The director was convinced that the board, not the CEO, must own the decision and the process for choosing a company’s chief executive. Indeed, his own company had an exemplary succession process with full involvement of the board. So he took a stand on a basic principle: It is the board’s job—its most important job—to select the company’s CEO. The board’s greatest opportunity to add value is to ensure that the company has the right CEO at all times. Nothing else compares.

Liberated boards would agree, in concept. Paradoxically, however, directors on Liberated boards don’t spend the requisite time and energy on the process. They often don’t bring the rigor to the process or the personal judgments to the table that you would expect for their most important task. When the time for succession arrives, the whole board is not involved. Directors delegate too much to the outgoing CEO and rely heavily on executive search firms. That is an error of omission bordering on negligence on the part of the board.

Consequently, some boards have inadvertently destroyed value at their companies by choosing the wrong person to lead the business. Think Al Dunlap. When the new chief executive lacks the necessary skills and experience, the business suffers, sometimes severely. But it takes one to three years for a board to sense the mismatch and come to a consensus on that conclusion. Thus a failure to select the right CEO can put a company at a distinct competitive disadvantage for a long period of time.

Just look at Kmart, which had three consecutive CEO failures over eight years while Wal-Mart left it in the dust. Or Apple Computer, which struggled to maintain its competitive position as three consecutive CEOs failed from 1993 to 1997.

Conversely, choosing the right CEO is a tremendous valueadder. In contrast to Apple Computer’s trials and tribulations with CEO selection, think of the IBM board’s decision to hire Lou Gerstner in 1993, when everyone was expecting a technology wizard to replace outgoing CEO John Akers. Given IBM’s success since then, it’s hard to imagine that it was at one time at risk of following Prime Computer, Digital Equipment Corporation, and Wang Computer into obscurity. Who wouldn’t agree that the IBM board made a huge contribution to shareholders, employees, and other stakeholders? By naming the right CEO, that board earned its spurs as one that creates value for investors. Since successful CEOs tend to beget successful successors—witness Sam Palmisano—the IBM board set the company on a terrific path for decades through its selection of Gerstner.

Success is never guaranteed, however. Mistakes will be made. But a Progressive board is conscientious about having the right CEO and keeping its succession process continuous. That way, the board is in position to rectify a wrong hiring decision. Procter & Gamble’s board shifted course to name A.G. Lafley CEO in 2000, following a short tenure by his predecessor. His subsequent success demonstrates the value of a board’s diligence in ensuring the right management and correcting a wrong decision promptly.

The problem is that many boards lack for robust processes to do the job well. The recommendations in this chapter will help boards translate a full engagement with CEO succession into decisions and actions that greatly improve the outcome:

Every company faces a unique set of challenges at a given point in time. It is up to the board to bring those challenges to the surface, debate them, and sharply define the criteria needed to address them before the CEO search begins. A company that faces a deep cash crunch and has to restructure its balance sheet, for example, might require a CEO who has credibility with providers of capital and the ability to build a superb operating team. A company that has grown rapidly through acquisitions and needs to take a breather to leverage them for competitive purposes might require a CEO who has specific capabilities in assimilating acquisitions and turning them into an organic growth engine.

These specific mission-critical criteria are not always obvious. Defining them requires that the board has a good grasp of the business and its current external and internal realities. It’s likely that different directors will have different views. But ultimately, the board must agree on three or four specific skills and abilities that are of utmost importance. These are the ones the board cannot compromise on; they are nonnegotiable.

In 2001, when Bank of America faced a succession decision, the board took the time to identify the bank’s specific needs. The search pointed to a very different kind of leader from the long-time incumbent. Sitting CEO Hugh McColl was a superb deal-maker who had used dozens of acquisitions to transform the unknown small Charlotte-based bank NCNB into a regional powerhouse, Nationsbank, then orchestrated the merger with California-based BankAmerica to create Bank of America, the largest consumer bank in the United States.

