Hiring your next CEO from within or outside?

“It is the responsibility of the Board to make sure it has the most talent available when it needs to make the decision” according to a recent article in The Boardroom Report, Volume 9, Issue 16, published on 24 August 2011 by the Australian Institute of Company Directors.  But there are complications with family businesses. And small businesses do not always have the scope to develop suitable candidates from within.  Should you look for a successor who is similar or different to the current CEO?

Following the fad of “rock star” CEOs, boards globally are beginning to realise they can get more value by choosing good, solid internal candidates, says Signe M Spencer, a senior principal at Hay Group’s McClelland Center for Research and Innovation.

She says an internal candidate will already have insider knowledge and relationships within your organisation, understand your customers and marketplace and have a proven track record. “The exception to this would be if you need to make some radical changes in your organisation. Then you are often better off with someone who is new and fresh.”

According to Spencer, this is a positive trend because competition for external candidates has been pushing up CEO’s salaries over time.

“We are also seeing that more responsible boards are starting to think about CEO succession at least three years out. This is because there is usually no internal job that adequately prepares someone to become CEO. So if you want an internal candidate that is ready, you need to start preparing that person and that is not something you can do in a month,” she says.

Locally, Henriette Rothschild, general manager Pacific of the Hay Group, has also observed the best boards starting early. “But we do see a lot of small organisations and family-owned businesses in Australia not starting early enough. Somehow they think they can manage CEO succession in a six-month time frame. We would strongly recommend they give themselves a lot more time because of the significant effect the culture and style of a CEO has on a smaller business.

“Given the senior level talent shortage in Australia and around the world, if you start three to five years out, you maximise the talent that you have. It is the responsibility of the board to make sure it has the most talent available when it needs to make the decision. Starting early means the board may sometimes look at unlikely candidates from within the organisation, rather than being at the mercy of what the market can provide it with later.”

Spencer believes CEO succession planning is especially tricky in family companies. If the candidate is not a family member, she says the biggest issue is clarifying that person’s role, the boundaries of authority, the accountabilities, who can make the final decisions and on what decisions. “This is especially unique to family businesses because of the family dynamics and the ownership you get there,” she says.

“If you are grooming family members, you need time to work people out of their childhood personas and roles and into a more professional role.”

Before looking at candidates, Spencer urges boards to agree – at least in some moderate detail – how much and in what direction, the board wants the business to grow, what the strategy is and what organisational culture it would like to see.

“If it doesn’t agree, it may get into fights about candidates, but this is actually a disguised argument about the vision and direction of the business in the future. Sometimes the board will have a couple of sentences the directors agree on but they don’t realise that they don’t actually agree – that they are each interpreting that sentence or two, or a phrase, in a very different way.

“It is very difficult to resolve this at this point. But if you agree first on where you want to go, then on what characteristics the CEO needs to take you there, the discussion about this person versus that person versus do we need to look outside is much cleaner.”

Spencer adds: “If you have a CEO that you really like, the temptation is to look for someone just like that CEO. This is not a good idea.

“First, where you were as an organisation and the challenges and conditions the organisation up to a certain size and, if you want to continue growing, you need a different kind of leadership, one that is often more into structures and processes.

“Second, no matter how wonderful any CEO is, he or she is going to have areas that they are not good at – areas of deferred maintenance. If you pick two CEOs who are very similar, they are likely to have the same gaps and those areas can reach a crisis point. If you have CEOs with different profiles, they probably aren’t going to have the same blind spots. So what one didn’t do well, the other will take care of.

“Third, if the previous CEO is well loved, it is very hard to fill his or her shoes. If the new CEO looks really different, it’s easier. It’s a new day.”

Spencer and Rothschild are seeing a trend where candidates experience a variety of roles within the organisation and don’t just come straight up from, say, finance or sales. “The traditional career ladder is not necessarily what breeds the best CEOs. It is lateral moves that are making the difference,” says Rothschild.

Spencer believes moving people laterally helps organisations retain good people because it stretches and grows them. And, it allows the organisation to have multiple candidates without having those candidates overly conscious and overly competitive about it. “But you need to be thoughtful about how you do it and frame it for them.”

Rothschild adds: “We are seeing smaller organisations that may not have all the growth opportunities internally providing opportunities for people to make lateral moves out of the organisation in order to then be more valuable to the organisation coming back in. In many cases, if you have a relatively small organisation, you may not have every possible role that you’d like to develop someone across. For example, we are seeing organisations second key talent into their customers to gain that external perspective of the market and to allow them to view the business in a different way.

“This is particularly useful if you are grooming a family member in a family business. If you do this five years out, you can not only anticipate their needs for personal development but also what the business is going to need from a strategic perspective.”

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If you would like some assistance at board and/or ownership level to develop a succession/recruitment strategy and specify the role of a CEO to be filled, take a look at www.CEOselect.com.au

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