Succession Planning

Keeping An Open Mind: Why An Unconventional Candidate Could Be The Right CEO Successor

 



A client in search of a new CEO recently asked us a common question: “What convinces boards to go for unconventional, “out-of- the-box” CEO candidates?”

“Unconventional outsiders,” or unexpected CEO choices from other industries, are prominent in headlines. Many of us have one or more iconic examples in mind, whether it was an appointment made this year, last year or a decade ago.

Dean Finch left National Express, an international FTSE 250 transportation business, at the end of 2020 to take the helm at Persimmon plc, a UK domestic housebuilder. Hailed by the media for having transformed National Express into a leading international group, delivering value for all stakeholders and developing a cohesive culture, Finch was seen as a key asset to transform Persimmon’s corporate culture, which had been highly criticized in the press.

Duncan Tait, a former Fujitsu executive, became the CEO of Inchcape plc, a FTSE 250 global automotive distribution company, in May 2020. Tait’s substantial experience in technology, along with his style, approach and knowledge of Japanese culture, was perceived as extremely valuable for accelerating Inchcape’s growth strategy.

From airlines to airwaves, Carolyn McCall broke the mold when she took over the reins of ITV plc in 2018, as it faced industry headwinds, including difficult TV advertising conditions. McCall had transformed easyJet in her tenure as CEO and turned the business into one of Europe’s best-performing airlines.

While there have been a number of such unexpected appointments in recent years, this is not a new trend. In a move that surprised the fashion industry, Robert Polet, president of Unilever plc’s global ice cream and frozen foods unit, became CEO of Gucci in 2004. At the time, Gucci had 10 luxury labels, many of which were unprofitable. Polet, who had run an $8 billion Unilever division with more than 40 brands, may not have known much about retail or high end fashion, but brought broad experience developing brands.

Unconventional outsiders make headlines, but are rare

These examples loom large in our memories, but how often do boards risk picking CEOs with skillsets and experiences outside traditional industry expertise? We examined CEO transitions among S&P 500 and FTSE 350 companies between January 2018 and the end of Q3 2020.

Unconventional CEO choices do occur, but are less common than we might think

Our analysis shows that on average, 14 percent of companies install a new CEO in any given year, and that the majority of these new CEOs are internal promotions

  • 70% are promoted from within the company
  • 30% are external appointments
    • 13% of external appointments are unconventional, out-of-industry profiles
      • 4% of newly-appointed CEOs had an unconventional background

Source: Russell Reynolds Associates analysis of S&P 500 and FTSE 350 CEOs appointed between January 2018 and September 2020.

There are many good reasons for this. Integrating oneself into a new organization while taking the top spot is not easy. Research shows it takes a new leader between six and seven months to contribute as much value to their new organization as they have consumed from it.1 A lack of prior sector experience could certainly slow this timeframe even further, as the new CEO navigates the new environment while building sector knowledge to better appreciate the company’s challenges. This could be a major risk for the company – yet boards should also consider whether they are being overly risk averse. While industry knowledge is clearly a benefit, opening up to talent outside the sector can be a significant advantage for an organization looking for fresh perspectives and new skillsets.

Where change is urgent and talent is scarce

We hear requests to consider non-traditional, “out-of-the- box” candidates at the start of most CEO searches. These tend to be more typical in conversations with boards from the B2C consumer and technology industries, suggesting those boards might be more progressive than the boards of traditional B2B industrial, healthcare, and financial services sectors. Boards may also be reacting to the need for higher levels of compliance or regulatory experience in the latter industries. More fundamentally, however, we perceive that the main drivers of appetite for unconventional CEO profiles are the pace of change the company is experiencing, its need for transformation and the lack of talent within the industry.

Where the pace of change is rapid, the need for deep transformation is urgent or where talent is scarce, there is an increased likelihood of bolder sector moves. In these cases, boards tend to focus more on candidates’ skills, rather than their prior industry experience. Where the business is transforming more slowly, we see some boards bringing in an unconventional future-oriented “Number Two” to help the incumbent CEO lead and transform the company rather than appointing an executive with an unconventional profile to the top role.