Through the series of mergers and acquisitions, the bank had established a large footprint in the United States. Next, the bank had to become a high-performance organic growth engine. As one director described it, when discussions about succession got under way, the board began to crystallize its thinking around that one issue: acquisition integration. What they needed, directors concurred, was someone who could bring everything together into a coherent whole and leverage the bank’s strong U.S. consumer franchise. Deal-making was not a priority; operating experience and ability to lead the business on a trajectory of long-term value creation was.

The criteria pointed to Ken Lewis, a company veteran and president of the bank’s Consumer and Commercial Banking division. He was well suited to the company’s needs. He suspended the acquisition spree and concentrated on organic growth, focusing on market segmentation and the cross-selling needed to achieve it. His efforts were successful and the board supported him. It wasn’t until late in 2003, with the announcement of the bank’s merger with FleetBoston, that the firm was again ready to take on major acquisitions.

Kmart’s board might have chosen different CEOs and had better results if it had more sharply defined the nonnegotiable criteria. If the CEO could not master the supply chain, recruit the right merchandising executives, and differentiate the company against its archrival Wal-Mart, there would be little chance of success. Those criteria should have taken precedence over others. The directors looked for candidates with strong leadership skills, a past record of achievement, and restructuring abilities, and made their choice accordingly. They seem to have missed the essential operating skills that the Kmart position required at the time. The toll on shareholder value, brand image, and employee sentiment has been high.

Times change; boards should occasionally revisit the quality of the match between what is required and what the current CEO has, even when a succession is not imminent. They must remain prepared in case of emergency. And they must keep these changing criteria in mind as they track inside leaders as succession candidates.

By contrast, consider how a board typically assesses an outside candidate: a handful of directors will each interview the candidate for roughly two hours; the board will be informed on the candidate’s past record and accomplishments; an executive search firm will offer its own opinion of the candidate’s capabilities; and, in the best-case scenario, directors will personally check the candidate’s references. All told, the board will spend four to eight weeks assessing an outside candidate. It’s easy to see that a board gets much more information about an internal candidate.

Of course, the internal candidate still has to be a match with the nonnegotiable criteria. The board has to ensure that there is a pool of potential successors who are getting the appropriate development opportunities well in advance of a CEO’s planned retirement, and they should be using that long lead time to get to know them well. General Electric’s well-documented search for Jack Welch’s successor involved a decade’s worth of work. As directors observed the up-and-coming leaders, the pool of candidates evolved. Then as the time frame shortened, the list of candidates shrank, until finally Jeff Immelt was selected from among three very strong contenders.

The sitting CEO must help directors learn about the succession pool. During at least two board meetings per year, the CEO should share personal insights about the top dozen or so managers, among whom possible candidates will emerge. Some boards go even deeper: they make it a point to get to know the top twenty to twenty-five managers. (Chapter Nine describes board practices to assess the leadership gene pool at all levels of the company.) Directors will probe on questions such as these: What are the precise talents the candidate brings to the table? Under what conditions would each be most and least likely to flourish and why? How is the CEO continuing to challenge each candidate?

And don’t forget: What specifically are the weaknesses of each individual? In the mid-1990s, during one in-depth discussion of senior executives at GE, Welch heaped praise on a star executive. But a director interjected and questioned whether the individual had any weaknesses or made any mistakes. The discussion then turned to individuals who had demonstrated their ability to handle adversity as well as success. The director’s question helped keep things in balance.

As a succession decision nears, the list should be winnowed down to the top two to four candidates. Discussions of senior-level leaders should include some context about how the business environment is changing and how the candidates are demonstrating or developing the requisite capabilities to deal with it. Thus the board can continually update its criteria and track who is likely to meet the future requirements and who is falling off the list. If the board suddenly needs to make a move, directors will be up to speed on who the internal candidates are and whether they are fully prepared.

