Psychological Pitfalls of CEO Succession—and How to Bridge Them

Leadership StrategiesLeadershipSuccessionBoard and CEO AdvisoryCEO Succession
min Article
anuradha-chawla.jpg
Anuradha Chawla
August 08, 2024
8 min
Leadership StrategiesLeadershipSuccessionBoard and CEO AdvisoryCEO Succession
Executive Summary
No single event has a greater impact on the success or failure of firms than the selection of a new CEO. And yet, even the term ‘event’ is a misnomer.
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While the appointment of a successor looks a lot like a snapshot of a photo finish race, the steps leading up to the announcement of a new CEO is (or should be) in reality more reflective of a relay race—an ongoing process that involves a series of baton passes that are fraught with risks but also ripe with opportunities.

One of the largest studies that aggregated the results of over 13,000 CEO successions spanning four decades found that following a succession event, companies’ financial performance often suffered in the short term, jeopardizing investor confidence in the board, firm, and freshly minted CEO. Yet, the study also found that successions lead to greater strategic change, generating positive momentum and innovation in the organization.

Whether CEO successions flip or flop isn’t always dependent on obvious hurdles, such as CEO experience. (An analysis of over 1,000 S&P 500 and S&P 400 MidCap CEOs found that length and breadth of executive experience did not predict the post-succession performance of CEOs).

Instead, it is the psychological nuances in the process that can derail even the most mature leaders and organizations. These subtleties often have a material impact on CEO succession, reinforcing the wisdom that, “It isn’t the mountains ahead that wear you out, but the pebble in your shoe.”

Below, we highlight three psychological pitfalls underlying CEO succession—and strategies to proactively manage them. In doing so, boards and CEOs can earn the trust of their stakeholders and tilt the odds of success in their favor.

 

Pitfall #1: The Importance-Immediacy Paradox

Board directors are aware of the magnitude of CEO succession decisions, yet they predictably table important discussions about the future CEO for more immediately pressing, day-to-day issues. Research by Russell Reynolds Associates in 2022 showed that succession planning placed ninth on boards’ lists of priority topics. Conversely, strategic planning or review, operational performance reviews, COVID-19 response strategies, oversight of major transactions, and financial statement reviews topped their lists.

Yet it’s also true that a lack of effective or timely succession practices is extremely risky—and costly. One study suggests that it wipes $1 trillion of value each year among the S&P 1500 alone.

When firms have to fire their CEO, a study of the world’s 2,500 largest public companies found that they forgo an average of $1.8 billion in shareholder value.

If forced to decide under pressure, boards often turn to boomerang CEOs, former CEOs who come back to save the day. Although there are several high-profile success stories, they are exceptions rather than the rule—the average annual stock performance of companies led by boomerang CEOs is 10.1% lower than first-time CEOs.

We strongly advise boards to start CEO succession discussions early. Often, a good predictor of the CEO’s receptivity to general succession discussions is the board-CEO relationship. When the relationship is strong, CEOs are receptive and even initiate succession discussions. Taking an honest read of trust in the relationship can help assuage board concerns about bringing up a seemingly delicate issue. When done at early stages, it sets the stage for transparency. Typically, there are three organic inflection points at which these can and should occur.

  • On the new CEO’s first day. We understand that this may be an odd request, but it helps to normalize discussions around succession by highlighting that this is all part of the CEO’s job.

  • After the first performance review. If not done at the start, the other natural milestone arrives just after the first performance review, setting the expectation that the CEO should begin thinking about this issue in the upcoming year.

  • At the midpoint of the organization’s three-to-five-year strategy. This is a chance for the board to ask themselves the honest questions of whether the current CEO will be the right person for this next strategy.

 

Pitfall #2: The Pendulum Preference

When it comes time to select the next CEO, the board and members of the succession committee often engage in one of two decision fallacies. Some board members prefer candidates that are mirror images of the predecessor—the copycat CEO—especially if the incumbent has a strong track record. Others repel this tendency by overcorrecting and seeking the complete opposite of the predecessor—the seesaw successor.

