How to fix the CEO succession problem | FT Working It

You can enable subtitles (captions) in the video player

[MUSIC PLAYING]

ISABEL BERWICK: Chief executives are stepping down at record rates. Badly managed transitions have cost companies billions of dollars in lost market value.

BROOKE MASTERS: If you've got a good company with good product, the next most important thing is who's in charge.

KATE LYE: You may have been a great CEO 10 years ago. Are you going to cut it now?

ISABEL BERWICK: Businesses need stability. So why are so few putting plans in place? I'm Isabel Berwick. I host the FT's Working It podcast, and I write a newsletter about the workplace. In this series, I'll explore some of the most pressing issues around the future of work, and talk to senior leaders about how they are making work better.

SUBJECT: The world is too dynamic. To keep up, you have to do leadership development for everyone.

ISABEL BERWICK: CEO turnover is at an all-time high. And over the past few years, we've seen many high-profile leaders leave and, in some cases, regain their top positions.

BROOKE MASTERS: There are a couple of reasons why we are getting so many new CEOs right now. The first one is that during the pandemic, lots of companies held on to their CEOs for perhaps longer than they might otherwise.

The second thing that happened is since Russia invaded Ukraine, the whole environment has changed for companies. Interest rates are higher, costs are higher. We've had killer inflation. We've shifted from a growth environment to a much more constrained environment. So companies need different kinds of leaders.

ISABEL BERWICK: While some CEOs recognise when the time is right to plan a transition, others need to be told to step down by their boards, or are even abruptly removed. Between October 2023 and October this year, more than 1,800 US CEOs announced their departure. That's a 19% rise from the previous year.

Although the full reasons for exits aren't always disclosed, retirement, burnout changing roles, underperformance, and misconduct are often cited. Poorly managed CEO transitions in S&P 1500 companies have resulted in $1 trillion of lost market value annually. With so much at stake, why are some boards not getting this right?

To find out more about effective succession planning, I went to my alma mater, Saint Catherine's College, Oxford, which is itself undergoing a leadership transition, to meet Valerie Mocker, CEO of coaching firm, Wingwomen, and an experienced board member and board advisor.

I know that whenever I read surveys of boards, they always say, CEO succession planning is one of the top priorities for us as a board. Do you think that actually happens in practise?

VALERIE MOCKER: On a personal level, you know that saving for retirement is important. That doesn't mean that you actually save enough for when you're going to retire. And in the same way as a board, we very easily get dragged into the day-to-day business of what it means to be a board member. So you meet and you discuss quarterly reports, but we certainly, as boards in general, don't spend enough time on succession planning.

Succession planning is a hard thing to talk about. Essentially, you need to talk to your CEO or CEOs and to the executive team and say, so once you leave, who could take over your job? It's not an easy conversation.

ISABEL BERWICK: What's the attitude of CEOs themselves to succession planning?

VALERIE MOCKER: It is important that we have CEOs at the top who have come in knowing that at some point their role will change, or they might have to leave to make room for new people.

ISABEL BERWICK: So you set the expectations right from the start.

VALERIE MOCKER: Yeah, I would always ask this question in the interview process already about, how long do you want to stay? What do you want to do after you leave? And what are you going to do in the time that you are here to train our people so that they can also follow in your footsteps once you leave? They are also the CEOs who will be more collaborative, more empowering, and also more effective in leading their teams.

ISABEL BERWICK: What happens when transition is forced, a CEO resigns, or there's ill health, or there's a scandal? How should boards react in those circumstances? And how quickly should they seek a new CEO?

VALERIE MOCKER: In an ideal world, you want to find the right candidate and not the most readily available candidate. That's why succession planning is so important. And when we talk about succession planning, ideally, I like to talk about succession practise. So you need to have people in the organisation who you give the opportunity to practise taking over a role with more responsibility. So that if you have a crisis, you have people who are immediately able to step up and where you as the board know, I trust these people to take over the job, even if it's just for a certain period of time.

It's never about the technical ability. What we need to train them in is the kind of soft effect, it's the human factors, the understanding how to strategize and how to really navigate an organisation, how you also navigate people who have very big egos. It's not enough to just be the busy bee who does really good work. One of the reasons why I built Wingwoman is to make sure that we have a space where people learn what these rooms of powers look like.