The CEO also should solicit directors’ feedback on the individuals. Frequent, open exchange of observations and opinions about people can open a CEO’s eyes to a candidate’s shortcomings and exceptional strengths, or to new ways to develop and test a person. As seasoned leaders with rich and diverse experiences, directors can sometimes pick up nuances of a person’s strengths and abilities that others haven’t noticed.

Directors, each and every one of them, must take an active role in assessing the individuals for themselves. By engaging with them during boardroom presentations, directors can gauge the breadth of the candidates’ thinking, how they go about solving problems, and the quality of their follow-through. But directors should beware of sound bites—that is, of giving too much weight to highly polished communication skills.

Thus directors also should get comfortable with candidates informally. One board has two or three directors dine with a promising leader the night before a board meeting for just that purpose. They engage the person on what is happening in their part of the business, and how they view the company’s strengths and weaknesses. Directors might pose hypothetical scenarios involving changes in the external environment, to get a flavor for how the candidate would go about approaching the business. These what-if questions provoke the individuals to do broader thinking. It gives directors more of a sense for what makes each individual tick. GE directors periodically visit leaders at their workplace. Over time, it gives them a better opportunity to know the leaders of the future.

Another best practice is to have candidates schedule visits to meet with directors individually. Whether the meeting takes place at the director’s office or over dinner, the idea is to create a friendly ambiance. In informal one-on-one interactions, questions can be asked that don’t come out when others are present. “What would you do if you were CEO?” a director might ask, so as to see the business through the candidate’s eyes. The idea is also to gauge how leadership characteristics got etched into the personality of the person, whether through military experience, sports, or personal hardships. It also gives the candidate opportunities to offer observations and judgments—about company culture or competitors’ prospects, for example—that might not otherwise come out.

The conversation—and these meetings are conversations, not interrogations—must remain loose and two-way. That lets the candidates learn by hearing what directors have in mind for the business, and both director and candidate will judge whether good chemistry could be built between them.

With these practices, the board and the CEO will over time develop a good sense for which candidates are a good fit under current and potential circumstances. Realistically, if a board can identify three truly great candidates, it’s doing well. If succession is not imminent, having multiple inside candidates is ideal to ensure that there is some diversity of skills in the succession pool. By the time succession arrives, there could be a shift in the required criteria, so boards should make sure they have a choice.

If internal candidates are too few or found lacking, the board might suggest that the CEO hire senior managers one or two levels down with one eye on infusing the pool of potential successors. This can also happen through acquisition. At Burlington Northern in the early 1990s, the board pressed CEO Gerald Grinstein for a succession plan. Efforts to recruit two candidates from competitors were unsuccessful. Then, in 1994, the opportunity arose to acquire Santa Fe Pacific, a smaller competitor with a young, highly qualified CEO who could become CEO of the merged firm. Due diligence on the acquisition target included a thorough review of its CEO, Robert Krebs, and his potential to lead the merged business. Similarly, many consider JP Morgan Chase’s acquisition of Bank One in 2004 partly a move to bring in Bank One’s CEO, Jamie Dimon, as a successor to JP Morgan’s CEO, William Harrison.

Burlington Northern’s initial succession problem began when two internal candidates were asked to leave because of their destructive conflict, a common concern among boards. Narrowing the field to two or three succession candidates years ahead of time can spark competition among them—which can have negative consequences.

Companies take different tacks to avoid this problem. At Medtronic, for instance, CEO Bill George picked Art Collins as his heir apparent about eight years before George’s planned retirement. It gave Collins time to prepare for the job, while the board got a chance to get to know him, and the company could avoid destructive in-fighting.

Will the heir apparent become impatient in the number two position and lobby for the top job, or leave the company? Boards have to think through the timing issues and decide which approach makes sense for them. Because Jack Welch’s three succession candidates ran separate businesses located in different locations rather than at headquarters, they were fully focused on leading their separate business units. Internal competition can be more damaging in a functionally organized company, where the business depends on collaboration among the competing candidates. The underlings (and corporate staff) tend to take sides in the competition.