Planning ahead and embracing unconventional profiles at other levels

Grafting a non-traditional profile directly in the CEO seat is not easy, and can cause organizational distraction, if not disruption. Some boards may therefore find it easier to embrace non-traditional candidates with CEO potential at the board level or within their C-suite, with a longer-term plan to develop them before having them step into the top spot.

A few examples:

  • John Donahoe, previously at eBay Inc., PayPal Holdings Inc., ServiceNow; served on Nike, Inc.’s board of directors since 2014 before becoming CEO of Nike in 2020.
  • Dean Banks, coming from Google parent Alphabet Inc.’s experimental research division, became CEO of Tyson Foods, Inc. in 2020 after serving on its board since 2017.
  • Jørgen Vig Knudstorp, previously at McKinsey & Company, became CEO of The Lego Group in 2004 after joining the Group as an executive in 2001.

Appointing a non-traditional candidate with CEO potential at the board level has numerous advantages. In addition to introducing diversity of thought and learnings from other sectors, it paves the way for future senior non-traditional hires. However, the tangible impact on the organization may take longer, given that non-executive involvement in the company’s operations is by definition less frequent.

It is also important to consider that despite the reality that homogeneous boards are suboptimal, some board members might feel disrupted with the addition of a new unconventional presence in the boardroom.

Hiring a non-traditional profile with CEO potential into the C-suite also has clear benefits. Not only does it increase the size and experiential diversity of the internal successor pool and send a clear signal as to the seriousness of succession efforts, it also means that if successful, the candidate would bring the unique benefits of an “inside-outside” perspective to the role. However, the pursuit of “C-suite successor hires” requires careful consideration. Our research shows that only 14 percent of internally promoted CEOs had three or fewer years of tenure in advance of their promotions.2

“Unconventional outsiders” are not particularly prevalent in C-suites.

  • A truly unconventional candidate is unlikely to be willing to work for a conventional CEO.
  • It may send an explicit signal that a horserace is underway, which some companies would prefer to avoid.
  • Expectations of newly-hired candidates can sometimes be difficult to manage.

Thinking beyond the obvious, looking for strategic skills and potential

CEO succession planning is one of the most important responsibilities of a board. The best boards approach CEO succession planning as a dynamic process, adjusting to the company’s strategic context and challenges. As leaders do their best to predict an unpredictable future, how should the job description of the future CEO be defined? What critical skills, attributes and abilities would this CEO need?

When creating and aligning on the future CEO’s job description, we would encourage boards to emphasize the key strategic skills and leadership behaviors that will be needed, rather than industry-specific experience and competencies. On top of evaluating CEO candidates’ current leadership skills, boards should also assess their future potential.

Our analysis of CEO transitions among S&P 500 and FTSE 350 companies between January 2018 and the end of Q3 2020 shows that where boards do opt for an unconventional, “out-of-the-industry” profile, demographic and gender diversity is nearly completely lacking. This is not to say that history should repeat itself. These are unusual times, and some companies no longer assume that what has worked in the past will work in the future.

Being more lenient on traditional industry requirements and looking at future potential may foster a more diverse pool of CEO candidates.

Openness to unconventional profiles is likely to be an important way for boards to enhance the diversity of the candidate slates for the CEO job across all dimensions of diversity, such as gender, ethnic, social, LGBTQ+ and age.

To help think about what a future CEO needs to bring to the company, we often recommend the board create a future “anniversary memo,” placing themselves three or five years in the future and looking back on their CEO choice. What has the CEO accomplished? What skills have they employed to get those things done? What part of the CEO’s track record gave the board confidence in the first place? And how would board members describe why they’ve been delighted with the performance of the CEO?

