Best practices and strategic, industry-standard processes necessary for successful CEO transitions, says new AlixPartners-Vardis’ survey
New survey suggests CEO succession “planning” may be a misnomer for many organizations that leave themselves exposed to significant risk due to a lack of process and preparation.
(October 29, 2015) – AlixPartners, the global advisory firm, and Vardis, the leading private equity specialist search firm, today announced the findings of the AlixPartners-Vardis 2015 CEO Succession Planning Survey. The survey, based on responses from 103 senior-level executives, found that while many companies are doing some form of planning, most are not doing enough to ensure a successful CEO transition. The study finds a need for best practices and standards when it comes to CEO succession planning and highlights some important distinctions between public companies and private equity firms.
Training, Timing and Expectations
More than half of those surveyed said their organizations were ill-prepared for one of the most important, high-risk events their organization will face: CEO transition.
Thirty-one percent of respondents said their company had no CEO successors identified, while 20% said their firm had just one successor identified. Meanwhile, 31% of respondents said their organizations provide no formal preparation or training for their identified CEO successor. Others cited on-the-job experiences (37%), coaching (36%), and formal assessments of strengths and weaknesses (34%). This suggests a staggering two-thirds of respondent organizations lack these fundamental developmental practices.
Even with this lack of preparation, 75% of respondents expected their company’s CEO successor to be ready for the top job within a year, and over 50% expected that within six months. Lack of planning was even more evident among private equity portfolio companies where 48% had no successor identified and, of the private equity respondents who’s company had identified a successor, 50% offered no formal training.
The lack of multiple, viable candidates, as well as training programs, leaves a company open to risk, as organizations often have very limited notice before needing to replace a CEO. And while private equity firms have many unique aspects to their business, the lack of attention to CEO development and preparation represents a real risk to their operations and the ultimate return they achieve for their investors.
“At the time a new CEO is named, that person should be deeply familiar with the board, have relationships with key stakeholders across the organization, have a keen understanding of the organization’s unique culture and challenges, and should be ready to bring leading-edge ideas to the company. This gives investors and employees a clear indication that a stable and controlled transfer, including institutional knowledge, has taken place,” said Ted Bililies, Ph.D., Managing Director at AlixPartners and global head of the firm’s Leadership & Organizational Effectiveness Practice, “It is difficult to understand why so many organizations continue to under-assess and under-prepare the individuals they plan to launch into their firm’s highest role, especially in light of recent high-profile CEO transition failures.”
Process, Criteria and Tools
Respondent organizations did identify important selection criteria for a new CEO, with most respondents choosing “people-leadership skills” (68%), “experience with similar strategic challenges” (63%) and “values aligned with board/owners” (56%). These are key characteristics, as objective candidate evaluation must take into account multiple perspectives, including past accomplishments and formative experiences, personality, and company-culture measures, plus a close read of a candidate’s motivation to take on the job. Evaluating candidates against clear criteria to determine how they will fare in the envisioned future of the business helps manage key risks in the succession-planning process, says the firm.
Views on the most critical CEO selection criteria differed in some significant ways, among the public companies and private equity companies surveyed. Most notably, private equity firms placed a much higher premium on “experience with similar strategic challenges” (cited by 74% of respondents) than did public companies (cited by only 42% of respondents). In many respects, this is one of private equity firms’ potential advantages over public companies: a laser focus on the near-term business priorities. With a three-to-five year horizon private equity firm can really afford to “pick a horse for the course” rather than an all-rounder.
When it comes to the tools and methods used to evaluate CEO candidates, 47% of respondents said their organization used internal interviews and just one additional method. Personality assessment and external, independent interviews are the most widely used, with more than 50% of respondents citing these tools. Case studies (18%), simulations (19%) and cognitive-ability tests (28%) are much less common. The most common assessment tool used by private equity firms, in addition to their own interviews, was interviews by an external consultant (48%) and personality assessment (44%).
“Assessment tools bring additional data to selection decisions, increase transparency and help depoliticize selection,” says Rob Elsey, Ph.D., Director at AlixPartners, “We encourage organizations to use several combinations of tools, including some of the less-widely used methods noted in the survey, such as case studies, simulations and cognitive-ability tests. Often the addition of less popular, more customized tools can reveal important knowledge about the candidate relative to the specific organizational culture or industry challenges, which may not otherwise be learned through traditional methods.”
Finally, there seems to be no standard in terms of who has primary responsibility for CEO succession planning. According to survey respondents, responsibility is most likely to be held by board member(s) (37%), the incumbent CEO (30%), or the head of human resources (26%). Because there is no industry norm, best practices can be difficult to establish. This potentially introduces risk, bias and politicization to the selection process.
About the Study
The AlixPartners-Vardis 2015 CEO Succession Planning Survey analyzed common practices, procedures, and criteria used by organizations when selecting a new CEO. The study was conducted in partnership with executive search firm, Vardis, in July and August 2015. It included an online survey or interview, of 103 senior-level executives, including c-suite, board members and business owners, with 38% of respondents from publicly traded companies, 39% from portfolio companies and 23% from private equity and venture capital firms. Among the companies represented in the survey, 54% had annual revenues of $500 million or more, with 31% having revenues of $1 billion or greater. All of the respondents said they had significant knowledge of CEO succession planning and selection within their organization.
AlixPartners is a leading global business advisory firm of results-oriented professionals who specialize in creating value and restoring performance. We thrive on our ability to make a difference in high-impact situations and to deliver sustainable, bottom-line results. The firm’s expertise covers a wide range of businesses and industries whether they are healthy, challenged or distressed. Since 1981, we have taken a unique, small-team, action-oriented approach to helping corporate boards and management, law firms, investment banks, and investors to respond to crucial business issues. For more information, visit www.alixpartners.com.
Vardis is the leading private equity search specialist in North America, Europe & Asia. It partners with investors throughout the deal cycle to help them Invest in, Grow and Exit their portfolio companies by appointing senior operating executives (CEOs and Direct Reports), Chairs and Outside Directors with PrivateEquityDNA™. For further information, please visit www.vardis.com.