When CEOs Step Up To Fail

The failure and subsequent departure of a CEO is a costly misadventure for any organization. The most immediate and devastating impact is often on the company’s market capitalization. In a matter of weeks, a floundering CEO can destroy a market valuation that has taken a decade to build. In addition, ousted CEOs rarely leave with empty pockets. A typical severance package provides the departing CEO of a Fortune 500 company with two to three times annual salary plus bonus, and extras can include compensation for life insurance, a $500,000 to $1 million annual payment for life, and office assistance for several years. If an executive recruiting firm is hired to find a replacement, its fees can run to more than $1 million. Shareholder class-action suits brought on by the plunging stock price are another hazard; in the past 10 years, U.S. companies have paid $20 billion to settle such cases. Last but not least, the organization’s initiatives go into limbo during a transition crisis at the top, and important competitive advantages may be lost during this time.

In recent years, several leaders at high-profile companies have flamed out early in their tenures: Among others, they include Richard Thoman at Xerox Corp., Durk Jager at Procter & Gamble Co., Richard McGinn at Lucent Technologies, Douglas Ivester at Coca-Cola Co. and Jill Barad at Mattel Inc. These puzzling examples raise questions: Why did such promising and previously successful individuals fail so quickly in the CEO role? And why is such failure happening today with relatively high frequency?

When a CEO fails after a brief tenure, the blame is often placed squarely on one person’s shoulders: the unsuccessful executive. It is human nature to point a finger at the CEO’s poor strategic choices, misguided actions or personality flaws. And up to a point, that is a fair judgment. However, in the cases of CEO failure that we studied, other major forces were at play. (See “About the Research.”) Once they are understood, companies can take steps to counter such forces and improve the chances that their leaders will not derail during their first couple of years on the job.

One cause that is often overlooked is the impact of the predecessor CEO’s actions on his or her successor’s performance. While outgoing CEOs do not intend to contribute to the failure of their successors, their personal needs and actions can lay the groundwork for derailment. A second contributor to early derailment is often the succession process itself. Once again, the outgoing CEO may be responsible, having failed to adequately prepare a successor; and the board is also often guilty of a lack of rigorous oversight. As a result, the wrong person ends up in a position for which he or she does not have the necessary skills. Finally, a third reason for failure by new CEOs is their often narrow expertise and inability to set a proper context as the senior-most leader. We will explore these issues and then offer advice to outgoing CEOs, directors and incoming leaders that may help them avoid the troubles that some companies have faced in making a leadership transition.

Legacy Actions of Outgoing CEOs

As a long-standing CEO enters the last few years of his tenure, three temptations loom that may make it difficult for the company to weather the transition to a new leader. Some executives, having been at the top for a decade or more, no longer have the will to grapple with new problems — they wish only to sail out into a golden sunset on calm seas. Others don’t want to leave the job at all; they hang on until the bitter end, regardless of what’s best for their companies or their successors. And still others are happy to set sail, but only after they’ve finished up their tenure with a headline-grabbing accomplishment that may reflect their own needs rather than the organization’s.

The average CEO’s job is so demanding, it is no surprise that some leaders are eager to move on even while it is still “their watch.” By then, they may be distracted by absorbing pursuits outside the enterprise, from company directorships to charity work to involvement in political campaigns; they may simply want to spend more time with their grandchildren. The product of these outside interests is diminished engagement in the CEO role; thus they may ignore critical trends or growing dilemmas until a crisis is at hand that the new CEO must confront.

This was the situation created by one long-standing CEO of a major industrial company. The executive had pushed through a major company reorganization in the early 1990s that had been successful but painful. Toward the end of his tenure, he had been reluctant to put the organization through a similar upheaval, despite the need for it brought on by new competitors and technologies. As someone who knew him well commented, “He wanted to end his career on an up — to coast out, a job well done. So he became defensive of his record. He did not want to engage in the changes that needed to be made. I would walk in to see him during that time and he would first talk about his fishing boat. He would then show me pictures of his beach house under construction and his grandchildren. His attention was clearly elsewhere — outside the business. Making a massive organizational change and the risks associated with that change were just not that attractive to him, despite the real need for them.” As a result, the CEO’s successor inherited a brewing crisis that he was ill prepared to handle. Within a year of his appointment, the incoming CEO was terminated. The retired chief executive then returned to his old post to save the company from disaster.

