The Challenge of CEO Succession to an Outside CEO

July 11, 2016 Seonaid Charlesworth

CEO successionIt seemed like a perfect fit on paper.

After an extensive search, a private, Calgary-based oil and gas manufacturing company hired an outside CEO to take over from its founder, who was retiring. The outsider seemed to have all the prerequisites for success: an impressive track record, an established network in the market and extensive industry experience.

However, soon after taking over, the new CEO began to aggressively introduce change, often without any warning to the Board of Directors. Coming from a larger organization, the CEO demanded greater autonomy than his predecessor and resisted the Board’s attempt to intervene in business decisions. Friction between the CEO and the Board became the rule, not the exception.

Not surprisingly, the CEO that seemed like such a perfect fit when he was hired, exited less than a year into his contract. The Board scrambled to find an interim executive to step in. At a time when this company needed to ready itself to withstand the volatility of the oil and gas industry, the company found itself mired in a leadership crisis.

What went wrong?

Like so many private and family-owned businesses, this company simply did not understand the challenges of bringing in an outside CEO to an organization that had relied heavily on generations of stable, internal leadership. It’s a challenge that an increasing number of these companies are facing.

Private and family businesses are forced to look outside for a new CEO for a variety of reasons: Founders retire; second or third generation heirs are not ready to take over, or choose another path; or the realization the pipeline of internal leadership talent has run dry or never existed.

Is bringing in an outsider a winning strategy? It really depends on how the transition is managed. However, many boards and founders can be blindsided by the challenges that come with recruiting an outside CEO. At the top of that list is the concern that without careful planning, transition to an outside CEO can be disruptive, even destructive, to organizational performance.

According to a June 2012 study published in the MIT Sloan Management Review, although outside CEOs tend to perform on average just as well as internal candidates, it is not a good fit for every organization.

The most vulnerable organizations will be those that have neglected CEO succession planning. As a result, they will not have anticipated all of the potential pitfalls and challenges of bringing in an outsider. Unfortunately, this is a common pitfall for private and family businesses.

“I’ve almost never found a case where the founder has invested enough time into succession and developing their people,” according to Rob Wildeman, managing director at Parallel49 Equity.

In most instances, the founders of family companies tend to spend most of their time focused on product or service development. Or, over time they have become the face of their organizations and are extremely reluctant to leave the helm. In some instances, the company has grown so much that there are no family members with the experience to take over.

An outside CEO can be, in the right circumstances, a good move. The MIT Sloan Management Review study found that companies suffering from pre-existing poor performance or rapid industry growth benefit the most from the fresh perspective that comes with an outside CEO. The study’s authors also found that outside CEOs tended to thrive when they were allowed to bring with them a new executive team.

When do outside CEOs struggle?

Outside CEOs can make for a difficult fit in the smaller, more unique culture in private and family businesses. In these companies, capital decisions are done in a much different manner, and CEOs are asked to take more of a roll-up-your-sleeves approach to daily operations. The Boards of these organizations also tend to be much more involved in day-to-day decision making than publicly traded boards.

This is a difficult challenge for outside CEOs to comprehend, particularly if they come from larger companies and have not taken the time to develop relationships with key internal influencers, customers and partners to their new organizations. It can be even more difficult in the case of family entities, where an outside CEO will need to interpret and execute the interests of the family owners.

In this scenario, it’s not unusual for the outsider to make too many changes, too quickly in the post-succession period, without fully understanding the consequences. Not only does this create confusion in the ranks below the new leader, it can be the cause of friction at the Board level.

It’s not uncommon to hear new outside CEOs complain that their management teams are incomplete, lack the right experience and suffer from skill gaps. Or their Boards are routinely shooting down ideas. Often, these decisions touch on how much cash needs to go back into the business, or requests for more CEO autonomy over major decisions. 

In family businesses, many CEOs may have expectations of growing and transforming the company only to find out that the family-dominated board only wants a caretaker for the next generation.

Much to their dismay, far too many outside CEOs find out too late that the fusion of ownership and control on the board of a private or family business is a formidable force.

How can a family or private company fully prepare for the transition to outside leadership?

Outside CEOs will need to do their homework to truly understand the unique qualities of private and family-owned businesses. They need to understand how capital decisions are made in these entities, and how to work alongside Boards that are actively involved in business decisions.

For the Boards of private and family businesses, it will mean defining the relationship with the new CEO as early as possible in the relationship. The following guide to a successful transition is based on stories from actual outside CEOs that found success in private and family businesses.

  1. It’s never too early to clarify the CEO’s mandate and responsibilities.  It’s critical to be clear on the role and powers of the new outside CEO before someone accepts the position. Explore the degree of input the Board wishes to have in decisions and discuss important milestones related to the strategic plan.  Make sure the working relationship is acceptable to a CEO candidate right at the outset of the interview process.
  2. Map the different interests of the Board, owners and family.  It’s important that the Board of Directors, family council or ownership council spend quality time with a new outside CEO to define the culture of the business and expectations for business decisions. Identifying the stage in the company’s life cycle at which CEO has arrived, and the goals of the Board moving forward, will provide the new hire with a complete picture and lessen the chances of conflict.

Ensure that new CEOs understand they are there to learn, not just lead.  A common mistake of outside CEOs is to arrive on the first day of work thinking that they already have all the answers.  When looking for an outside CEO, try to find someone who wants to work hard to understand exactly how his or her new organization works.  As outsider CEO must engage with employees by asking a lot of questions and genuinely listening to what people have to say. 

Anticipate the impact a new CEO is going to have on your people.  Boards must ensure the outside CEO actively manages the anxiety and trepidation that can spread through a private or family business when an outsider arrives. Not anticipating this reaction, or dismissing it as weakness, can trigger widespread fear, which could block attempts at change.  It’s critically important that the boards of family or private companies make this a priority to ensure a smooth transition.

Manage the talent. The Board should communicate to its new outside CEO that preparing for future CEO succession must begin the first day on the job.  CEOs must be able to map out the top talent and make tough people decisions early on to remove underperforming leaders. Failure to act decisively in this regard can undermine a new CEO's currency. Failure to adequately plan for the next succession can undermine the entire organization.

The overarching principle here for both boards and outside CEOs is to ensure that everyone is reading off the same page. If the board isn’t sure what it wants, and the CEO is inadvertently encouraged to be too aggressive or presumptuous, then conflict will surely be the outcome.

How can a private or family-owned business troubleshoot these problems, and find solutions that allow for a seamless transition? If this is the first time a company is reaching outside for a CEO, it will be very difficult to anticipate all of the pitfalls. In these circumstances, one of the most important things any board or CEO candidate can do is reach out to other companies to hear directly about their experiences.

Talking to Board members from another company that has been through this difficult transition will give any company a much better understanding of the full range of dynamics that comes with outside leadership.

About the Author

Seonaid Charlesworth

Seonaid Charlesworth, Ph.D., is Senior Vice President of Succession and Assessment at LHH Knightsbridge. An expert in industrial psychology, she advises Boards and CEOs on C-level succession. She has designed succession and assessment programs for Fortune 100 companies, public utilities and government agencies in Canada, United States, United Kingdom, Netherlands, Italy, and Brazil.

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