We conclude with some basic guidance and recommendations for Boards of Directors drawn from our research and analysis.
- Be attentive. Establishing the best leadership structure is an ongoing responsibility of the board. Governance guidelines should state the commitment to reviewing leadership structure regularly, and the board should take that responsibility seriously. Evaluate the pros and cons of the current structure, and don’t simply rubber-stamp the status quo annually.
- Be clear. Boards and their published governance guidelines should be clear and transparent about preferred leadership structure (if any), the roles of independent Lead Directors, and the handling of Chairman and CEO transitions, including any preference for transition periods with otherwise combined roles.
- Be flexible. Any structure change should be driven by both the immediate situation and the longer term governance goals. Most companies avoid unconditional commitment to a particular structure. Stay focused on the goal of adequate independent oversight by the board. Be purposeful in the structure you choose, and don’t split merely for the sake of “governance optics.”
- Be prepared. Transitions are often unforeseen. Scandals, fraud, shareholder pressure, and unscheduled departures drove 40% of the actions to split roles in the F100. When discussing leadership structure and succession plans, anticipate the possibility or necessity of changing the structure under the circumstances of sudden CEO or Chairman departure, shareholder pressure to split roles, business conditions calling for combined roles, or ethical lapses by senior executives.
- When the roles are split and success depends on the working relationship between CEO and Chairman, be explicit about the roles and responsibilities of each. This is especially important if the new CEO is an outsider, or if the Chairman is the former CEO, serves as a public face for the company, or is otherwise active in leading the company as well as the board.
- When roles are combined and success depends on strong independent governance, leverage the role of Lead Director. Make the Lead Director’s qualifications and responsibilities explicit, including the responsibility for communicating with and advising the Chairman-and-CEO. Make sure that the Lead Director is strong but collaborative and doesn’t have an eye on other roles.
- When transitioning from a company founder or long-time CEO, be especially deliberate about structure and succession. That is typically not the time to change leadership structure, unless of course the long-time CEO assumes or retains the Chairman role. All bets are off, however, if the CEO’s departure is sudden and unscheduled.
- Any structure change carries risks as well as potential advantages. Having the former CEO remain as Chairman can be problematic, except for a specific transition period, where it can be very useful. Having roles combined can make it easier to recruit a very strong and accomplished CEO, but that’s accompanied by the operational and organizational risks of bringing in an outsider.
- When considering or making a change in leadership structure, anticipate how the board will communicate with shareholders and manage their expectations. Appearing to be reactive, caught unprepared, or forced to change puts the board and the company on the defensive.
To protect yourself from the worst case scenarios, and to maximize your chances of success with leadership structure and CEO transitions, we recommend:
- Mind your books. Make sure you have strong CFOs and other controls, so that you don’t, for example, get Dell’s $100 million fine under Kevin Rollins during an industry downturn.
- Have realistic expectations. If the company has only had six CEOs in 120 years, don’t expect that the next one will last for another 20. Times have changed.
- Give the new CEO a fair shot and room to operate. But maintain controls that help maximize the opportunity to succeed. If you promote from within or the person is a known entity, it is a lot easier to give them room, as you know and trust them.
- Complement the new CEO’s skills. Keep in mind that the no. 2 to a long-term CEO or founder is likely to have complimentary skill sets and not be a carbon copy of the former CEO. Surround the new CEO with an appropriate team that complements his or her skills.
- Transition in good times. Try not to transition, especially from a long-term CEO, during a business downturn.
- Look at intentions of Lead Director candidates as you do with executive succession. If you appoint a Lead Director who is really hungry for the CEO or Chairman spot, you’re compromising the leadership structure.
- Be realistic about what an “independent” Chairman means. If the former founder/CEO of 30 years steps back in as Chairman after three months off the board, he is not independent, no matter what the rules may say.