CEOs who depart after 18 months on the job cost small-cap companies an estimated $12 million each. For large-cap companies, the figure is $52 million. Some research estimates that these departures add up to a minimum loss in the United States of $14 billion each year.9 Other research shows that a failed leader transition can cost 10 to 20 times the executive's yearly compensation.10
And this represents only the obvious, visible costs. Even more damaging are the long-term effects on the company's ability to operate effectively and to innovate well enough to meet ever-changing customer needs and competitive challenges. When a new leader is hired, he inevitably redefines priorities, imports new ways of operating, and often is charged with an agenda to change strategic direction. But when he founders and is then replaced by the next leader who repeats the same drill, the resulting disruption and confusion risks pulling the company into a negative cycle that will be difficult to reverse.
Transition failure also levies a cost on the company's reputation externally in the eyes of customers, investors, and analysts, and importantly, internally in ways that affect employee motivation. The reputations of once-proud companies such as Hewlett-Packard have suffered greatly because of the transition mismanagement of their boards. Also, collateral damage of transition mistakes by the company includes injury to the careers of the talented, capable executives who fail after taking over the organization and the loss of key talent.
It is likely that the problem of higher turnover in senior positions won't go away any time soon, and that attention on it will increase. New U.S. government regulations as well as rules of the New York Stock Exchange and NASDAQ require boards to develop a succession plan that is available to shareholders, who have become increasingly restive and demanding about CEO selection. But while the result has been more scrutiny by the media and shareholders on the selection of new CEOs, little or no attention is paid to the details of preparations made by the company, standards for getting ready for a new leader, or guidelines for the organization to maximize success once an offer has been accepted.
It is never a sure thing when someone takes on a job at the top. For one thing, the person chosen is often assuming more responsibility than he has ever had and facing strategic, operational, political, and personal challenges that are tougher and more complex than he has ever faced. And not only is this true of CEOs but also of the people selected as designated successors. Only about 25 percent of those next-in-line executives hired from the outside succeed in the CEO job, and only about 50 percent of those who have been promoted from within.11
Why are success rates not better? One answer is that people chosen as new leaders do not do a good enough job at preparing for and managing their entry into the top spot. Both experience with leadership transitions and research conducted at the Harvard Business School confirm that leaders who fail within a couple of years of assuming a top-level position make the same handful of mistakes:12
● They fail to use wisely the time between accepting the position and Day 1 in their jobs.
● They do not read the political situation well enough to understand the relationships, coalitions, and alliances most important to their success.
● They fail to understand the culture well enough or adequately manage it to follow their direction.
● They misread the capacity or willingness of the people they inherit to implement needed changes.
The net result of such missteps is that new leaders do not achieve notable successes within their all-important first 18 months. That in turn limits the commitment of a critical mass of people to support their agendas. Ultimately, the person at the top in this situation never attains the loyal followership needed for effective leadership.
We believe that the person assuming the senior spot can do much to succeed once in the top position if she moves quickly to avoid or resolve these common mistakes. But there is a second answer to the question of why more leaders do not succeed: that the organizations that have hired or promoted them have not done their part to ensure success. Until the company that hires or promotes leaders into its top positions does its part, the problem of transition failures will not be solved.
By “the company,” we mean the major players who most determine its strategy, how it operates day-to-day, who is hired and who stays, how its various parts are expected to coordinate, and its culture. In particular, the players on the company's side of the transition equation who have the most significant roles in determining whether a transition at the top is successful are the board of directors, the CEO, the chief human resources officer, and the other key senior managers who report to the CEO.
When we refer to “leadership transition” we mean the process of maintaining strategic, operational, and cultural continuity as one leader passes the mantle of authority to a successor. That process spans the steps and events from before the winning candidate accepts the company's offer to the point that a critical mass of followers assign their loyalty to her as the established leader.
Because there are different paths to the top, there are various types of transitions. The CEO might be promoted from within after many years with the company, be hired directly from the outside into the CEO position, or come to the top position from the board of directors, either temporarily as a permanent leader is found or intending to stay. Also, the leader might become CEO through a planned transition, where he is hired into a high-level position (for example, as chief operating officer or division president) and moves up by way of a predetermined, managed process. While examples we use cover a range of possibilities, this book concentrates on planned transitions because they are more complex and include steps that are necessary in other types of handoffs.
Thinking through what that process should be for any particular transition situation should include a thorough understanding of why so many handoffs at the top fail.
The Roots of Failure
It may seem at first glance that the challenge of a transition is simple: Lay out the capabilities needed in the new leader, manage the search well, find the best person possible, and the rest will take care of itself. “After all,” as one CEO put it, “we've done all we can.” Sixteen months later, that same person said, “How could we have gotten it so wrong?” The answer is that he and his transition team did not do all that they could have. The fact is that the transition of the leader is a complex cascade of steps and events that last for many months and are affected by strong emotions.
Complexity
Chapter 1 explains that a leadership transition is not a simple transaction but rather is a process that has many moving parts that exist through a string of interdependent steps. If decisions involving each are made on the basis of the wrong logic or too carelessly or for the wrong reasons, it can cause the whole process to go off track.
Not only does the new leader need to make adjustments but each of the major players also must adjust. The directors must ensure that the process is off on the right foot without trying to do the work that management should be doing. Also they must adjust to the