This article originally appeared in the August 2008 issue of The ESOP Association's newsletter.

Hiring the CEO is typically a responsibility of a company’s Board of Directors. However it is often the case in ESOP companies that the first leadership transition following an ESOP’s implementation is made prior to the creation of a fully functioning Board. The responsibility for the transition process, then, typically falls on the current CEO who just sold much or all or his or her company stock to the ESOP.

What follows are recommendations for achieving successful leadership transitions based both on observing many such transitions and interviewing many outgoing and incoming leaders.

A leader ready to move on

On the face of it, this requirement seems an obvious component of a successful transition. However, a CEO not fully ready to leave this position is one of the root causes of failed leadership changes. In many failed transitions we have seen, the CEO was not ready to retire and, therefore, was not ready to let go. Not letting go can take forms such as micro-managing the new CEO from the position of Chair of the Board, staying involved in many aspects of the company, encouraging staff to talk to him or her about what’s not working, and so forth. Many of these behaviors can undermine the new leader and his/her authority with the staff.

CEOs who are prepared to change their role typically have developed other interests prior to their planned departure.  Occasionally they desire to move into another senior role in the company (e.g., new product development, design quality control, development of international markets, etc.) where they can focus their interests and attention.  More often, the departing leader has strong outside interests in which he or she wants to be much more involved. These might range from community, charitable, or academic endeavors to developing another business.

False starts

‍Several transitioning CEOs report having had at least one (sometimes several) “false start(s).” There are various reasons a first transition attempt does not work. Some CEOs, looking back, believe they were not fully ready to give up the reins when they identified their initial candidate for a successor. In hindsight, they believe this led to their not fully thinking through the competencies needed by the next CEO.

In several cases, CEOs reported that they initially chose a successor with the necessary business experience and technical skills but soon found that the person did not practice the values and beliefs that were necessary to continue to support and built the ownership culture that had been developed. This can happen when the successor is an insider or an outsider, but is less likely to happen when the departing CEO has worked closely with the incoming CEO, which is more likely with an inside candidate. In all events, the departing CEO has to balance vigilance with micro-management and their own inability to let go.
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Choosing a successor

Departing leaders should consider the skills their successor needs that may be different, as well as similar to their own. For example, a company founder is likely to be a person with skills weighted toward the entrepreneurial and opportunistic while a successor may need to be a better manager, a better communicator, and more focused on building effective systems. While a founder might have strong finance skills, a successor may not need a similar financial background because those skills now exist elsewhere on the leadership team.

The importance of leadership values & practices

‍A very important criterion for an incoming CEO of an ESOP company is the ability to foster a high performance ownership culture. ESOP ownership cultures require leaders who value fairness, employees’ worth and dignity, and also involve employees in problem solving and decision-making. They also understand the importance of open communication and employee education and development. Choosing a successor who has demonstrated a commitment to the company’s core values is essential to a successful transition. Too often a successor with the right technical background may lack the values that define the company’s ESOP culture or may not behave in ways that show their commitment to those values. An ESOP company CEO who was planning to retire related that he had recently realized that he had chosen a successor with strong financial and business skills but not the leadership beliefs and style to maintain the ownership culture built over 15 years. This realization caused the founder to change direction, select someone new, and postpone his own retirement. Unfortunately, this CEO’s story is not unusual. Long-time leaders often underestimate how strongly their own deeply held values have influenced their company’s culture, and the skill and commitment it takes to continue and improve upon that culture.‍

Looking forward

‍It is important to consider the company’s leadership needs in terms of the direction the company is moving, the company’s growth model, and the areas of technical expertise that will be needed but are not present in the existing leadership team. Of equal importance, the behaviors a successor candidate must demonstrate to evidence commitment to company core values should be identified. As Anne Marble, retired founder of A.D. Marble, put it: “When I finally got it right, I chose a person who had high energy, focus (she initiated getting educated in areas where she needed it) and who I had observed building effective relationships with others in the company at the same time that she was leading successful projects. Unlike me, she was a born extrovert.”

Involving others

‍Departing CEOs often find it helpful to have others involved in identifying the experiences, competencies, and values desirable in the firm’s next leader. If an active Board exists, it should serve this role. Whether a real Board exists or not, there is great value in soliciting input from the current leadership team.Gaining input from the executive team will likely result in identification of qualities that the Board and/or the transitioning CEO may not have considered. Their involvement also will facilitate their acceptance of a new leader who has the qualities that they have identified as essential. 

Another means to check one’s tendency to look for a successor too much like oneself, is to include input from outside trusted advisors. It also may be helpful to ask a neutral third party to gather input from a wide range of employees regarding the qualities desired in an incoming CEO. A person with no particular stake in the outcome can help individuals and organizations think about what is needed in the future without being bound by current circumstances.

Bringing in an outsider to take over the company’s leadership poses some additional challenges. Typically it is harder to determine an outsider’s level of commitment to the values and behaviors that underlie the company culture, including whether he or she values employee ownership. CEOs have reported that once an outside successor was in place, his or her behavior did not align with their presentation of themselves in interviews.

Several CEOs said they prefer successor candidates who actively pursue the senior leadership role, rather someone who just or expects the role to be handed over. Of course, all insiders who desire and actively seek the top spot are not necessarily the right candidate for the job.

Anticipate some turnover on the leadership team

‍Once a successor has been chosen and the leadership team informed, it is not unusual, for one or more persons to resign, particularly if there are other members of the current team who wanted the position. To mitigate this loss, one ESOP company made all internal candidates agree that if not chosen they would not leave the company.

Of course, there is no way to prevent failed candidates of the old leadership team from leaving. However, understanding why someone would leave rather than work under the new leader can be informative: is it for ego reasons or a basic values clash with the successor? Fear that someone of value will resign should not be a factor that trumps selecting the right person to lead. Those who won’t accept working under the new leader are likely to create problems on the leadership team. It is better that they leave quickly so that replacements can be found. Anticipating and planning for possible turnover, can make the transition process less painful and/or detrimental to the organization.

The leadership transition process

Discussions with leaders on both sides of successful transitions reveal common practices that contribute to a smooth and effective process, particularly when the successor is internal or when there is overlap between the old and new leader.

• Begin the succession planning process long before the actual succession is to occur so there is plenty of time to design a smooth transition.
• Establish clear time lines and/or criteria for shifting specific responsibilities and authority from the old CEO to the new CEO.
• Define any skills/ knowledge areas the successor needs to develop and a process for when and how this will be accomplished.
• Include at least the senior leadership team (and possibly other employee owners) in the transition process so that the new leader has support.
• Plan the formal transition announcement to the company with an emphasis on continuity and future expectations.
• Define the specific role of the departing CEO once the new CEO is fully in place (e.g., does the departing CEO remain as Chair of the Board and, if so, for how long? Is she or he going to be a consultant to the company for some specified number of hours during a specified time period? Will she or he be a member of the Board?).
• Define how each person will interact with other employees once the transition occurs (e.g., if people go around the successor to the old CEO to complain about the new CEO, the CEO agrees to send them back to the new CEO).
• Have both parties meet regularly (separately and together) with an external third party to ensure that agreements are implemented and any tensions are resolved; if the departing CEO still has a role in the company, continue meeting until both parties believe the transition has been successfully accomplished.

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