When a company’s chief executive officer (CEO) leaves their position or plans to retire, it raises an important question: who will take over as the next CEO? Selecting a successor is one of the most critical decisions a company will make, as the CEO has immense influence over the organization’s strategy, culture, and performance. There are several key factors boards of directors consider when appointing the next CEO.
What is the typical CEO succession process?
The CEO succession process typically involves both extensive planning and input from key stakeholders. Here are some of the most common steps:
- The outgoing CEO works with the board on a transition plan and timeline. This usually begins at least a year before the CEO plans to leave.
- The board forms a special CEO succession planning committee. This committee oversees the process and identifies and evaluates candidates.
- The committee develops a CEO profile by assessing the company’s strategy and needs. This helps narrow down the desired experience and capabilities for CEO candidates.
- A search firm may be enlisted to identify external candidates. Internal candidates from the executive team are also considered.
- The committee interviews and thoroughly vets finalist candidates. This includes assessing their experience, leadership capabilities, fit with the company culture, and vision.
- The committee makes a recommendation to the full board of directors for the final decision on selecting the next CEO.
This rigorous process allows boards to carefully consider various alternatives and find the best CEO for the company’s needs at that point in time. Both internal and external candidates are often considered. Some companies, however, have a strong preference for promoting internally.
Who are typical candidates for the CEO role?
There are two primary pools companies draw CEO candidates from:
- Internal candidates – These are executives who already work for the company and have extensive experience and familiarity with its business. Common internal options include the:
- Chief Operating Officer (COO) – The COO is responsible for day-to-day business operations and reports directly to the CEO. This makes it a common stepping stone to the CEO position.
- Chief Financial Officer (CFO) – As head of the finance function, the CFO understands the company’s finances, cost structure, and sources of profit deeply.
- Head of a Division – The leader of a major business unit or division also gains experience running a sizable organization and may move up to lead the overall company.
- President – Some companies have a President who ranks just below the CEO and oversees major functions. This can be another transition point to CEO.
- External candidates – These are executives outside the company who offer fresh perspective from other industries or firms. Some common external options include:
- Leaders from related industries – A seasoned executive from an industry related to the company’s can offer relevant insights and experience.
- Highly successful CEOs from other firms – Bringing in an outsider who has a strong CEO track record can indicate fresh thinking.
- Prominent leaders in academia or politics – Sometimes companies target a noted scholar or government leader to bring new ideas.
There are good arguments for either promoting internally or recruiting an external CEO. Companies weigh factors like continuity, culture fit, change needs, and experience. Many firms utilize a mix of both internal and external CEOs over time as the needs of the organization evolve.
What qualities and experience make for a successful CEO?
While each company and situation has unique needs, there are some core capabilities that are commonly sought after in CEO candidates:
- Leadership skills – Strong leaders can inspire employees, set a vision, make tough decisions, and instill a high-performance culture.
- Strategic thinking – CEOs must understand markets, trends, and competition to set effective long-term strategy.
- Industry knowledge – Extensive experience in the company’s industry provides an understanding of its dynamics and drivers.
- Operations excellence – Knowledge of operations and executing business plans is critical for performance.
- Financial acumen – Oversight of finance such as cash flow, capital allocation, and growth figures comes with the CEO territory.
- Communication skills – CEOs must communicate well internally with employees and externally with investors, media, and other stakeholders.
- Technology vision – Increasingly, technology expertise and understanding emerging tech like AI is valued in CEOs.
- Change management – Leading major business transformations and cultural shifts falls onto the CEO’s shoulders.
Beyond these core competencies, CEOs also benefit enormously from significant experience in executive roles prior to becoming the CEO. This allows them to prepare for the immense responsibilities of the CEO position.
How is CEO succession evaluation and planning evolving?
As the business environment continues evolving, companies are taking a more proactive and strategic approach to CEO succession planning. Some of the ways this process is changing include:
- Planning is starting earlier – Companies are beginning the conversation 3-5 years before an anticipated transition rather than reacting nearer to the date.
- It’s becoming more transparent – Companies are communicating more openly with stakeholders about the process and timeline to reduce uncertainty.
- Diversity is increasing – More focus is being placed on considering female and minority candidates to break historical CEO demographics.
- Succession pools are expanding – Companies are developing deeper benches of internal talent and exploring wider nets externally too.