ISABEL BERWICK: After speaking to Valerie, I realised the value of having a continuing and wide ranging focus on succession planning, not just for the person at the top, but for all sorts of roles. Experience and practise is vital, and that task of securing a diverse talent pipeline is even harder.

Boards are actually getting older. Spencer Stuart research on UK boards shows that 90% of board members are now over 50.

BROOKE MASTERS: There are CEOs who stay on who everybody wonders when they will go, but people don't want to push them out, like Jamie Dimon at JPMorgan Chase or Larry Fink at BlackRock, who are both seen as important big figures in business. And so nobody's going to tell them to go. But there is concern sometimes that they are not planning appropriately for the future.

Jamie Dimon, for example, has a reputation for having pushed out lots of people who could have been his successor and have gone on to run other banks. He would, of course, say that his new generation of potential successors is equally good, and the bank will be in great hands if and when he decides to retire. It is the single hardest thing for a company in many ways. If you've got a good company with good product and a business model that will throw off money, the next most important thing is who's in charge. And so, I guess you could say the average tenure, I think, is now around five years for big public companies, which means they don't screw it up all the time. But that means one out of every five companies is changing CEOs every year.

ISABEL BERWICK: Goldman Sachs, the global investment bank, has been working on a method to help keep their leaders in place. I went to the bank's office in London to find out more from its chief learning officer, James Fulton, and leadership consultant Kate Lye, who worked together to help leaders, both inside and outside Goldman Sachs.

JAMES FULTON: One of the prime tools that every leader has every year is the tool of feedback. And what we can do is make sure that that's more useful, both to the leader themselves and to the organisation. And particularly at senior levels, I think some executives worry that it's political, that feedback they receive isn't unbiased about performance, but it's affected by rivals who might yearn for that seat, by people with opposing agendas.

KATE LYE: If you ask most CEOs, when's the last time you got feedback that genuinely made you stop in their tracks, it will be years.

ISABEL BERWICK: Wow. And is that their choice because they feel they've got to the top? Or is it because they don't have time? Why is that?

KATE LYE: Well, if you think about it, to give your boss's boss's boss serious feedback, you've got to be really vested in doing that, haven't you? Why would you do it? It's a--

ISABEL BERWICK: Career ender.

KATE LYE: Career suicide.

ISABEL BERWICK: Yes, career ending.

KATE LYE: Yes, so I think you should absolutely bank on the fact that the more senior you get, the less people are going to tell you things that will be distasteful to you. And you have to actively put processes in place, which Goldman have, to make sure that their partners don't operate in an echo chamber.

ISABEL BERWICK: Goldman Sachs has just over 46,000 employees, of whom just 400 are partners. New partners are selected every two years. And this sophisticated feedback programme helps them to develop as leaders.

So all the things you've talked about suggest to me that a leader who is aware of this, how they're changing, how they could perform better, has a better chance of staying in post for longer, either because they leave or because they're ousted by a board who's not happy with the changes. Would that be correct?

KATE LYE: If you're listening to disconfirming feedback and feedback from people who aren't thrilled, maybe, with every part of your performance, you have a chance to react to it, whether it's to dispute it or change it or act on it.

JAMES FULTON: Are you likely to drive better with an accurate dashboard? Yes, you are. And similarly, you're likely to lead better and more sustainably with accurate and regular feedback.

ISABEL BERWICK: What would be common things that executives might need to look at?

KATE LYE: I think one thing I see a lot is unintended consequences of their actions and words. So they think they've done this in good faith, and this was their intention, and they're genuinely baffled that it was interpreted like this or understood like that.

JAMES FULTON: I think leaders underestimate how crisp their communication needs to be and how repetitive it needs to be in order for people to understand, what does the boss think.

ISABEL BERWICK: Does that play into not really understanding the impact they have, the impact of power and status on the people around them?

JAMES FULTON: It's quite common in our experience, that executives don't realise how senior they are. They don't realise how many people are looking at them.

KATE LYE: So you even look at something or make a flippant comment about it, people take that as a judgement.