This board’s approach to succession was exemplary in two ways: the board took the time to establish specific criteria, and it created a process that deepened directors’ insights into what each candidate had to offer. The board’s thorough assessment of the candidates and restraint from reaching premature conclusions made it easy to see which one of them best met the requirements of the job.

Here’s how it went. The board formed a search committee and produced criteria for an executive search firm to propose outside candidates. Though some directors championed the two insiders, all agreed that broadening the search was a serious responsibility. So the committee reviewed profiles of ten candidates proposed by the search firm, and narrowed the list down to three outside candidates after a lengthy conference call with the recruiter.

The six members of the search committee then set aside a weekend for the sole purpose of interviewing the five candidates, three from outside and two from inside. Committee members broke into two teams of three directors each. Each team interviewed one of the candidates for about an hour and a half. When the teams took a break, they discussed what they heard and what they wanted to probe further. Next, the teams exchanged the candidates. Thus, by the end of the weekend, each team had interviewed all five candidates.

Beginning Saturday night over cocktails, and continuing Sunday afternoon after all the interviews were complete, the two teams got together to cross-check their opinions. Remarkably, the teams had very similar views of the candidates, and a clear consensus emerged. The directors thought one candidate was brilliant and insightful, but they weren’t sure he could execute, because his experiences might not be replicable for this industry. Another was essentially an investment banker and had no operating experience. By the end of the weekend, the search committee rejected all five candidates, including the internal candidates some committee members had once so ardently advocated.

In fact, through the dialogue over the five first-round candidates the board began to question whether the initial selection criteria were specific enough. In its initial discussions with the executive search firm, the committee had decided that its new CEO would need to move the business into adjacent segments and turbocharge growth through acquisitions. But through the process of interviewing, and after consulting other directors, the committee realized that there was room to grow within the industry, as long as the new CEO could sharpen the company’s focus and culture. This was a pivotal realization in the board’s decision to reject one of the outside candidates, whose claim to fame was his experience in substantially broadening the scope of his current company’s business.

The search firm went back to work and recommended two more outside candidates. The committee repeated the small-group interview process and decided on a leading candidate. The committee then took their recommendation to the full board, and after two more rounds of interviews and careful reference checking, it offered him the job. With one director coaching the new CEO, the early signs are terrific and the board remains confident that it chose the right person.

Evaluating succession candidates accurately adds a world of value to a corporation and cannot be delegated. Executive search firms are very good at finding talented external candidates with a record of performance and achievement. And boards are increasingly hiring top-tier search firms to let the public know that they are taking succession very seriously. But boards must own the process, clearly defining the criteria, making their own judgments about people, and trusting their own instincts about who is the best match for the job.

Leaders are often assessed based on their success in previous positions. But can a great leader of a single business run a multibusiness company? Can a great marketer make the leap to CEO? Can the leader of an amazing turnaround grow a business? Directors have to think through the basis of the person’s past success and carefully consider whether it is relevant. Success couched in broad, abstract form does not necessarily translate to another situation and a different set of issues, and a person’s flexibility and ability to learn may have limits.

Small-group interviews followed by cross-checking is a great way for directors to get to know candidates, but directors must also personally check references—rigorously. Reference checking should extend beyond the usual palette of accomplishments and touch on areas that define an individual’s psychological makeup.

In one case, a board relied heavily on a search firm to find sitting CEOs who could be succession candidates. It also engaged a prominent investment banker to help out and validate the final selection. But when the new CEO struggled for several years and couldn’t deal with some very important people issues, one of the directors did a little private digging. It turned out that at the CEO’s previous company, many decisions regarding critical people were made not by the CEO but rather in the neighboring office by the Chair, who was the former CEO and son of the company’s founder. The board should have known that ahead of time. Directors’ personal investment of time in accessing their personal networks for reference checking could have paid dividends if it had uncovered that fact before making the hire.