Given the ever increasing dynamism of markets, it will be extremely difficult for CEOs to coast through their last years. During the six- to seven-year tenure typical of many Fortune 500 CEOs, shifting marketplace demands are likely to require organizations to go through at least two major waves of change. A successful CEO will negotiate the first wave early in his tenure but may not have the energy to take on the second, especially if it washes in near his retirement date.1 But leaders who ignore the last wave of necessary change in order to retire on a high note will only produce more failures among their successors.

CEOs who deeply enjoy their role and want to stay on as long as possible can derail their successors just as effectively as those who ignore a growing crisis. Roberto Goizueta, the legendary CEO of Coca-Cola, was known to delight in keeping everyone guessing about his retirement plans.2 He would often repeat a comment made by a shareholder in 1996, “You should be like the pope and never retire.” For such individuals — and they are a relatively small group — retirement can be a crisis in which the sense of purpose and one’s individual importance are lost.3

Not wishing to contemplate the end of their careers, some postpone the succession process as long as they can. If a CEO has been particularly successful, the desire to stay on beyond retirement age may be supported by the board, and the press may reinforce the idea that the executive is irreplaceable. The problem is exacerbated by CEOs who are strong narcissists. These individuals seldom mentor others and prefer protégés of lesser capabilities who may not have the skill set required to lead a company.4

Sensing the reluctance of the CEO to release the reins, talented individuals who might be suitable candidates to take over the top position often leave the company. Internal candidates who remain may have had limited developmental opportunities or be chosen for the wrong reasons — especially if the succession is carried out hastily under emergency conditions.

The third way outgoing CEOs stack the deck against their successors is by seeking to close their tenure with a grand departure — in the form of a major acquisition, a record year in earnings, the achievement of an industry first, or an investment in a bold new venture.5 A focus on one of these goals may result in poorly timed decisions or misplaced investments; it may even encourage the outgoing CEO to pursue unethical actions or at least to turn a blind eye to certain questionable activities. Regardless, the new CEO may inherit a crisis that leads to her derailment.

In his later years as CEO, Richard Greenbury, the former CEO of British retailer Marks & Spencer Plc, had established an ambitious profit target for himself and the company: ¥1 billion. That would have been a record achievement in the world of retailing at the time. The pursuit of the goal, however, led him to underinvest in the company’s existing stores, information technology and training. Ultimately, the ambitious profit target contributed to a slide in the company’s performance and to the downfall not only of Greenbury but also of his successor.

The Flawed Succession Process

Many legacy actions that contribute to the derailment of incoming CEOs could be neutralized if the outgoing CEO and the board managed the succession process more rigorously.6 Poor succession management is a major contributor to CEO failure.7 In particular, internal candidates need proper grooming, and that is not a task that can be rushed.

To be adequately prepared and tested for the CEO role, candidates need to have had at least two major enterprise positions. Assuming that each one requires three years of experience to ensure adequate learning and testing of capabilities, potential company leaders need six years of top-level on-the-job training. Given the length of the average tenure of a Fortune 500 CEO, the chief executive and board need to initiate developmental opportunities for succession candidates soon after the CEO is chosen.8

When a CEO fails to prepare a potential successor and is suddenly pressured to step down, unexpectedly falls ill or passes away, it is not uncommon for the board to select the company’s number-two executive by default. The appeal of the choice is quite simple: The second-in-command has likely played an instrumental role in the CEO’s success and is well versed in the company’s challenges.

In many cases, the number two possesses a set of skills that complements those of the chief executive officer; for example, special expertise in finance or hands-on operations capability. This skill set, however, may not be what the CEO’s role requires. Once in the top job, the former deputy may continue to rely on the strengths that resulted in promotion, failing to grasp that new and different skills are required.