ISABEL BERWICK: You can't do that anymore.

KATE LYE: You can't do a lot of things. You can't do a lot of things, and people need to get really smart that quickly.

ISABEL BERWICK: We're all human. We don't want to think about the waters closing over our heads. And presumably that's magnified. If you're a very powerful person. Who takes care of the psychological piece of preparing a CEO for transition?

KATE LYE: Oh, honestly, sorry, it's such a hot button for me. I just think most succession plans are about the who and not about the how. And I think there are three opportunities here that companies can really up the emotional choreography--

ISABEL BERWICK: Oh, I like that.

KATE LYE: Of how a CEO leaves, because they failed to ask the question, what really matters to people here. So they do the contract and the shares and all the legal stuff. And the reason I think you get so many spanners in the work at the end is people realise things that they've invested decades in are going to be trashed and egos start acting out. I think often they are disenchanted, they're distracted, or they're trying to dominate it and say, I want my version of my legacy messages to prevail.

ISABEL BERWICK: I had a really interesting chat with James and Kate. One of the things that struck me was the importance they place on reflection and stepping back. Often, leaders don't get a chance to do this. They're so busy, but making time and space for regular talks with trusted people can bring long-term incremental gains in the quality of their leadership and extend tenure.

BROOKE MASTERS: Just things go wrong, people get sick, people have trouble keeping their pants on, things happen. If you're a really great business, you probably do have three or four people who you think could fill some of the great roles. In fact, you ought to. If you're a properly run business with a good board, they should have that.

If you replace a long-running CEO, as with most managers, the longer you do something, the things you are good at you continue to do well. The things you are not so good at build up. And so by the time a longstanding CEO leaves, whatever it was that CEO was slightly less good at, is going to have built up as a problem. And so that's the other thing is the new CEO is going to have to deal with whatever didn't get dealt with before.

ISABEL BERWICK: CEOs are very well rewarded and have sky high status, but it's lonely and hard at the top. And some people burn out or have hidden mental health issues. Those pressures are enough to dissuade many talented people from going for the top job. As a way to combat this, some major companies have adopted the co-CEOs model. This leadership structure creates equal heads of an organisation.

VALERIE MOCKER: The co-CEO model is a great one for bringing in fresh talent in the younger generation, because you can have a more seasoned CEO who maybe the board trusts with the experience he or she brings. And also if you have shareholders or certain stakeholders, they might not be as open to get someone younger in or someone who is maybe different to the typical type or who is outside of the industry. It makes it so much easier for you as a board, because especially when it comes to succession planning, you don't worry as much about a person leaving and your CEO leaving, because there's always a second person who can steer the ship and who can continue running the organisation if, for whatever reason, one of the CEOs is deciding to leave.

ISABEL BERWICK: Having people to share the burden with and having a spread of expertise sounds like a great solution for increasing CEO tenure. So why aren't we seeing more partnerships at the top? Perhaps because power is intoxicating, and it can be hard to let go and let someone else share your platform. And being a co-CEO is like any long term partnership-- it comes with built in disagreement and friction. That's something that will need to be carefully managed if it's going to survive long-term. Whatever leadership structure is being used, getting succession right is important.

BROOKE MASTERS: When it comes to succession planning, overall, I think most companies are doing a better job than they would have 10, 15 years ago. They're putting time and energy into it. Not only what do we plan for the CEO, what do we do if our CFO gets recruited away and therefore he's not there as a possible successor?

So I think a properly run big public company at this point has spent quite a bit of time doing succession planning. They may not have done it well. And I also think that the ones where it's a big personality in charge, particularly ones where the founders are still there, they're not as good at it because it's very hard to turn around and say, Elon Musk, like, what's your succession plan? So I think succession planning is better than it once was. That doesn't mean some companies don't screw it up pretty badly.

ISABEL BERWICK: People get to the very top because they're single minded and focused. Some of them are never going to leave without being told to go.

I think there'll always be dramatic CEO exits, with all the anger and damage that can cause to the leader, to their team, and to the business. For boards, keeping your existing senior people in position and performing well for longer has to be the starting point for any succession plan.

[MUSIC PLAYING]