‘Internal chaos’ just one consequence of poor CEO succession planning, Russell Reynolds’ Stamoulis says

A prospective CEO may look great on paper yet be completely at odds with a company’s culture.

CEO succession planning is one of the thorniest and most important issues a company faces, and it comes with many challenges.

The wrong choice can send a company into a tailspin, no matter how good the rest of the executive ranks are. The CEO sets the company’s tone, good or bad, and that leadership has a bearing on every facet of operations.

A prospective CEO can look perfectly good on paper and be completely at odds with a company’s culture. That’s one of the reasons finding the right CEO can be no easy task, said Dean Stamoulis, managing director at Russell Reynolds Associates, a leadership advisory and search firm.

The board of directors technically chooses the CEO, but since many CEOs are chairmen of their companies' board there can be conflict. Often, advisory boards are set up.

“A CEO can have very strong feelings about who their successor should be” and this can create complications, Stamoulis said. “Internal chaos” can be created by setting up internal competition.

Also, a company can suffer if there is a lack of confidence conveyed in the current CEO.

The best approach is to get succession planning underway early, by as much as a year. During that time, make a deep analysis of what the future of the organization will look like. And have a constructive current CEO who works with the board.

There are pros and cons of both internal and external candidates, but getting the right person is more important than making an internal/external call. Recent studies have confirmed that there is no real difference in success rates based on whether they are internal or external, said Heidi Pozzo, founder of Pozzo Consulting, a performance improvement consulting firm.

One of the challenges of lining up internal candidates is that the potential successors not selected to be CEO tend to leave and take a top post elsewhere. That leads to loss of top talent. On the other hand, it allows other people to be developed when they move into the role of the individual that leaves.

Also, when an internal candidate is chosen, their relationships change. Former peers are now subordinates, so there can be some discomfort that must be worked through. The CEO needs to establish him- or herself as the new leader, separate and apart from the former CEO. Unfortunately, the shadow of the former CEO can be long.

Challenges with going external include finding a person that aligns with the culture and purpose of the company. And with some, there may be a tendency to bring in top staff, displacing existing senior people within the business, Pozzo said. “This can happen with an internal candidate, too.”

Successful internal succession planning gets people ready to advance before the current CEO leaves/retires. The best way to do this is determine the skills that are needed and providing candidates with experiences to fill the gap, Pozzo said.

CEOs that focus on strategy are more successful. “They are looking at what actions need to be taken to further the organization,” Pozzo said. “They are not mired in the weeds of the day to day activities. That helps them innovate and understand their customers’ needs.”

And if the CEO is not a fit for reasons that include friction, competency, market missteps or ethical reasons “make a move as quickly as possible to replace that person to limit the damage,” said Matt Mooney, partner at ON Partners, an executive search firm.

There is a surprisingly high amount of times this happens, and the company should steel itself for litigation.

At small- and midcap companies new CEOs don’t work out about one-third of the time, Mooney said. At large companies it happens about 10% of the time, with these enterprises tending to be more established and with stronger professional boards.