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No Organization Is Immune to the CEO Turnover Ahead

7/1/2020

Audrey Smith, Ph.D.

in BLOG

Don't let your board of directors get caught by surprise.

Buckle in, because we’re in for a bumpy ride ahead. In the next 6-12 months, CEO turnover is going to skyrocket. And no business will be immune.

I know it’s a bold statement. But it’s coming from deep experience working with boards to prepare for CEO succession. Right now, there’s a temporary lull in CEO succession as companies seek stability. But the conditions are brewing for a massive amount of turnover at the top.

To state the obvious, the pandemic has created a massive interruption for nearly every company. The new COVID context has marked a dizzying shift from one of the most opportunistic growth economies in decades to an environment dominated by stunning uncertainty and socio-economic, political, and health risks.

Most businesses have been forced to accelerate their technological transformation just to keep doing business. And a much more dramatic shift is ahead as they reexamine their customer value proposition and go-to-market approaches.

These dynamics cast doubt on past perspectives on strategy, and in turn, the relevance of current and future executive leaders. Even successful CEOs may struggle to sustain organizational energy, entrepreneurship, and/or execution focus. And the slate of CEO hopefuls may have looked good in the previous context, but now lack the crucial ability to reinvent their organizations.

At the risk of sounding alarmist, it is starkly evident to me and my colleagues that the market and industry disruption spawned by COVID-19 is so dramatic that major leadership changes are inevitable. Significant CEO turnover, both forced and voluntary, will create a time of reckoning for many boards, as they opt to lead or be led by this “once in an era” redefinition of successful leadership.

CEO Turnover Was Already Skyrocketing

In truth, CEO turnover was already rising rapidly. 2019 saw the highest rate of CEO turnover in history, according to Challenger, Gray, & Christmas. And until the pandemic hit, 2020 was on pace to be another record-breaking year.

In part, the CEO departures were driven by baby boomer executives who had delayed retirement following the previous economic crisis. But it was also driven by a loss of board confidence in sitting CEOs and business volatility. In fact, about half of exiting CEOs were fired.

When the pandemic hit, CEO turnover plunged as companies sought stability. But the May numbers showed an early, renewed uptick of CEO turnover. In our own experience, we’re seeing a rise in C-suite recruiting, both in terms of new searches for acute or “soon to be expected” openings. 

Even more telling, there are bubbling conversations across our CEO and senior executive network. Across the board, they’re reflecting mass exhaustion, frustration with board pressure, and anxiety around the markets. And it doesn’t help that many have had to take deep pay cuts. Many CEOs question if they will be around long enough to recapture the financial reward expected in return for their sweat equity, creating temptation to start fresh somewhere new.

This wave of departures will continue as accelerating market shifts demand sharper strategic focus, simplification, digitization, and extreme fiscal prudence. Senior executives who hold onto past mindsets will be left behind. Meanwhile, leaders who demonstrated boldness, agility, and tenacity through turbulence will be in high demand. These leaders will be coveted by both their own and other organizations to reposition for the future. 

And when CEO turnover unfolds, the cascading impact to other C-level roles is obvious. We’ll begin a game of C-suite musical chairs that will stop the music for some.

How Boards Will React

I’ve partnered for a long time as an executive coach and board consultant focused on CEO and executive succession. Broadly speaking, I’ve worked with boards who react to these situations in one of two ways.

First is the group who takes CEO succession very seriously as a fundamental part of their fiduciary responsibility. These boards know that choosing the right CEO is their most meaningful lever to drive profitable growth, competitive differentiation, culture, and brand. In addition, as investors put more focus on environmental, social, and governance issues, the boards recognize that CEO succession has become a major factor in shareholder confidence and valuation.

On the flip side, we often see boards who take a more casual approach to succession. Usually, these boards look at their CEO as a fixed part of their plan. It may be because they’ve worked with the CEO for many years and have trust and confidence in their leadership focus and approach. Or it may be because they’re simply focused on solving more urgent issues, believing succession can wait.

The first group is obviously going to be better prepared for a CEO who chooses or is forced (such as by health or family circumstances) to leave suddenly. They’re also more likely to spot that a different kind of CEO is needed for their future, and assertively move to replace their current CEO.

The second group is more focused on the business problems ahead rather than the people implications. It’s completely understandable, as most businesses are radically adjusting their strategy for a post-COVID world. But it leaves them deeply vulnerable.

An unplanned CEO turnover has far-reaching and long-lasting impact for customers, markets, organizational memory, and associate trust. And in a volatile environment, investors have little tolerance for complacency around the manageable risk of CEO turnover.

Start Preparing Now

The bottom line is that the pandemic has the potential to clear your C-suite bench. There are several things that we recommend boards start to do now:

  • Prepare for the worst. Do not kick the can down the road. It’s not the time to lend only superficial attention to the risks and opportunities presented by CEO and senior executive succession. The National Association of Corporate Directors reports that 20% of public companies and 30% of private companies have absolutely no CEO succession plan in place. Act like your future viability is at stake because it is.
  • Recognize that CEO succession planning is scenario planning. There is no such thing as a perfect CEO. There are only CEOs who are the right fit for your context. So, as you look to the future, you need to be looking at different scenarios for your business context. Looking at your people in light of changing context and market demands may lead you to make different decisions.
  • Be transparent. Focus on retention. The person you think is your preferred CEO successor may be the first person to leave your organization for more immediate opportunities. If your board or incumbent CEO have been reluctant to openly share possible career paths for CEO candidates, push for candor now. Some boards worry about unleashing competitive dynamics when there are several viable candidates on the slate. But mature candidates will put the enterprise first, and those that do not will shed light on risks ahead. Clarify unanswered director questions, expectations and perspectives around specific growth opportunities to aspirational CEO candidates.  Time may be shorter than you think.
  • Take a supply chain perspective. Think of your C-suite pipeline as you would any other supply chain. One disruption could cause a major issue on all other positions. Ensure CEO and senior executive continuity through proactive, data driven evaluation of executive fitness for evolving needs. And make sure that you systematically accelerate their development to ensure they’re ready to deliver. Start now and never stop.  

What’s Next

COVID has reminded us all that everything is transient. We have to be ready to pivot quickly, even when it means re-thinking everything we thought we knew. And that starts with the question of who is best to lead an organization into the historical “next normal.”

Boards that are alert and proactive in this new era will differentiate themselves in the new economy. They will be the ones who have the right leaders in place to move forward with confidence, fueling investor, customer, employee, partner, and stakeholder trust for the future.

To find out more about how CHROs and boards should prepare for the CEO turnover ahead, download our whitepaper CEO Succession Planning: What Boards Get Wrong.

Audrey Smith, Ph.D., is Principal Partner of DDI's Executive Services. An avid-practitioner, thought-leader, and architect for DDI’s C-suite and succession offerings, she has over 25 years’ experience with boards, CEOs, and executive teams striving for high performance, business transformation, and growth. 

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