Seven myths of CEO succession

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The Stanford Closer Look Series issued on March 19th 2014 a paper entitled Seven Myths of CEO Succession, authored by David F Larcker, Stephen A Miles and Brian Tayan.  Both Larcker and Tayan are affiliated with Stanford GSB's corporate governance inititatives and Larcker is Director at the Rock Center.  Miles is Founder and CEO of the Miles Group.

Effective CEO succession plans matter.  The paper argues this important board activity is a process rather than a one-off decision.  The Board of Directors (versus the CEO) should be taking responsibility for the CEO succession issue.  Moreover, directors with experience in succession planning can make a real contribution to the long term viability of the firm, re-inforcing the value added by effective governance.  

The seven myths of CEO succession include:
  1. Companies can name the next CEO.  According to the authors, only over half of the firms participating in surveys are grooming a specific successor for the CEO position, which is an issue facing 10% to 15% of companies each year.  On average, it takes 90 days to name a CEO successor according to a referenced study by Heidrick & Struggles (2010),
  2. There is one best model for CEO succession.  The paper notes there are four general approaches for CEO succession:  CEO in waiting (where a leading candidate is identified), internal development (where more than one candidate is identified and a development plan for each is readied), external recruitment (especially attractive when internal candidates are deemed not suitable or a in a turnaround situation), and an inside-outside approach (combining internal development with external search),
  3. The current CEO should choose the successor.  In fact, the board is responsible for performance and strategy in the future, not the outgoing CEO,
  4. CEO succession is a risk management issue.  CEO succession choices is more than a risk management issue; the paper argues that boards can build on the existing leadership team to build rather than just preserve value, 
  5. Boards always know how to evaluate prospective CEO talent.  The paper argues effectively that boards place undue weight on financial track records in other organisations and thier perceptions of a candidate's leadership qualities, rather than evidence of future performance in a new corprorate environment, 
  6. Board prefer internal candidates above external ones. The paper cites research done by Spencer Stuart that 74% of companies go outside over a ten year period, 
  7. Boards want a minority or female CEO in a quest for diversity, citing information from The Associated Press and BlackEntrepreneurProfile.com that only a small number of firms actually recuit form these sectors.
More on this informative corporate governance series can be found at: http://www.gsb.stanford.edu/faculty-research/programs/cgri/research/closer-look

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