Don’t Set Your Next CEO Up to Fail

After a long and distinguished career in logistics and transportation services, in 2015 Per Utnegaard was appointed CEO of Bilfinger. The job was clearly a big challenge. Bilfinger, once Germany’s second-largest construction company, had been having financial difficulties for a number of years, and a prior CEO succession had already proved unsuccessful when Roland Koch, the former minister-president of the German state of Hesse, failed to orchestrate a turnaround.

Less than a year after Utnegaard’s highly publicized appointment, he left Bilfinger, and the search for a new CEO began again.

We shouldn’t be surprised. CEOs come and go — even seasoned executives with previously unblemished track records. According to a study by Equilar, the median CEO tenure at S&P 500 companies has shrunk to about five years, and we have found in ongoing research that more than 15% of all CEOs depart within two years. The best-laid plans — especially succession plans — often fall apart when they encounter reality. What is surprising is how shocked and appalled boards are when their CEO choices fail — sometimes repeatedly.

The financial costs of these poor choices are enormous. To find the right CEO (or one who appears to be right), boards routinely bring in search firms whose fees, related to the compensation of the people recruited, can easily reach seven digits. You don’t want to repeat that drill year after year. And the costs extend beyond the selection process: A study by PwC consulting company Strategy& estimates that companies lose more than $100 billion in market value annually through botched CEO appointments.

Of course, the organizations suffer as well. If there is a vacuum of leadership at the top, uncertainty pervades the ranks, and the vision becomes unclear. That is typically followed by a standstill in development, the departure of key talent, and a decline in financial performance.

With so much at stake, what can companies and their boards do to increase the odds of success?

At the heart of many failed succession processes is the lack of a clear mandate. Boards often have only an implicit sense of what they want the CEO to do — in particular, how much they want the strategic direction and organizational model to change and how they expect the new leader to accomplish that. Clearly defining the mandate and matching the CEO’s profile to it is critical. Yet, there is surprisingly little expert guidance on how boards can do those things effectively or how leaders should act to fulfill their mandate.

We have interviewed more than 100 CEOs, executives who report to CEOs, board members, and senior leaders of search firms. Our research suggests that CEO mandates can be divided into four types: continuation, evolution, transformation, and turnaround. They each require different candidate profiles and different approaches to the job.

Continuation. Some organizations want to continue their existing strategy under a new leader. That was the case at the Swiss elevator company Schindler when former CEO Silvio Napoli became executive chairman, with Thomas Oetterli succeeding him in the CEO role. In this type of situation, the new CEO is tasked with executing a strategic path that was chosen under the predecessor. As at Schindler, the previous CEO often stays on as a member of the board, which leaves relatively little room for the new leader to make changes. Continuation mandates are mostly the domain of successors from inside (like Oetterli) who need to fully buy into the existing strategy and are willing to work within a relatively tight framework set by the board.

Evolution. In the second type of mandate, boards seek mostly incremental adjustments to strategic direction. For instance, when Mark Schneider joined Switzerland-based Nestlé as CEO, the company was gradually shifting its portfolio toward a focus on health and wellness. Schneider was thought to bring relevant expertise for the revised scope of the business and the ability to accelerate change through his experience in acquisitions and divestments. When companies define an evolution mandate, the new CEO has leeway to adapt and refine an existing strategy. Because the changes sought aren’t radical, leaders frequently are recruited from inside, but outsiders can be an option if they bring desirable skills to the organization, as Schneider did at Nestlé.

Transformation. In some situations, a fundamental transformation of the organization is required to achieve its strategic goals. For instance, when Erwin Mayr was appointed to lead Wieland-Werke, a German manufacturer of copper products, the Europe-centered company aimed to expand its geographic footprint, and it needed to restructure its organization, processes, and systems to deliver on its global ambitions. Coming from a large U.S.-based multinational corporation, Mayr could draw on firsthand experience to help meet that objective. Transformation mandates leave the CEO substantial latitude to make such changes. The call for a decisive departure from the past provides advantages to leaders from outside the organization, who can approach the job without legacy constraints.

Turnaround. The most extreme changes are called for with turnaround mandates. For instance, when Jonathan Lewis joined Amec Foster Wheeler, the U.K.-based oil-industry services company had experienced years of financial decline and was at risk of not meeting its obligations to lenders. From day one, Lewis had to stage a turnaround to bring the organization back to a sustainable position. When boards have this mandate in mind, the organization tends to be in financial distress. New CEOs need to take drastic action, often under intense time pressure. Turnaround mandates typically require financial and organizational restructuring experience and are best led by an external CEO who isn’t tied in any way to the current approach.

The requirements of the four mandates are very different. But, in our experience, many boards spend too little time clearly identifying strategic development needs and the CEO profile that’s best suited to meet them. As a result, they pursue appointments with a poor fit — and the CEO often gets blamed for the fallout.

For would-be CEOs or those seeking new roles, it pays to be critical of their own profile, assessing how effectively they can dive into the mandate and asking themselves how willing they are to work within its boundaries. If the mandate isn’t clearly defined for them, they should ask pointed questions to suss it out. Without a close match between mandate and profile, there’s a high risk that the appointment will damage both the company and the individual’s career.