This seems to have been the case with Doug Ivester at Coca-Cola. Second-in-command to Goizueta, and the financial architect of his strategic vision, Ivester was unanimously appointed by the board soon after Goizueta died of lung cancer. A little more than two years later, Ivester was forced to resign following a serious slide in the company’s share price. His fall was attributed to the poor handling of a product contamination scare in Europe, international market shocks, public-relations snafus and anticompetitive allegations in Europe, and an interview in which he described a new vending machine that would allow the company to charge more for a Coke in hot weather when demand would likely be higher. The Wall Street Journal concluded that “Ivester proved incapable of managing Coke’s most treasured asset: its image. An accountant by training, Ivester knew the math but not the music required to run the world’s leading marketing organization.”9

It is difficult to know fully whether Ivester was indeed a poor choice or rather the victim of a confluence of external events, but it is clear that Goizueta’s untimely death encouraged the board to make a quick decision. Moreover, Goizueta’s enjoyment of his role and the limelight may have led him to overlook the need for Ivester to develop a greater aptitude for the CEO role through a set of preparatory experiences and executive coaching. Instead, Goizueta sent mixed messages, implying at times that Ivester would be his replacement while at other times identifying other candidates and complaining at one point that Ivester lacked the desire necessary to lead Coke.10 While Ivester’s mistakes are clear, it is also clear that it would have been difficult under the circumstances for him to do more than step up to fail.

CEO Orientations: Content and Context

We think of CEOs as broadly oriented in favor of content or context. The distinction reveals a common pattern in cases of early- tenure CEO failure. As with any typology, the distinction between the two orientations highlights the extremes; most CEOs demonstrate some mix of the two and a few are particularly strong in both areas. (For a summary of the characteristics of the two orientations, see “CEO Orientation Archetypes.”)

Content-oriented CEOs focus on the substance of the company’s business. Their interests and capabilities relate to corporate strategy, the core technology of the business, financial structure and performance, and business portfolio changes. They bring strong skills in what could be called business design.11 They possess a deep understanding of the competitive environment, the customer, the offerings, the sources of profit and the nature of competitive advantage. They believe firmly in analysis and the power of the right answer. They may rely heavily on specific functional strengths such as finance or marketing.

In contrast, context-oriented CEOs focus more intensely on the environment in which content decisions are made. They are concerned with values, purpose, the interactions of the executive team, the engagement of leadership across the enterprise, the culture of the organization and the processes that influence and shape these factors. They have a strong belief in the power of the right processes, particularly social processes, to produce the best decisions and a commitment to implement them. They are much less reliant on a functional strength as their main focus for assessment and action.

Now consider what happened in several instances in which an outstanding context leader was replaced by a content leader. Henry Schacht at Lucent, Paul Allaire at Xerox and John Pepper at Procter & Gamble were particularly good at creating collegiality at the top, building an executive team, engaging the organization, emphasizing values and forming connections with many people in their companies. They also chose as their heirs apparent individuals with strong content orientations, people with the intellect, strategic insight and analytic capabilities to complement their own strengths very effectively.

Once the incumbents departed, however, and the new CEOs suddenly had to create a new context on their own, trouble started. Their lack of interest in context or inability to create the right one was problematic. They were unable to build and manage the necessary network of relationships inside and outside the organization. As a consequence, they were unable to engage the top team, build the collective intuition of the leadership group, create an environment in which others felt free to express dissenting views and so on.

Faced with performance shortfalls and disappointments, these content-oriented CEOs typically engaged in a cycle of failure. They became more entrenched in their search for the right answer and their belief in the power of that answer. They tended to pay even less attention to context and grew more detached from the reality of the team and organization they were leading. They often fell back on their historic strengths, which were of limited use in the CEO role. Ultimately, the combination of declining performance and increasing disaffection within the top leadership groups became painfully evident to the boards of directors, which removed the CEOs.

During the failed CEOs’ terms as heads of these companies, billions of dollars of value were erased. Much, if not all, of the blame can be attributed to the actions of the failed CEOs. At Lucent, Procter & Gamble and Xerox, the boards asked the previous CEOs to return and restore the context that would ultimately enable new leaders to succeed.

While a context-oriented leader is usually preferable in today’s economy to a content-oriented CEO, there are exceptions to the rule. Sometimes a company may be going through a transition in which its specific needs could be met by a CEO with particular content skills. A firm that is in the midst of a financial crisis, for example, may require the leadership provided by an operations-oriented or finance-oriented CEO in order to survive.

