Why so many companies fail at succession; A focus on three circumstances that can cause self-destructive behavior in leader selection, even for the well-managed companies: the style of the incumbent CEO, rapid growth, and strategic inflection. What's a board to do?

• Author: Bower, Joseph L.
• Position: Cover story

EVERY YEAR for the past five years, the consulting firm of Booz Allen Hamilton (BAH) has conducted a survey of the world's 2,500 largest public companies, attempting to develop a clear picture of the phenomenon of executive turnover. BAH's researchers have found an astounding degree of turnover at the most senior ranks of the corporate world. Much of that turnover isn't voluntary.

If you assume, as I do, that the data contained in these reports are accurate, then you have to conclude that corporate succession as it is currently practiced is a disaster.

Why are all these train wrecks happening? The obvious culprit is a shift of power away from the imperial CEO--although it's not always clear to whom that power is shifting. I don't personally believe that this power is shifting, or should shift, toward boards of directors. Boards are necessarily populated by part-time advisers. They can play a very constructive role in succession, but only as a special part of the set of processes by which the company is managed. The people best suited to manage the process are the individuals who, on a day-to-day basis, run the place and look out for the interests of the shareholders. Succession is one of their key responsibilities.

But given all the downsizing and other self-inflicted wounds, a lot of institutional memory may have been lost and, along with it, internal ability. If this is the case, it's even more important for the board to step up.

The board's choices

You already know the choices: the board can look outside, or they can look inside. Almost certainly, they hire a search firm. While search firms are used to provide reassurance to boards during internal succession processes, they are a necessity for a board looking outside. If boards do look outside, they are likely to be directed to one of the legendary people factories--GE and Procter & Gamble come to mind for generalists; Baxter, for technologists--where they will knock on the door with a large bag of money in hand and hope for the best.

What's likely to happen next? Well, the incoming CEO with a modicum of experience will find ways to cut costs during the first two or three years, thereby fattening up the bottom line somewhat. (This is especially true if the incoming CEO is a so-called turnaround artist, who is practiced at the art of corporate surgery.) After that, performance deteriorates, and it's time, once again, to get a new CEO. Most likely, the turnaround artist didn't have the time, motivation, or skills to work much on succession, so the board must look outside--again.

This time, though, the stakes are likely to be higher. The board now has at least one highly visible failure in its recent past. What follows, as a natural result, is a search for the "perfect leader," who will swing his or her sword and cut through all the company's mounting problems. This phenomenon is well described by Rakesh Khurana (in his book, Searching for a Corporate Savior, Princeton University Press, 2004) as a very unhappy process for the board...