Both are neither unequivocally right nor wrong. Fundamentally, it’s about whether the board exercised full internal due diligence to have a robust discussion and debate, and are aligned on the type of person that is needed for the next CEO.

That thoughtful consideration should always be centered around the business context and needs and include the development of a CEO blueprint, which is the bedrock of a strong succession program.

 

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Beginning a CEO search or succession planning without knowing the endpoint is ineffective and inefficient. In fact, we won’t begin assessing candidate suitability until we have a very open discussion with the board on what the blueprint for success looks like for the next CEO.”

Dr. Anuradha Chawla
Russell Reynolds Associates

 

If boards skip the blueprint step, it commonly leads to misalignment around what they are looking for. You can hope that the misalignment surfaces early so you can head it off. But more often than not, the misalignment doesn’t materialize until the board is far along the process, having met with candidates and unfortunately, finds themselves in disagreement with each other on who is the more suitable successor.

In developing the blueprint, it is not necessary to exclude the incumbent CEO. In fact, the incumbent CEO is likely to have insight into what the organization will need on the road ahead, and what characteristics, capabilities, and experiences will be necessary. It can also be very jarring to be fully excluded from such discussions. The board’s accountability for succession and involving and consulting the incumbent CEO don’t have to be mutually exclusive.

 

Pitfall #3: The Messiness of Change

Any type of organizational change is disruptive, and it is especially so when it involves a changing of the guard. From an external stakeholders’ perspective, the longer the process drags on, the more uncertainty it will invite around the future of the company in the eyes of investors, senior management, and other important stakeholders.

Internally, the mere mention of CEO succession can trigger implicit sentiments of a horse race. Questions begin to surface: When is the CEO leaving? Who is next in line? Will I have a shot?

Over time, coalitions start to form around likely contenders, creating political silos that encourage gossip and discourage knowledge sharing, which stymies organizational progress in the interim. If navigated poorly, this period can result in disengaged leaders and plant seeds of intentions to exit depending on who is chosen as the successor

 

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CEO succession can breed messiness and ugliness in the ranks if not managed proactively and with a firm hand. Organizations cannot avoid the uncertainty that will follow when they announce a new CEO, but they can plan in advance to mitigate the overpoliticization of everyday decisions, posturing, and horse race mentality that can ensue. It helps if a process is created whereby all candidates have a fair shot and are provided support, even if they are not chosen as the successor.”

Dr. Anuradha Chawla
Russell Reynolds Associates

 

To level the playing field, all interested internal candidates must be offered comparable attention and support leading up to the selection. After the successor has been chosen using objective criteria that establishes who the next CEO should be, unsuccessful candidates need to be informed about the decision with appropriate care and timeliness, and be given airtime to discuss options or insecurities about their future. Providing them with off-ramps needs to be discussed and planned, instead of left to the unsuccessful candidate to figure out. While unsuccessful candidates may not like the outcome, they will know the process was fair and can envision a path forward.

Finally, the outgoing CEO cannot be overlooked. As upcoming research from RRA will reveal, the outgoing CEO will be experiencing their own host of positive and negative emotions. They often find themselves marginalized once announcements have been made, despite having contributed greatly to the organization. And yet, their role is not fully done, since they likely have to support a smooth transition of the incoming CEO, while managing the needs and reactions of the board, markets, customers, and wider team.

 

The Bottom Line

CEO successions are risky events. The reasons for their failure are plentiful and their consequences can be ambiguous and unclear in the short-term, making them particularly precarious. But they don’t have to be.

Ultimately, these three psychological pitfalls culminate in three fundamental recommendations for a robust CEO succession program:

  • Establish a blueprint that serves as the north star for determining the needs of the business and CEO role.

  • Conduct in-depth, arms-length, and objective assessments of potential successor candidates against the CEO blueprint.

  • Start the process as early as possible to normalize the succession process and support all candidates before and after the transition.

 

Authors

Navio Kwok is a member of Russell Reynolds Associates’ Center for Leadership Insight. He is based in Toronto.