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How to Find Your Next CEO

Almost 1,500 CEOs quit or were fired last year – about six per day on average. Marquee names in the last year included Jerry Yang of Yahoo, Aylwin Lewis of
Sears, Steve Jobs of Apple, and Dick Bond of Tyson Foods.

Small wonder, then, why
a new CEO ranks as a top concern for corporate boards
— yet only half of them have a
plan in place to find a back-up boss. "This is the single-hardest job
a board faces, but it's the one they fail at the most,"
says Nell Minow of The Corporate Library, a research firm focused on corporate
governance. Your board doesn't have to be among those that fail to
plan for a smooth transition at the top. Here are the steps your directors can
take to create a succession plan that works.

Plan for Plan B

Goal: Make succession an ongoing priority.

The recent past is littered with examples of boards that have
failed to make succession a front-burner issue. While Citigroup’s
former CEO Chuck Prince was under fire throughout most of his tenure, the
company had no succession plan in place when he left, says Mark Nadler, a
partner at Oliver Wyman Delta Organization & Leadership, an executive
consulting firm. Nadler, who authored the book “Building a Better
Board,” contrasts Citi’s example with that of Time Warner,
the media giant that replaced Dick Parsons with Jeff Bewkes. “The
process took two years, and the board was involved the whole time,”
he says.

Succession planning can be sticky because CEOs historically
controlled the process, and chief executives typically don’t want to
plan for the day they’re gone. A CEO should be involved in creating
and implementing your plan, but he or she cannot be the driving force. Boards
should delegate the job to one or two board members on either the governance or
compensation committee.

Constance R. Dierickx, a senior consultant with RHR
International Co., suggests drawing up two written plans: a “hit-by-the-bus”
emergency plan and a long-term plan. Both should identify a timeline, name who
will be involved (current CEO, HR staff, and a consultant perhaps), establish a
process for identifying potential candidates, and lay out how often the full
board will receive updates.

The hit-by-the-bus plan should not only identify the “ready
now” candidate to step into the CEO role, but it should also outline
a process of what to do if a CEO suddenly quits, is fired, gets injured,
becomes ill, or dies. Work with your media team, too, to decide how the news
will be communicated. When Steve Jobs stepped aside in January because of ill
health, for example, the move forced the company’s PR team into
triage mode because only a week earlier Jobs himself said that his health
concerns were not serious enough for him to step aside.

Nitty Gritty

Enlist the Current CEO

Because few board members get involved with day-to-day
operations of the company to access potential successors, incorporating CEO input into the succession process is crucial, according to Minow. To ensure that a CEO stays
committed to helping with the plan, companies can tie his or her compensation
or bonus to identifying and mentoring potential successors. Boards also can
prevent a CEO from cashing in any stock for three years after his or her
departure as an incentive to selecting a solid successor, Minow says.

Identify Critical Needs

Goal: Know the company’s long-term goals
and future challenges.

This is no easy task these days, since the economic outlook
fluctuates on a daily basis. Nevertheless, when boards set out to create plans,
it is incumbent upon them to address what challenges and market conditions the
business will likely face in three, five, seven, and 10 years.

Dierickx of RHR suggests boards hone future projections from
interviewing analysts and surveying customers. Individual interviews with board
members and industry outsiders will clarify a vision for the future, she says.
Historical analysis of businesses also can help in the current environment.
P&G, IBM, and GE were founded during economic panics in the 1800s, for
instance, and United Technologies hung out its shingle in 1929. The way these
giants navigated a tough economy may lead to some insights for directors trying to
look past present market conditions and plan for the future.

When conceiving succession plans, don’t fall into the
trap that many boards do by thinking they only need to clone the existing CEO,
says Stephen Miles, managing partner at Heidrick & Struggles, an executive
search and consulting firm. “In only the rarest cases are the
challenges ahead going to need the same skills that worked in the past,”
Miles says.

Hot Tip

Get your criteria straight

Don’t settle for a laundry list of adjectives when
profiling your dream CEO. Trite descriptions of what a leader should be do not go deep enough when describing what your company needs, says Ram Charan,
author of the book “Leaders at All Levels.” Board members
may agree they want a CEO who is “visionary,” but they may
have drastically different views on what that means, he says. Would that person
bring radical change immediately? Or institute change over a few years? Avoid
catchphrases and discuss what leadership qualities are really meaningful to the

Start the Search

Goal: Find promising internal candidates and chart
their leadership potential.

