Company boards in Britain inevitably spend time considering succession issues for the chief executive. The reasons for this are obvious, but let's spell a few of them out. First, they may have to, because the incumbent wants to leave for another post or is ready to retire early, or a consensus has emerged from stakeholders that the incumbent is not up to the job. Second, some boards review succession planning for a CEO on a regular, but not frequent, basis when an incumbent has let it be known that they wish to retire or move on at a specific date in the future.
The big question to be addressed is whether the company has an internal candidate who can be promoted into the CEO role, or whether they should seek an external candidate. If the board has been forward-thinking on succession planning, internal candidates will have been identified. Often, they'll have been brought into a magic circle of contenders deemed to be in the frame but not quite ready, and they may well be benchmarked against external candidates accessed through the headhunting community.
So with plenty of choice of candidates and the offer of a splendid package of remuneration, what is the problem? The issues that boards face on succession are, to my mind, manifold. CEO succession, together with board composition planning, are issues on which boards are not yet fully engaged or are not equipped to handle. For the purpose of this article, the issue of board composition must be set aside. However, any CEO has to report to and relate to a board, and their effectiveness depends on a good working relationship between them and board members.
The first major issue a board faces is how to reach a consensus on the attributes required to do the job. This is not easy. The necessary professional skill-set of the candidate must be put into context: first, of the type of business (eg, manufacturing, service-based, monopoly provider, technological); second, of how mature the company is (eg, young, venture capital-backed, listed, FTSE 100); and last, of its success (eg, growing, declining, value-destroying, award-winning, innovative, treating customers fairly, well rated by external investors and the market).
The influence of corporate governance and the growing activism of shareholders in listed businesses has led to increased consultation with external shareholders on both the type of candidate and their remuneration. We might expect this consultation to develop more widely to other stakeholders eventually - such as direct reporting lines, customers and regulators - and force the process that boards go through to be more fully disclosed to stakeholders.
Having determined the professional skill-set required for a company, the more difficult task is to assess objectively the behavioural characteristics that will best suit it. Fortunately, boards have moved on from the days when comments such as 'he will fit in' or 'his father led a distinguished career' were regarded as influential in the decision-making process.
An increasing number of boards - although they are still in the minority - seek help from professionals in reviewing the behavioural strengths and weaknesses of candidates.
Natural leaders, who are able to inspire, motivate and lead from the front, frequently find the delivery of bad news or sensitive messages difficult, yet any CEO has to be able to do this. Good management should be able to demonstrate the reasons for taking difficult decisions, to engage in and execute tasks, and to measure their outcome such that the success of prior actions can be analysed and justified to stakeholders.
A larger company must look for a combination of natural leadership skills such as integrity, passion, energy, obsessiveness, pride, skills in communication and negotiating, ambition, responsiveness and a listening capability, as well as a proven, relevant and measurable track record at running a business. It will not suffice to rely on anecdotal illustrations of success in former jobs, together with headhunters' recommendations and references from previous employers. A full due-diligence programme on a candidate must be devised, led by external and professional human resources consultants, with whom the board should develop a close relationship.
However, it's crucial that the decision as to who and why must be taken by the board as a whole, and that all board members need to be engaged in differing ways in the entire process. Board agendas, particularly those for non-executives, need to include more time for discussion of executive leadership effectiveness. Generally, this subject is approached in the context of remuneration, itself a hot topic and now governed by regulation on disclosure and consultation.
But surely it is important to spend time on assessing whether a CEO has the right leadership qualities for a business before spending time on remuneration issues. The boards of most public companies probably do not even appraise their existing chief executives in a thorough and professional manner, yet they are asked to thoroughly assess their external auditors. Where should our priorities lie?
CV: Alison Carnwath is chairman of Vitec Group Plc and non-executive director of a number of other UK-listed companies. A qualified chartered accountant, she spent 20 years working in investment banking, most recently as a managing director of Donaldson, Lufkin & Jenrette in New York.