“I think it’s time I moved on.” These words strike fear into the heart of a company chair when they are uttered by the CEO.

Of all the duties of company directors, recruiting a new CEO is likely the most important. Get this wrong and the company will suffer. Get it right and the company will prosper. And, regardless of committees and other aids, it is the chair that boards look to for guidance on how to respond when the CEO, inevitably, moves on.

What is the right way to recruit a CEO?

The best boards have already started the process long before they hear those fateful words. They are continuously managing the executive succession (and their own board succession). They use a continuous process that looks something like this:

Good boards have a close enough relationship with the Chief Human Resources Officer (CHRO) to be well informed on the ‘bench strength’ available to supplement, and eventually supplant, the current CEO. Even in a small company, where limited budgets leave no scope for a ‘CEO in Waiting’ to lurk in the senior executive ranks, good directors make sure they are aware of the potential for each of the CEO’s direct reports to step in as a short-term replacement in case of vacation or illness. They carefully extend this potential by splitting and sharing the CEO role among the executive team so that people can acquire and practice new skills.

Most boards have a close relationship with the current CEO and, as part of their annual assessment of CEO performance, will review the CEO’s strengths and weaknesses. This exercise should not stop at the determination of an appropriate bonus; it must extend to building new capabilities to address emerging requirements and issues. Training and experience can be tailored to requirements. If your CEO is growing and developing in their job, he or she will be much less likely to look for a new one.

Whilst ensuring appropriate skills to deliver the strategic plan is the first, and prime, aim of the boards monitoring of CEO performance, a second, and almost as important, aim is to understand his or her motivation for the role. As motivation fades a good board can be prepared to introduce new strategic challenges that keep the job fresh and exciting or to start scanning the environment for potential replacements. This is a good time for a leadership audit of executive ranks as well as a review and update of the CEO position description. The board may undertake this in a quasi in-camera session with the CHRO or in-camera with outside assistance. They may also delegate the role to the nominations and remuneration or ‘people’ committee or to an ad hoc task force. Making this an annual review, rather than a hasty response, keeps the information fresh and relevant and the board in a state of preparedness.

When the fateful words are uttered, it is time to move into deployment of plans. The board can delegate the task of reviewing the list of ‘likely suspects’ to ensure that they are still relevant potential choices and decide whether to attempt a direct approach or use professionally qualified assistance. Most boards encourage internal applicants to apply and provide them – if unsuccessful – with detailed feedback on the skills and abilities they need to develop to be successful next time round.

This is also the time to review market terms and conditions for CEOs in similar sized, paced, or scoped businesses and ensure that their pay scales are in line with their strategic positioning. Some companies choose to pay in the lower percentiles and offer education, experience, or conditions that attract high calibre candidates; others choose to meet or beat the market to improve their chances of attracting the right applicants away from their current roles. There is no right or wrong positioning as long as it is a conscious choice and made before talking with candidates for the role.

At this point in the process the board should investigate the current CEO contract. Too often the notice periods are woefully short. A CEO giving three months’ notice at the Melbourne Cup, for example, would leave even a well-prepared board with a stiff challenge to get a replacement into place for a handover before mid-February. Again, it is important to look at the market. A notice period of three months when the industry standard is six can leave a board with three suboptimal choices:

  1. A period of role vacancy
  2. Taking a suboptimal recruit because they can start when needed
  3. An interim CEO and two disruptive transitions rather than one

Good boards will also look wider than their own ‘hit list’ to source candidates from outside their sector or region and give the selection committee a wider choice of candidates for short-listing. Again; this must be driven from the strategic plan, with emphasis on skills or attributes that would be relevant in the next three to five years.

An on-boarding plan is essential. The new CEO, even if recruited internally, will need to gain familiarity with the role, the board, the external stakeholders, etc. A review of the delegations is pertinent; a new CEO should come to the board for authorisation more frequently and for lower thresholds than one who is experienced in the role, company, and strategy. Delegations can be reviewed and increased when the learning curve has flattened.

This constant and continuous approach ensures that there is always a level of preparedness in the boardroom for CEO change. The chair must drive this process as it can easily be pushed of the agenda by more urgent, yet less important, issues. If the process of CEO replacement is well advanced “I’m thinking of moving on” will sound like a wonderful opportunity to increase the strategic capability and refresh the skills available for building success.

To put into place good Board practice for CEO recruitment call Julie Garland McLellan  +61 411 262 470