That was the case with Japanese beer manufacturer Asahi Breweries Ltd. in the mid-1980s, when Hirotaro Higuchi took over as CEO. Before Higuchi’s arrival, Asahi had seen steady erosion in its market share over a period of years. Much of the decline could be attributed to product and promotional problems. Higuchi, a former Sumitomo banker, was an extremely content-focused CEO who directed his attention to operations. He immediately became involved in product decisions — even down to the selection of raw materials. His hands-on, content-oriented focus helped turn around Asahi’s performance.

Content-oriented CEOs, then, can be a better choice in times of crisis or when there has been a major shift in a fundamental element of an industry’s business model — a significant change in technology, distribution channels or manufacturing processes — that can best be navigated by someone with content expertise. Once a company has successfully bridged the transition, however, a more context-oriented CEO is preferred.

What Outgoing CEOs Can Do

Just as outgoing chief executives, their boards and incoming leaders bear part of the responsibility for the early-tenure flameouts of new CEOs, so too can they all be part of the solution. Outgoing CEOs can start by bearing in mind that a truly successful legacy is one in which their successors flourish and company performance continues to be excellent. In other words, a critical measure of a top executive’s legacy is the outcome of the full tenure of his successor; it is not enough to manage the initial transition effectively. From that realization, it follows that an outgoing CEO should consider these steps:

Given the critical importance of succession planning, work on this issue needs to start on day one of a new CEO’s tenure.12 The new top executive should make it a priority to create development plans and opportunities for a slate of promising internal candidates. These senior managers will require two major developmental opportunities at the enterprise level to develop and test their capabilities (especially context skills) for up to six years. Such assignments should, as a matter of course, be made part of a company’s talent development and general-management succession processes.

Second, the demonstration of context skills should be a critical variable for candidate selection. Context orientation reflects an individual’s character; it is not something that can be learned in the way that certain skills and tools can be developed. Stated most starkly, some people may never be able to develop an effective context orientation and the skills that go with it: They simply do not have the personality or interpersonal style that it requires. And attempts at changing someone’s personality and character are usually exercises in futility. Thus the task of assessment is even more critical: Some people, despite their tremendous intellect and strategic sense, will not be effective CEOs, and both boards and incumbent CEOs need to face up to this reality. It’s particularly important to consider whether a clear number-two executive has been in a position to demonstrate context skills.

Third, the CEO should annually track the progress of internal candidates and look for emerging ones as well. At review time, she should get as many perspectives on individual candidates as possible and hold frank feedback sessions with each candidate. Assessment tools such as 360-degree feedback should be used, and the board should also be involved. The CEO should make certain the board is exposed to candidates in formal and informal settings. At periodic board reviews, the chief executive should candidly discuss candidates’ progress.

What Boards Can Do

A company’s board will live with a new CEO long after the incumbent departs. Given reforms in board governance and increased media scrutiny, the day is gone when CEOs alone could choose their successors. Boards will be active in the succession process earlier and in greater depth.13 It is critical therefore for boards to figure out how best to collaborate with their CEO in the process, and the following steps can help:

Remember that succession is an emotional issue for many CEOs and can lead to a variety of nonproductive behaviors. Some may resist thinking deeply about succession simply because they do not want to confront their eventual retirement. Others, obsessed with making the right decision, may succumb to over-analysis and then paralysis in settling on candidates. Another CEO type may argue that one promising candidate after another is not up to the job (because, implicitly, he is irreplaceable). Directors must monitor company leaders for these signs of an emotion-driven approach to the issue.

A second related problem is that some CEOs show an unconscious desire to replicate themselves — even when rational analysis points to a need for a different type of leader. Thus board directors may need to move discussions away from a focus on personality and fit. They should instead engage the CEO in a discussion of the strategic demands of the business and determine which candidates are most up to the task of handling the challenges.

Third, an effective board will ensure that the CEO has a succession plan in place at all times. The board should require in-depth reviews by the CEO of promising candidates at least once a year; it should also bring in the senior-most HR executive for presentations on the candidates. New people, including external candidates, should appear from time to time, and some names should fall from the list. The same list of individuals as succession possibilities over a period of several years is a worrisome sign of lack of engagement on the part of the CEO.

