Getting the CEO Transition Wrong Can Be Costly

A new Strategy & Business study finds that costs “can mount quickly when the chief executive officer of a large company is fired or departs suddenly without an obvious internal replacement.”

“The typical seven-figure severance package and six-figure retainer for an executive search firm are just the beginning. Board members might have to fly in on short notice for an emergency meeting. A small army of professionals — all of whom charge by the hour — begins to mobilize: communications consultants and employment lawyers, movers and relocation experts. The longer the clock ticks, the higher the figure on the meter.”

“And those are just the hard, easily quantifiable impacts. They pale in comparison to the less visible costs. Turmoil and uncertainty at the top filter quickly down through the organization, slamming the brakes on growth initiatives, hindering the closing of vital deals, and causing some valued employees to start looking for new positions elsewhere. Because unexpected successions can paralyze even the best-functioning companies, they can wreak a harsh toll on revenues, earnings, and stock prices.”

A related McKinsey study finds that “nearly half of top executives say they weren’t effective at earning support for their new ideas when they moved into C-suite roles—and more than one-third say they have not successfully met their objectives during their tenures.”

After reviewing both sets of research, the Harvard Business Review concludes that “many of the people responsible for key corporate appointments – decisions that affect not only careers and companies but also industries and economies – do not clearly understand how to evaluate, or differentiate between, performance, competence, and potential.”

“Few have studied research on effective hiring processes, and even fewer understand the validity and reliability of various assessment methods (including tests, interviews, and reference checks) and the best practices for conducting each. Most are also unfamiliar with the most important leadership competencies and unable to map them to the particular situations of their companies. And hardly any of them have mastered the key concepts of and conditions for talent portability.”

The bottom line: “C-suite appointments should not be made based on intuition or cursory evaluations. Instead, directors must commit themselves to learning and living the best practices for making the right hiring decisions.”