- Assessment is intensifying – Prospects are undergoing even more rigorous assessment and vetting procedures.
- Board involvement is deepening – Boards are devoting more time and resources to succession planning activities and oversight.
This strategic process gives companies the lead time required to adequately prepare for their future leadership needs. Developing an executive talent pipeline and maintaining continuity plans have become board-level priorities.
What happens when succession planning fails?
Poor CEO succession planning can leave companies facing major risks and uncertainty. Some potential consequences include:
- Leadership void – A lack of qualified, ready successors may force an unplanned vacancy at the top.
- Disrupted strategy – Abrupt CEO turnover can lead to drastic strategic shifts destabilizing the business.
- Culture clash – Bringing in an outside CEO unfamiliar with the company culture risks employee disengagement.
- Loss of knowledge – Long-tenured CEOs take institutional knowledge with them that is hard to replace.
- Board tensions – Scrambling to find emergency replacements can create rifts between directors.
- Investor concern – Surprise leadership events make shareholders nervous about governance weakness.
- Lower performance – Periods without permanent leadership tend to increase business disruption and falling results.
Careful planning is essential to avoid these pitfalls that hurt stakeholder confidence and impact the business negatively. Even well-planned transitions usually involve some speedbumps as the new CEO gets up to speed.
Historical trends and statistics on CEO succession
Looking at historical data on CEO succession provides helpful context on trends over time. Here are some noteworthy statistics:
| Measure | Statistics |
|---|---|
| Average CEO tenure at largest 500 US companies | 5 years ( declined from 7 years in 2013) |
| Average age when appointed CEO | 46 years old |
| Most common sources for external hires | 35% from related industries, 23% from unrelated industries, 11% from private equity portfolio companies |
| Transition types | 70% planned retirements, 15% forced turnover, 7% founder transitions, 3% due to health issues, 5% other causes |
| New CEOs hired externally | 22% historically – rising to 33% in 2019 |
| New CEOs who are female | 6% historically – 15% in 2021 |
As shown above, companies are hiring more CEOs from outside, turnover rates have increased, and diversity is slowly improving. Tenures remain relatively short given the steep learning curve. These trends indicate finding qualified, experienced leaders from a mix of sources is growing in importance.
Typical career path to becoming a CEO
Very few executives take on the CEO role without extensive experience in other senior leadership positions first. Here is a look at a typical career journey:
- Get a bachelor’s degree – Most CEOs have an undergraduate business, engineering, or economics degree from a competitive college.
- Work in consulting, finance, or operations roles – Early career experience in corporate strategy, investment banking, or core business functions.
- Obtain an MBA – Many future CEOs earn MBAs from top programs to advance leadership skills.
- Manage business units and functions – Broader experience running finance, marketing, product groups, or regional operations.
- Take on VP or SVP positions – As Vice President or Senior Vice President of major divisions to gain general management skills.
- Serve on the executive team – Act as Chief Operating Officer, Chief Financial Officer, Chief Technology Officer, etc.
- Advance to CEO – After a decade or more in key executive roles, promotion to CEO is common.
Very few people become CEOs in under 10 years even with strong performance. Seasoning through diverse live experiences makes more well-rounded leaders. Jumping into the CEO seat too quickly often ends poorly.
Tips for aspiring CEOs earlier in their career
For professionals interested in leading at the CEO level later in their career, some helpful tips include:
- Seek out leadership development programs.
- Volunteer to lead visible projects and teams.
- Build networks across your industry and company.
- Understand the full business, not just your function.
- Deliver strong results consistently.
- Develop communications and influencing skills.
- Gain international experience if possible.
- Get exposure to boards of directors.
- Obtain profit and loss ownership experience.
- Emulate other successful leaders, but develop your own style.
With deliberate focus on the right experiences and skill building, talented executives can put themselves on the CEO track over the long term.
Conclusion
Selecting the next CEO is a crucial responsibility for company boards. Careful succession planning and preparation is vital to maintain stability and continuity. While each situation is unique, boards typically consider veteran internal leaders as well external seasoned executives who offer new perspectives. Developing a diverse slate of qualified candidates and thoroughly vetting capabilities allows incoming CEOs to hit the ground running. With strong leadership in place, companies can smoothly transition while maintaining business momentum and stakeholder confidence.