Fourth, the board should insist on a longer and appropriately structured transition process, one in which the heir apparent is given the chance to create context before assuming the CEO’s role — or to demonstrate that he is not up to the task. Time and time again we have worked with CEOs in their first year or two and heard them exclaim that they never understood the job until they were in it. To improve a prime candidate’s understanding of the role, the board may want to involve him more actively in board activities and require him to work with an executive coach. Both the board and the outgoing CEO should be involved in ensuring a carefully orchestrated transition.

Boards should also focus on the development of internal candidates and beware of external CEO searches. While it is difficult to assess the context skills of an internal candidate fully, it is even harder to judge the skills of someone recruited from the outside. Context skills cannot easily be discerned from a résumé, and the external search process is sufficiently flawed that boards often end up basing their most important decision on spotty information.14 (Note that boards should possess a slate of external candidates in order to benchmark internal candidates against outsiders; also, if an emergency arises and no internal candidate is fully prepared, the board can quickly choose a successor from the outside.)

Once the new CEO is in place, boards should continue to observe her context management capabilities. This assessment can be made by observing whether she does the following: encourages participation, discussion and dissent in board and senior team meetings; communicates with different constituencies within the organization in ways that build credibility, inspire commitment and create energy; invests energy in creating the desired values and culture; is able to admit mistakes; and so on.

Beyond succession planning per se, board directors need to continually assess the outgoing CEO’s engagement with the business as he approaches retirement. Where does his interests lie, with the company or with his retirement estate? And beware the grand gesture as a career finale. Is the CEO talking about a planned acquisition that will change the industry or an investment in a risky product that will fundamentally change the course of the company? Such plans are often driven by ego rather than business sense. Directors should be aware of the opposite problem, too: the CEO who seems to be downplaying marketplace or organizational problems.

What CEO Candidates and Incoming CEOs Can Do

Candidates for the top job can take several steps to make their eventual transition more successful. A candidate’s obvious place to start is by making sure she develops context skills over the course of her career. She should seek out jobs that require a broad network of relationships at various levels in the organization; the creation and deployment of effective teams to execute initiatives; and the shaping of values and culture. In addition, such positions should provide opportunities to assess the impact of one’s behavior on others.

Second, it is imperative that candidates invest the time needed for due diligence.15 A potential CEO should have a full understanding of the challenges the outgoing CEO is leaving behind. The outgoing leader will want everything to look good as he departs, and the incoming executive will want to hear that everything looks good. But she should be prepared to dig deeper and corroborate the information that is offered. It’s important to find out as much as possible about initiatives launched in recent years by the departing CEO. A candidate should talk extensively to company clients and to employees to gauge the challenges ahead and problems that may be brewing. She should also review equity analyst opinions on the company and articles by respected journalists describing the outgoing CEO and the company.

Once the choice of a new CEO has been announced internally, the successor should also, through discussions, assess the quality of the predecessor’s executive team. Are the team members highly capable and able to critically evaluate the firm’s business model? Is there a consensus about the fundamental challenges facing the company and possible solutions to those challenges? The candidate should ask what the executive team’s priorities have been over the last few years. Do these match up with the industry challenges that outsiders perceive?

Perhaps the most important task to be performed by a strong candidate for the CEO role is an intense self-assessment. Any candidate must be prepared to answer this question honestly: Do I really want this job at this particular company, and at what cost? If an offer is made, she shouldn’t let the flattery of the offer negate intuition or preclude negotiations. The potential new leader must ensure that she is appropriately compensated, supported and positioned for the road ahead, whether it turns out to be smooth or rocky. A careful assessment of the situation and the legacy actions of the outgoing CEO may lead one to the conclusion that the risk of derailment for the incoming CEO is very high. In that situation, the heir apparent must be prepared to look past her ego and belief that this is the challenge of a lifetime — and turn down the opportunity.

A Better Legacy

While many factors contribute to an organization’s failure or success, leadership is crucial. In the current business environment, the failure of the CEO can have major consequences for all the constituencies of the corporation. The impact of CEO failure requires companies and executives to gain a deeper understanding of the derailment process so the odds of success can be increased. For early-tenure CEOs, insights into the legacy actions of their predecessors are critically important. In addition, the succession process must be robust, with particular attention paid to the concepts of context and content orientation. Armed with an understanding of these dynamics, outgoing CEOs, their successors and their boards may indeed be able to avoid the failures that have marked otherwise promising careers at major companies.