Uber and Disney might not at first glance appear to have much in common, but if there’s one lesson to be learned from watching both companies recently, it’s that replacing a CEO can be a difficult task. The ride-hailing company’s search for Travis Kalanick’s successor – which eventually saw the role go to former Expedia boss Dara Khosrowshahi – was made more complicated due to him remaining on the board, while Disney had to renew the contract of CEO Bob Iger for a further year because the board wasn’t able to find a suitable replacement in time.
CEOs’ substantial remuneration packages are often the subject of media scrutiny, and might lead to the assumption that there would be no shortage of candidates for these roles. But this money-centred view is reductive and overlooks the simple fact that being a CEO is one of the hardest – and most all-consuming – jobs out there. In fact, our research found that the reality is very different.
Speaking to 113 directors of Fortune 250 companies, as well as 18 executive recruiters and compensation experts, we found that boards are finding it harder than ever to replace outgoing CEOs, especially if the individual concerned is one of the company’s “visionary” founders. If the talent pipeline for CEOs is as constrained as it appears, this will have profound implications for talent development, succession planning, and compensation packages.
According to directors, the market for CEOs has never been tighter, with the pool of relevant candidates reducing further as leading companies across several traditional industries – from retail and consumer goods to hospitality, transport, and entertainment – come under increasing pressure to manage rapid transformations in the face of digital innovation and evolving business models and consumer behaviours. The challenging landscape only serves to ratchet up the pressure on boards to make the right decision – the entire long-term fate of their company could depend on their next hiring decision.
This goes some way to explaining why almost 100 of the Fortune 250 directors we surveyed estimated that fewer than four people would be capable of stepping into the CEO position at their company and running things at least as well as the incumbent. Meanwhile, almost seven out of ten directors said that fewer than five individuals would be capable of adequately leading one of their major competitors, and more than half put the pool of suitable “turnaround specialist” CEOs for a troubled company at the same size.
The scarcity of capable CEO candidates (whether genuine or only perceived) has other significant implications – not least that risk aversion may cause boards evaluating the performance of an incumbent to be disproportionately tolerant of results or behaviours they would not accept if they believed there was a deep pool of potential replacements for them to choose from.
“Visionary” founders almost impossible to replace
Identifying qualified CEO candidates is harder for some companies than others. Apple’s Tim Cook, for instance, a highly capable executive who built his reputation on revolutionising the company’s supply chain operations, has repeatedly been criticised for not having the creative spark of his predecessor Steve Jobs.
Our research indicates that replacing similarly “visionary” founders such as Amazon’s Jeff Bezos, Tesla’s Elon Musk, or Warren Buffett of Berkshire Hathaway would be significantly more challenging than it would be for larger, more traditional public companies. When asked to name how many people could do the job of these visionaries, the directors believed that just two could replace Bezos, and three for Musk and Buffett. The bosses of IBM, Procter & Gamble, General Motors, and Pfizer could apparently be replaced much more easily, with as many as 14 to 15 viable successors.
Turn to homegrown talent
Talent is scarce, the job is tough, and there is minimal margin for error in recruitment. All these factors – combined with the fact that the average tenure of a CEO is shortening – mean that companies need to have a proper succession plan in place. As well as looking externally, they should be investing in identifying and grooming less senior executives who they believe have the potential to grow into CEO material. The CEO role isn’t one somebody can just step into with no preparation (nobody is actually “ready now” for this role). Companies that fail to support and strategically develop internal candidates as part of their succession planning will ultimately suffer – whether from a management breakdown or reputational damage.
And judging by our research, there’s a strong consensus that the corporate environment moves at a much faster pace and is less forgiving than it used to be of mistakes made in the selection process of a new CEO. If the board chooses the wrong candidate, they will have less time to right any wrongs and will struggle to prove themselves from the outset. It would help companies to avoid this situation if they gave greater strategic weight – even a seat at the boardroom table – to their HR leaders, rather than (as is too often the case) allowing talent management and succession planning to become an afterthought.
David Larcker is a professor at Stanford Graduate School of Business.