In some cases, the company might have someone waiting in the wings, as McDonald’s had with Charlie Bell ready to go in 2004. Other companies might name a director to be interim CEO while the board initiates a search.

Either way, the Governance Committee—or better, the whole board—must decide who the candidate will be in case of an emergency. This decision can be updated periodically, perhaps every year. But such a practice is no substitute for establishing a clear succession process that begins years in advance of a planned retirement and involves every member of the board.

Board support is crucial early on, when the CEO is unproven. There is a time lag—usually about two years—before results begin to show (apart from character flaws or ethical lapses). Boards need to show some backbone in standing up for their CEOs as they go about doing what they were hired to do. Public pressure can be intense, particularly if the stock price does not immediately improve. A board must be willing to stand up to it.

When Bob Nardelli became CEO, president, and Chair of Home Depot in December 2000, the stock price languished for two years. Shareholders and analysts questioned whether the company could continue to grow revenues, comp sales (year over year sales growth at the same stores), and EPS. But Nardelli and his board were focused on installing processes for accountability and measurement, while at the same time strengthening the balance sheet. They also recognized external trends that offered opportunities to grow the business in adjacent segments and vertical markets. Directors were in synch with their CEO and publicly endorsed his efforts. The board could tell that Nardelli was executing the strategy it hired him for. Three years later, with its house in order, Home Depot was again on a growth trajectory, and long-term shareholders are now benefiting.

Supporting a CEO doesn’t mean turning a blind eye to problems. If the succession process is done well, the board will have a full picture of its new hire, including potential weaknesses. Those are the things to which the board should pay particular attention in the early going, and give the CEO feedback on progress on those fronts.

Directors should be encouraged to make themselves personally available to the CEO, especially when they have specific expertise to offer. An outside director who is also a sitting CEO elsewhere might be a sounding board on strategy, organization, or people issues, for example. Some boards go so far as to appoint a director, usually a former CEO at a different firm, to be a coach for the new CEO.

At one company, a new CEO proposed his five-year goals to the board and mentioned that he would present those goals to Wall Street. The directors were collectively concerned that the goals were unrealistic. So one highly respected director approached the CEO in his office and advised him to relax them a bit. If the goals are too ambitious, he explained, it could damage your credibility. The CEO took the advice.

The board should also have a formal mechanism for gathering and presenting constructive feedback to the CEO. This feedback process is different from the performance review of a first-line manager in that it is forward-looking and action oriented.

There are different ways of collecting feedback. For example, boards could begin by using the CEO Feedback Instrument in Exhibit 6.1. This instrument, one of several versions in use at real companies, is designed to draw out each individual board member’s judgments on the issues that are key to the CEO’s and the company’s success. The instrument is divided into five sections that correspond with a CEO’s areas of responsibility: company performance, leadership of the organization, team building and management succession, leadership of external constituencies, and leadership of the board (if the CEO is also Chair). The idea is to find not only which areas but also which specific issues are in most need of improvement. The lead director or Chair of the Governance Committee can collect and analyze the responses.

The instrument is only a beginning, however. No checklist can collect the nuances of a director’s judgment about the CEO. Even with space for open-ended comments, directors’ thinking can be pigeonholed by the language of the checklist questions. A skilled interviewer, on the other hand, can surface these nuances and bring out the reasoning behind the directors’ responses.

Thus the lead director or the Chair of the Governance Committee should follow up the checklist by interviewing each non-executive director, focusing on three questions: What significant gaps does the director feel are in the CEO’s performance so far? What will be required to improve the company over the next three years? What help is needed for the CEO going forward?

For example, Wal-Mart is now the largest retailer in the world. The Wal-Mart board probably has few complaints about execution. But the board does have to make sure the CEO is facing up to the growing number of activists who decry the company’s labor practices or who feel the company’s size is impeding competition in the nation. The board’s dialogue and feedback on those issues could be enormously helpful to Lee Scott, Wal-Mart’s CEO.

