By David H. Jackson, Partner, Mercer
Overseeing CEO succession is one of the central strategic and fiduciary roles of the board of directors. The role the CEO plays as the “Chief Culture Officer” of the organization must be a critical element for the board as they consider CEO succession and transition planning.
The CEO influences culture to such a degree that she or he may be thought of as the key factor that sets the culture of a corporation. In a workforce context, culture is about behaviors that deliver business outcomes and how operational drivers are leveraged to reinforce those behaviors across the workforce.
A CEO, who is the ultimate culture champion, drives the employer brand so that her or his organization prevails in the talent wars and, over time, builds a workforce and working environment in which people are not only engaged but thriving both today and in the future.
With guidance and accountability by the board, the CEO is the ultimate owner of culture alignment, and it is therefore essential that cultural factors are considered in CEO succession and transition. As noted in a recent report by Marsh & McLennan Companies , the board’s main instrument by which they can influence culture is through the selection of the CEO, and in turn, the team the CEO develops.
In fact, as NACD recommended in their 2017 Blue Ribbon Commission report, “Directors should make culture an explicit criterion in the selection and evaluation of the CEO and set the expectation that the CEO and senior leaders do the same in their identification and succession planning activities.”
Culture is critical to organizational success and a risk factor in strategy execution
An organization’s culture is recognized as vital for success and differentiation and can be viewed as the rocket fuel for delivering value to stakeholders. Successful businesses show time and again that possessing the right culture that enables employees to thrive can prove to be a source of competitive advantage.
For example, consider the criticality of culture alignment to the success of merger and acquisition (M&A) transactions which so often represent the biggest capital and branding bets a CEO undertakes. Recent Mercer research found that 43 percent of M&A transactions worldwide experienced serious cultural misalignment, causing deals to be delayed or terminated or negatively affecting the purchase price.
Culture issues were cited as the reason 67 percent of M&A transactions experienced delayed synergy realization. Leaders also noted that 30 percent of deals fail to ever achieve financial targets due to cultural misalignment and subsequent problems, such as productivity loss, the flight of key talent, and customer disruption.
The CEO as culture champion
Despite the important role of organizational culture and the CEO as the “Chief Culture Officer,” NACD research suggests that in many instances cultural elements are not formally or clearly embedded in the CEO succession and transition process.
For example, survey data suggests that over the past 12 months, nearly 40 percent of boards have formally evaluated the CEO as a leader of organizational culture but just 22 percent have assessed executive candidates for cultural/values fit. However, while assessment for cultural fit is important when reviewing internal and external CEO candidates, according to NACD only 12 percent of boards have used an assessment survey to review the candidates’ “fit as part of their succession planning.”
Poorly managed CEO succession and transition plans pose a serious threat to business performance and, ultimately, to shareholder value. When a CEO transition goes awry, the collateral damage can be enormous – creating a leadership vacuum, the defection of quality talent, increased internal and external uncertainty, interruptions in normal decision-making and business processes, and the loss of shareholder and stakeholder confidence.
Getting started: How to incorporate culture into CEO succession planning
How should the board approach the all-important role of CEO succession and transition and ensure that critical considerations about culture are part of the process? Here are four specific steps a board should take.
- Determine the desired culture
The culture will catalyze business results per the business strategy and ensure effective competition for talent recruitment and retention. To do this, the board works with the CEO and the CHRO to select an assessment tool, then workshops with senior management to define the culture, business model and workforce requirements. The compensation committee works with the CHRO to compare the CEO and executive leadership against a competency profile aligned with the desired culture.
- Assess the incumbent’s fit
Identify the behaviors required to drive the desired culture. Then, communicate expectations to the CEO as the foundation for annual performance evaluations and compensation reviews to emphasize the criticality of the CEO delivering on the culture. In addition, survey the workforce on the degree to which the desired culture is manifested in the employee experience.
- Apply culture criteria to succession planning
Document a statement of the desired culture to share with CEO candidates, internal and external, and with executive search vendors. Ensure that the CEO behavioral profile, syncing per above with behaviors that will drive and sustain the desired culture, is used through the succession process.
- Track and support CEO with culture championship
Make culture – including stewardship and ways to track and demonstrate it – an ongoing agenda item in board meetings. Keep both the CEO and CHRO engaged in discussion and ensure they provide regular reports on the results of employee engagement and culture surveys. Embed measurement of cultural leadership into the CEO’s annual performance evaluation using the CEO leadership profile.
The job of CEO has always been challenging, and adding a cultural dimension could be seen as too subjective and hard to measure within succession planning. But society and organizations today are so dynamic, fast-changing and stakeholder-driven that cultural rigor is required for CEO’s and boards.
Having a CEO with the right cultural fit can make a transformative difference to an organization’s performance. Boards today must ensure a leadership bench and successful CEO transitions that will deliver the targeted culture and thereby the workforce and business results for the future.