Now that the board knows what it wants and needs in a new CEO,
it’s time to identify those people who best fit the specific
criteria. More companies — 60 percent —
now promote from within, according to management consulting firm Booz Allen
Hamilton. Steve Jobs handed the baton in January to Apple’s COO, Tim
Cook, who filled in as CEO in 2004, when Jobs underwent cancer treatment. And Tyson’s
board bounced 61-year old Dick Bond in favor of former insider Leland Tollett,
71, who served as CEO and chairman of the meat giant from 1995 to 1998.

Internal candidates can be especially valuable in the current
environment, where seasoned talent is difficult to find, if not impossible. No
one working today was running a company during the Great Depression, for
example, and the global financial crisis is a first for this generation of
executives. So a candidate with some company knowledge can make up for lack of
experience with the macroeconomic climate, and speed up the transition time.

Here’s how to narrow the pool of would-be CEOs:

Groom potential successors and track their progress. Outline how the existing CEO will mentor executives, how candidates will
develop their leadership skills, and how they will rotate through various posts
in the company on their way to that corner office. Dierickx uses “talent
maps” — color-coded organizational charts — to
update board members on the professional development of internal candidates.
(For more information on developing future leaders, see BNET’s Crash
Course on href="">How to Start a Mentorship

Don't let the process turn into a spectator sport. Most boards keep their succession candidate lists quiet,
and for good reason. An openly announced competition can cause a politically
destructive environment within a company, and it can ultimately undermine the
effectiveness of the existing CEO, says Nadler. Make it clear to candidates early on that they'll be
graded on how they stay above the fray, and how well they stay focused and work

Get out of the boardroom. To get to know a
potential chief executive, directors need to know what he or she is like
outside of the office, says Nadler,“With off-sites and dinners,
directors have a chance to just sit and get a feel for a candidate,”
he says. Some companies send directors in pairs to visit faraway operations, to
meet with top management, and to mix office time with social time, like dinners
and drinks.

Standardize the evaluation process. Establish a way to measure
the readiness of all of the candidates. Will the process involve in-depth
interviews? Personality or leadership tests? Or 360 interviews, which combine
online ratings and interviews with a candidate’s peers, bosses, and
the people they manage?

Danger! Danger! Danger!

Consider external candidates with caution

If the board wants to consider outside candidates, stay
focused on challenges and competencies, and don’t be swept away by a
CEO’s personality or great resume, says Charan. A deal-making CEO
that succeeded in the telecom business by making acquisitions may not be right
for your slow-growth business, he says. External candidates also face a huge
learning curve. Perhaps they are new to the industry, or the corporate culture
is vastly different, says Nadler. “You never know anyone as well as
the people who work inside your company,” he adds.

And be warned: The appointment of an outsider also may
prompt other valuable insider executives to depart. When Yahoo hired former
Autodesk CEO Carol Bartz, 60, to replace Jerry Yang early this year, the board’s
decision apparently irked then-president Susan Decker, who had been considered
for the job. Decker served alongside Bartz as on outside director on Intel
Corp.’s board, which made the choice even more uncomfortable for her.
She quit when the company announced the Bartz appointment.

Plan the Transition

Goal: Set up the new chief
exec to succeed.

Companies should enlist the outgoing CEO or a hired
consultant to coach the new leader for what can be a lonely job. But keep the
period of transition short — six to 18 months at most, says Nadler.
Letting go may be tough, particularly for a founding CEO, or for the CEO who is
still a shareholder, which is very often the case. “You don’t
get to be a CEO without being a strong, independent person. Sometimes you have
to pry their fingers off that job,” says Minow.

In the case of a public company, outgoing CEOs must limit
their involvement once a regime change has been made. The board cannot legally
share certain information because he or she is now an outsider. The outgoing
CEO should, if possible, physically distance himself or herself from the new
recruit, moving to an office down the hall, down the street or even out of
state, Nadler says.

When Bob Lawless retired in January 2008 from McCormick
& Co., the Baltimore-based spice company, he moved to Florida. But, as
chairman, he still coaches the company’s new CEO, Alan Wilson, by
taking business trips when Wilson invites him to, and through weekly phone
calls. Lawless says he never initiates those calls — he waits for
Wilson to seek advice and counsel.

Big Idea

Bring in a successor — but keep the search process going

Despite the disdain for bonuses and perks in the wake of the
ongoing government bailouts, companies hiring a new CEO should be careful not
to get seduced into a comp package devoid of incentives to perform, says Minow.
CEOs should consistently be evaluated against the rest of the world, and even
if it seems that he or she is the best person for the job, succession plans
should be refreshed continually. Boards should always be thinking and planning
for the next successor. “If your CEO is not doing the best job today,
then your board better have a Plan B,” says Minow.

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