SELECTING THE NEXT chief executive officer is arguably the most important decision a board of directors must make. Many maintain that it is also the most difficult decision because it often relies on a process that generates too little useful quantitative and qualitative information concerning the management and leadership skills of candidates. If the board is lucky, the process works.
Too often it doesn't work. The high failure rate of CEOs attests to the fact that boards must demand and engage in a rigorous process that increases the odds of success. Even if the selection process is, as some directors maintain, a "crap shoot," both the costs of failure and the rewards of success to all stakeholders make it imperative that boards employ the best available tools, methodology, and processes.
The process outlined in this article, although not guaranteed to ensure success, is designed to increase the probability that the board makes an informed decision based on the best available information. The process begins with the assumption that there are one or more internal candidates for the CEO position. Although completion of the process may lead to the informed conclusion that internal candidates do not possess the required competencies, at that point a decision can be made to seek an external candidate.
Let us begin, however, with a process designed to determine whether the internal candidates are viable successors. Following are the steps that will engage the board in a deliberate process to reach a rational conclusion.
Step 1: Define the challenges facing the next CEO
Ram Charan, a noted expert on corporate governance, stated in a Fortune article: "One of the five pitfalls of CEO succession is the tendency to use boilerplate criteria. Boards need to drill down to the specifics. A board's task is to find someone with the right skills for this job, not someone who meets central casting's idea of a leader."
To "drill down to the specifics" requires a disciplined analysis of the challenges facing the new CEO and identification of the competencies needed to master those challenges successfully. Both of these tasks rest on an in-depth review of the vision and strategic direction of the company. Such information can be gleaned from formal strategy documents and should always be supplemented by tapping the views of fellow board members and key members of the executive team.
Step 2: Identify the competencies required to address the challenges
The steps in the process can be brought to life by referencing the recent experience of a company facing a transition in leadership. A $10 billion-plus company in the services sector, it had identified and prioritized its principal strategic challenges as follows:
* Achieve operational and...