under which putting it into the actual goals and objectives and tying it to compensation is appropriate. I wouldn’t take a firm position to say that it’s unacceptable because it could lead to the wrong behavior or that it is completely acceptable. There are different circumstances. I have seen it incorporated once as a modest component of the performance plan.

JS: Did you feel that that worked well?

RB: I did. I thought that the topic, therefore, was very much front of mind of the CEO and therefore the board stayed much more active in the process.

JS: Going back to our discussion about developing the profile for the next CEO, how does the board go about determining if internal or external candidates fit that profile? Is the profile adapted based on the availability of internal and external candidates?

RB: The board should always be accessing the capabilities of the senior leadership team because the senior leadership team, in addition to the CEO, are very important to the success of the corporation. The board should be getting access to the direct reports – typically the people that would be candidates for the CEO position. They should get access through board meetings and for some of the board members to meet with some of the senior leaders in one-on-ones, but always with the cognizance of the CEO.

That allows the board to get better insights into the skills of the senior leadership team and, as result, when it is necessary to develop a succession plan, some of the board members have a deeper understanding of the capabilities of the senior leaders.

JS: How about external candidates? It must be difficult to approach external candidates about their interest and not expect their current employer might learn of this. How should the board manage that?

RB: Dealing with external candidates makes the process very complex. First of all, once you begin to contact external candidates, it is impossible to keep it completely secret. So a board needs to be cognizant that if they are going to do a search and it’s going to involve external candidates, they really are going to have to deal with the issue of when and how they are going to make the search known because it is going to get out into the market.

JS: And when it is known to the market, do you think that’s perceived as bad? Perhaps when it’s in the market, an unidentified candidate might express interest.

RB: Well, what it does is it creates a certain amount of concern and uncertainty if this hasn’t been formally announced by the company. Then, people just start to speculate. Is the individual in the position failing? Why is the company conducting the search?

If you are going to do an external search, it is best to make it known at least at the point that you believe this will get out into the marketplace. One of the examples of a process that many have been aware of is at Intel, in which its CEO announced that he was going to retire, that a process was going to be initiated and the board was going to look at both internal and external candidates. That way, the information was in the marketplace and nobody got upset about it. That is a great example of going out to the marketplace with the information and then, as you said, candidates that might be interested can put up their hands. I think that was good practice.

JS: Just one final question. In some unusual situations, there may be a need to have an emergency succession where a retirement is announced or the CEO leaves unexpectedly or a poorly performing CEO needs to be dismissed. How does the board identify who could serve as an interim CEO while the succession planning process continues to identify the permanent CEO?

RB: An emergency is always a possibility for every company. Every board has to be cognizant of the fact that this could happen and the board needs to know what it will do. When boards think about this, they have to be thinking of what are the characteristics of the person that we would like to step in on an interim basis. First of all, is the individual available and capable of stepping in immediately? I would suggest that you would ideally want somebody that has been a CEO. Because then they understand all of the aspects of being a CEO. And unless the company is really in a freefall, then the interim CEO should really not be a disruptive individual because that’s not what’s needed. The individual basically should come in, see the things that are most critical to deal with and deal with them, but not attempt to put a stamp of dramatic change on the company.

And  the individual that is picked needs to be someone that the constituents view as an individual that is respected and that is going to keep the company on the appropriate path as the process to identify the permanent CEO is conducted by the board.

JS: Would you like to add any further insights?

RB: In summary, CEO succession is one of the most critical thing that the board does. It needs to be a very thoughtful process. The board needs to have a good idea of what it will do in an emergency. It needs to have a good sense through discussions with the CEO what the CEO’s tenure is going to be so that they can have or put plans in place in the appropriate time frame. And they need to make sure that the review process is conducted on a periodic basis. Good boards do that.

JS: I would like thank you Rich, for your time and insights today.

RB: Thank you.

 

About the Guest Blogger:

Jason Schloetzer, Assistant Professor, Georgetown University McDonough School of Business

Jason Schloetzer, Assistant Professor, Georgetown University McDonough School of Business

Professor Schloetzer’s research focuses on the monitoring and control mechanisms used to manage the modern organization. This includes examining issues related to the design, implementation, and performance consequences of performance measurement systems. His articles have been published in leading academic accounting journals, including Journal of Accounting Research and The Accounting Review. He serves on the Editorial Advisory and Review Board of The Accounting Review.

To link his research with practice, Professor Schloetzer is a frequent contributor to The Conference Board Governance Center. He is particularly involved in current issues regarding CEO turnover, CEO succession planning, and board structure. His research has generated over 250 media mentions in leading U.S. and international news outlets, including Forbes, Fortune, The Wall Street Journal, and USA Today. 



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