In this article from the Harvard Business Review, the authors, from global leadership advisory firm ghSMART, discuss the growing number of instances in which companies appoint CEOs from the board. According to the article, from 2018 to 2023, 10% (213) of the total number of new CEOs in the S&P 500 and Russell 3000 were appointments from the board, reflecting a threefold increase over the period, and “making board director the fourth-most-common pre-CEO role,” after various executive roles. The authors note that the majority of those 213 CEOs were permanent hires. Interestingly, however, the authors observe that when a company appoints one of its own board members as CEO, the frequent assumption is that there must have been a problem with succession planning: “Maybe the company is desperately trying to get itself out of a protracted period of tumult. Maybe the previous CEO’s departure was unexpected or forced, and only a tried-and-true board member can keep the ship sailing steadily until a permanent replacement can be found. Maybe the CEO’s departure was routine and expected, but somehow the succession-planning process just came up short.” But sometimes, they suggest, the reality is that the board member was actually “the best option” to serve in that role. Why might it be a good idea? What can go wrong? How can the company increase its chances of success? In their article, the authors address these questions.
According to the authors, board members are sometimes the optimal choice because they combine the benefits of two perspectives: “As insiders, they have a valuable feel for the company’s culture, history, and strategy; as outsiders, they can more easily challenge the company’s existing ways of operating.” But there can also be hiccups—misperceptions about the director gleaned in a board context, overestimations of the director’s industry knowledge or just bad feelings and loss of morale among those executives passed over for the job.
How to maximize the potential for success? The authors studied 2,086 CEO successions over the period from 2018 to 2023 among the S&P 500 and the Russell 3000, focusing on board-to-CEO transitions. They also conducted a number of individual interviews. From their analysis, they identified the following factors as likely markers of success: “demonstrated efficacy in a past CEO role, institutional knowledge, and in most cases, relevant industry experience.” Armed with this background knowledge, the new CEO may be positioned to get a better head start on planning and targeting, while also potentially introducing new ideas and strategies. The authors found that 73% of the board-to-CEO successors in their study had prior CEO experience, which not only offered a sense of security, but also led to improved performance: directors with prior CEO experience, the authors found, were “10% more likely to outperform the market during the past five years than first-time CEOs selected from the board.” The new CEO with past experience may be more “clear-eyed about what he did and didn’t know about the company,” perhaps recognizing more clearly the distinction between serving on the board and becoming CEO of a new company—and all that entails—while preserving “rapport with the outgoing CEO, relationships with the leadership team” and harmony with the rest of the board, all of which could facilitate implementation of “tough business decisions.”
In addition, the authors point out, when “a company has a culture of hiring CEOs from within and therefore feels it may be risky to bring in an outsider, a board member can serve as a compromise,” especially where there may be a “readiness gap between its up-and-coming leaders and the current CEO.” The authors suggest that the compromise approach “can be particularly useful when an organization’s departing CEO is a founder who hopes to hire a successor who can sustain the firm’s institutional knowledge and culture.” The authors found that “12% of the incoming board-to-CEO appointees replaced departing founders.”
Longer tenure on the board can also make a difference, providing more familiarity with “the company’s strategy, culture, and key stakeholders.” In their study, the authors found that board-to-CEO successors had been board members for over four years on average and six years in the S&P 500. The authors also found that “appointees who had spent an extra year on the board (relative to their peers) outperformed the market during the first two years of their CEO tenures.”
Potential problems? The authors identify four potential dangers:
- “Mistaking board expertise for readiness.” Board service does not necessarily equate to a “nuanced understanding of the business”; diving in to the position, they suggest, and listening to employees may be required for a successful turn. The authors found that “25% of the permanent board-to-CEO appointees that we studied lasted less than a year in their role, and only 53% made it past the two-year mark.”
- “Competition within the board.” Other directors may start “jockeying for position” as CEO candidates, relinquishing their positions as “supportive partners and objective advisers.”
- “Negative reactions from internal candidates.” Internal candidates may become demoralized and leave the company, with a “ripple effect throughout the organization.”
- “Decisions clouded by peer pressure.” Pressure, especially in a crisis, could lead a candidate to take on the job. But the authors contend that “CEOs should take the job because they want it and know that they’re the right person to do it.”
To illustrate, the authors tell the tale of a board-to-CEO successor who had previously served as a CEO and, although his board tenure was relatively short, was considered a trusted peer. The board appointed him as successor to a founder-CEO who was to serve as Executive Chair. But the parameters for working together were not well established and the new Executive Chair did not agree with the board-successor CEO on product strategy. After a number of months, the successor CEO left. The leading internal candidate had already left on the appointment of the successor CEO. The company’s share price dropped.
Recommendations. The authors have four recommendations for effective board-to-CEO succession:
- “Plan early and often.” The authors recommend leaving plenty of time for the board “to be dynamic, strategic, well-informed, and deliberate,” such as time to develop lists of candidates (including time to invest in, develop and test any internal candidates in critical roles) and consider succession scenarios. “Early planning,” the authors advise, “helps you avoid hiring from the board out of desperation.”
- “Treat board candidates just as you would any other.” To overcome any awkwardness of evaluation of other directors, the candidate-director should be recused from all discussions. The authors advise that the candidate from the board should be measured using the “same scorecard that you’re using for all the other candidates, internal and external.”
- “Maintain credibility with the executive team and the organization.” If a board member is selected as CEO, to avoid internal friction and morale issues, the authors recommend proactive personal communication with internal candidates, “making clear to them why they weren’t selected and what the impact will be on their career path at the organization,” including that the company continues to develop internal talent and is “beginning the process of planning the next CEO succession immediately.” They view this practice as a great way to “reengage high-potential leaders and prevent any future need for emergency succession.” The new CEO will also need to gain buy-in, perhaps by undertaking a substantial listening tour.
- “Establish clear lanes for the chair and the incoming CEO.” To grease the skids for the transition from director to CEO, the authors advise, the chair or lead director “should play an active role in ensuring a healthy separation between the new CEO and the rest of the board. And new CEOs themselves need to do the same. ‘You have to be fully present as CEO,’ one former board member who made the move to the corner office told us. ‘Don’t try to be a quasi board member and a quasi CEO.’”
The board-to-CEO succession process must be carefully devised, the authors conclude, taking into account, not only the factors discussed above, but also the highly individual dynamics of the organization. Moreover, the authors advise, companies should not lose sight of the “bigger picture…. Board members should never be your default option for CEO. Effective succession strategies maximize your possible choices.” After all, the goal should be to “identify the person best positioned to lead the organization and achieve its goals,” whether internal or external executive talent or already serving on the board.
The article also provides several interesting illustrative stories. Be sure to check it out.