Helping unconventional CEO profiles be successful

Unsuccessful CEO appointments are common and costly. Just three in five newly appointed CEOs live up to performance expectations in their first 18 months on the job3. The main reason for these failures has little to do with competence, knowledge or experience, but rather with an out-of-touch leadership style. Conversely, the benefits of a successful CEO appointment are significant and executive transition support programs can reduce the time to the break-even point by as much as half.4 Companies with a successful CEO generate a TSR that is three times higher, on average, than that of companies with new CEOs who are a poor fit or overdue successions.5

How can boards support CEOs to unlock their performance potential and provide positive returns for the organization? We recommend that all boards prepare an effective onboarding plan for newly-appointed CEOs as soon as they have shaken hands to mitigate the risks linked to the transition. When boards select a non-traditional candidate for the CEO position, a transition plan is even more critical. Planning ahead reduces organizational anxiety, sending signals of proactive and thoughtful management, and builds internal and external confidence in the new CEO.

In addition to the transition plan itself, we also advise boards appointing “out-of-the-box” CEO candidates to create a thoughtful plan around the communication of their choice – to employees, the market and key internal stakeholders — and that this plan emphasizes the following four key areas:

  1. Clarity around the future CEO role and leadership skills required - The board should be prepared to answer questions around how the CEO profile was defined, how it focused more on tasks and leadership required for success rather than characteristics and past industry experience, how the new CEO will embody these skills, and how clearly articulated the roadmap is for the future CEO.
  2. Soft capabilities of the new CEO - The premium and preeminent competence of successful leaders is their ability to learn and re-learn. An unconventional hire also needs humility to adapt. The board needs to be able to share how the new CEO demonstrates these competencies.
  3. Environment transition - To support the new CEO in his or her transition, it is essential for the board to understand the culture of the new CEO’s previous environment, and what types of adaptation will be necessary. The board should also look at what can be done to warm the seat for the CEO in the new enterprise.
  4. CEO feedback - Like everybody else, CEOs need structured feedback regarding their performance and how well their onboarding is going. The board needs to ensure they are creating a well-defined and transparent process to provide immediate and regular feedback and guidance to the new CEO, both from internal and external In addition to this near-term process, the board might want to think about how they plan to communicate with the CEO with openness and trust over the long term, to ensure a strong foundation and effective outcome.

Conclusion

While boards rarely take the risk of choosing a new CEO with skillsets and experiences beyond industry expertise, it may be time to revisit past assumptions. Given the pace of change and disruption in many industries and markets, we believe that the target profile of the future CEO should be defined based on the company’s challenges, and should emphasize the key strategic skills and leadership behaviors that will be needed, rather than industry-specific experience and competencies. As many companies are learning, what has worked in the past will not necessarily work in the future. In the right circumstances, with thoughtful planning and support, the unconventional candidate could be exactly the right fit.

AUTHORS

  • Emma Combe is a member of Russell Reynolds Associates’ Board and CEO Advisory Partners. She is based in London.
  • Pieter Ligthart is a member of Russell Reynolds Associates’ Board and CEO Advisory Partners. He is based in Amsterdam.
  • Isabel Rousseau-Calisti leads Knowledge for Russell Reynolds Associates’ Board and CEO Advisory Partners group. She is based in Paris.
  • Todd Safferstone leads strategy and corporate development for Russell Reynolds Associates. He is based in New York

With thanks to our RRA colleagues to their guidance, especially Tuck Rickards

  1. Watkins, The First 90 Days (2003)

  2. RRA research on internally-promoted CEOs at S&P 500 companies (January 2020). Internally-promoted CEOs have on average a 13.6 year tenure within their company prior to their promotion

  3. Eben Harrell, Succession Planning: What the Research Says Harvard Business Review (2016)

  4. Byford, Watkins & Triantogiannis, New Leaders Need More Than Onboarding Harvard Business Review (2017)

  5. BCG, Bringing Science to the Art of CEO Succession Planning (2019)

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Keeping An Open Mind: Why An Unconventional Candidate Could Be The Right CEO Successor