The idea is to draw out the nuances that a checklist can’t cover. Are these issues transient or permanent? What is the view from both sides of the aisle in Washington? Candid responses from a half-dozen or more non-executive directors can yield amazing insights into potential areas of improvement, as well as on the CEO’s strengths and accomplishments. The interviewers should distill those insights and bring them up for discussion in executive session. After the board has settled on the one or two most important areas, the lead director or Governance Committee Chair, or both to ensure accuracy, can then discuss the collective feedback with the CEO. As with the feedback given after an executive session, it’s preferable to have two directors communicate the feedback together.

What’s important is to choose the one or two most important things for the CEO to work on; five pages of feedback is useless. Procedural issues could be packaged and communicated quickly. But the bigger-picture feedback must be brief, constructive, and specific—for example, to identify succession candidates and engage the board for feedback on them, or to build a relationship with an important external constituency. The board of one large financial institution, which in the early 1990s was performing adequately but not spectacularly, foresaw emerging issues coming out of Washington that could affect the firm. Knowing that the CEO was not a political operator, four or five board members advised him to recruit a Vice Chair with expertise in this area. The CEO and the company benefited from the advice.

There must be a solid consensus among board members before any advice is given. And confidentiality and intellectual honesty are paramount. Such an instrument can be quite damaging when the comments become loose talk in CEO circles.

There may come a time when the business cycle turns downward, and the company begins to suffer despite healthy finances. At that point, the board will need to demonstrate the skill and the backbone to make a key decision: back the CEO or make a change. Boards are truly tested under those circumstances, as the boards at technology companies such as Cisco and Sun Microsystems could attest after the technology bubble burst. With a rigorous process to bring the nuances of directors’ judgments to the surface, the board will ultimately know whether it supports the CEO or not.

Because a change in leadership is so disruptive, boards must be certain they are taking the right course of action—or inaction—for the right reasons. Boards should be careful not to act impulsively, but they can’t wait so long that the CEO and the company are left twisting in the wind. When red flags go up, whether in the form of missed targets or gut instincts, the board has to proceed swiftly but methodically to get to the root cause of the lack of fit between what is required and what the CEO is providing.

Directors’ instincts are not to be ignored, but the board should do some fact finding before reaching conclusions: Is there a disconnect between what the CEO is saying and doing? What is the evidence? Is the CEO confronting reality? What exactly is the CEO missing? Are the CEO’s direct reports frustrated? Why? Is Wall Street dissatisfied with company performance? Is what they’re saying credible? The board must get to the root cause of any sound bites. The full facts will reinforce or dispel the concern.

If the board discovers problems, there is often an opportunity to tactfully provide feedback to the CEO in a way that can alleviate them. Solutions could be as simple as telling the CEO, “Your work dealing with external constituents in Washington has been great, but it is eating into your time. Have you considered whether you need someone with strong operations skills to work with you?”

There have been several cases over the past decade when a renegade director or two have driven a board to force a CEO to resign. It’s infrequent but it happens. It is the full board that must move, carefully, until it reaches consensus. When multiple opinions converge, they are usually right.

Then the focus must be on the transition: What will the succession process be? Who would be a better candidate? Do we need an interim leader? How do we manage it from customer, employee, and investor relations perspectives?

It takes time to fire a CEO and not destroy the company in the process. An orderly transition takes months or even a year from the time the board’s red flags go up to when the board is ready to let the CEO go. Take enough time to address the problem properly, though no longer.

When the board has the foundation in place for directors to pool their opinions, get to the relevant facts, and find a consensus, dealing with a faltering CEO is not nearly the problem it would otherwise be. Combined with the careful selection of a successor, it is a tremendous opportunity for boards to exercise their collective judgment and prove their worth.

These events do not happen every day or even every year. On the average, they happen once or twice in a decade. But it is at this juncture that the board makes its full contribution. All other contributions notwithstanding, having the right CEO and the readiness to implement a succession plan when the need arises are the true measure of a board’s effectiveness.