CEO succession as a strategic imperative
A health care organization’s strategic planning involves the board in a number of important activities. But how many boards have considered CEO succession planning to be one of them? For many reasons, the success of an organization’s strategy depends on the quality of its process for changing leaders.
A cautionary tale
It was late summer, and the board members of a two-hospital system in Central California were deep in discussions about their new strategic plan when the board chair requested that they go into executive session without their CEO. “Ladies and gentlemen,” he began formally once the CEO, Judy, and her team had left the room. “Judy has informed me that she plans to retire at the end of the year. Her health scare last year made her realize that even though she’s only in her late 50s, there are other passions she wants to pursue before she really slows down.”
The board members sat stunned by this sudden news. It was a moment before anyone spoke.
“What does this mean for the new strategic plan we are about to approve?” the board member who had been chairing the strategic planning task force said. “Should we still move forward with implementation? What should we do about finding her replacement?”
Too often in hospital and health system boardrooms across the country, boards are taken by surprise when the CEO announces his or her departure. A field that is going through unprecedented change, combined with the wave of baby boomer CEOs retiring, means more boards can expect this “surprise” in the next few years.
But should this really surprise any board? And what plans do most have in place for dealing with the eventuality of their chief executive’s departure? No one stays in a job forever. Savvy boards begin planning for this as soon as they sign a new CEO’s contract. After all, hiring and delegating work to the organization’s chief executive is one of any board’s primary — and some would say most important — responsibilities.
New approach
CEO succession planning typically is viewed as one of the board’s least exciting activities. Planning for the departure of a CEO who’s genuinely valued may seem counterproductive. Because of this, boards can be almost superstitious about raising the question of succession when things are going well. Conversely, planning for the replacement of a CEO who is not performing well is a task board members universally dread.
A new approach to CEO succession planning, however, turns this traditional viewpoint on its head. Looking at CEO succession planning as a key activity in an organization’s strategic planning is a way for boards to address the critical role that the CEO plays in its success. It can link strategic goals, activities, incentive compensation and organizational performance together in a way that motivates high performers and ensures continuity of the critical initiatives designed to enable the organization’s success.
Far too often in our experience of working with boards across the country, we see boards that underestimate the importance of the person who plays the CEO role. Each CEO brings his or her own style of leadership to the job, and this has an impact on how or whether the strategic plan is implemented. In the event of CEO turnover, the board must be prepared for a shift in strategic plan timelines — and even in goals and objectives — with the arrival of a new leader. It’s not uncommon for strategic plans to be completely rewritten or discarded upon the arrival of a new CEO.
After all, think about it: CEOs are leaders. They are smart, accomplished and enjoy the effort, the work and the rewards it all brings. CEOs want to know how success is measured, and in the event that their boards don't tell them, or don't set goals and reward them for hitting or exceeding those goals, they will do it themselves. Great boards use this to their advantage, building performance plans with stretch goals that motivate the CEO, the organization and the board itself on successfully implementing the change that matters … all based on performance.
Since organizations can expend significant resources on the development of a strategic plan and hiring a new CEO, it only makes sense to consider the impact changing leaders will have on the organization’s central direction-setting guide: the strategic plan.
Running the show
Planning for the transition of your chief executive is a unique task, with an organization's special circumstances bringing their own features to the endeavor. As seasoned executive recruiters will tell you, no placement is like another. Additionally, most hospital and health system board members don’t have experience hiring for a position at this level of responsibility, compensation and scope. It can be intimidating. Boards that feel unequal to the task will try to delegate it entirely to an external consultant or firm, often with less-than-stellar results. This, frankly, is a mistake.
While an executive recruiter or consulting firm can be a board’s close partner throughout the process of selecting a new CEO, the board should never lose sight of the fact that it must run the show. Board members may start off feeling daunted at their responsibility for a change in leadership. After a few deep breaths and some just-in-time education, however, many boards surprise themselves with their capacity and competence in this governance role. After all, who better to understand what the organization and community needs in the role of a leader than the group of community leaders who’ve been watching over the organization for an extended time?
Another daunting aspect of CEO succession planning is that, even with careful planning, there are no guarantees that the placement will stick and the CEO will stay for the long term. It is not uncommon for a new CEO to leave his or her position within 18 months.
Boards that realize the high risk of failure in their CEO placement efforts will adopt a thoughtful process to minimize these risks. Increasing the likelihood of a successful placement, despite the inherent risk of failure, should be every board’s goal.
Strategic moves
Since the CEO plays such a pivotal role in setting strategic direction and ensuring success of high-level organizational initiatives, succession planning should be intrinsically tied to the organization’s strategic direction. Two questions every board should ask when considering a new strategic plan or direction is, first, “How long do we anticipate our current CEO to remain in the role and what is our plan if he or she should abruptly depart?” Second, “How can we take the surprises out of this process so we have adequate warning to make the changes as seamlessly as possible?”
As a negative example, one large tertiary medical center found its strategic planning project come to an abrupt halt when the CEO was suddenly terminated by the board. The planning process, along with a multiyear, cultural engagement study, was scrapped and all the resources, energy and organizational momentum that had been devoted to it were lost.
Savvy boards recognize that the leadership style, experience and aptitudes of an individual CEO will influence strategic direction, and they embrace it. Without this awareness, boards may make the mistake of thinking that CEOs are interchangeable parts. Particularly when there are personality clashes, a board may start to think of their CEO as “not the right fit” and act as if “we’ll just find another.”
Boards should, therefore, consider succession planning to be tied intrinsically to the organization’s strategic plan. And they should understand that one of the most strategic actions a board will ever take is the hiring of a new CEO or grooming and promoting an internal candidate.
3 phases
Given its importance for the organization’s mission, what does an effective CEO succession-planning process look like?
In the first phase, the board should outline what success will look like for the organization. Many assume all organizations will be looking for the same thing in a CEO, but this is simply not true. If possible, the departing CEO should be involved in the discussions but not be in charge of them. The skills and traits your organization needs right now are different from what will be needed in five years. Consider the organization’s future needs and develop the desired CEO skill set and job description.
Next, the board should consider whether there are internal candidates to consider, and assess their competencies relative to the desired skill set. There will be gaps, most likely, but those should not rule out internal candidates. Board leaders and/or the departing CEO, if retiring, can work with internal candidates to solicit their interest in building skills to fill the gaps. In these days of heightened competition and the associated recruiting costs for experienced CEOs, boards would be remiss not to consider growing their own future leaders.
Selecting the right internal candidate as your new CEO can be less traumatic to the organization, require a shorter onboarding time and, potentially, be less expensive than going outside. The likelihood of this new leader’s success can be greater, as well, since he or she already is acculturated to the organization’s way of doing things. Internal candidates, however, may be at a disadvantage when competing against external candidates offered by recruitment firms — unless the board is clear about its desire to consider both.
The board also should agree on a timeframe for selecting the new CEO and a plan for communicating with employees and the community about the process. Many organizations lose momentum during the CEO recruitment process because time and attention are wasted by individuals speculating about what’s happening. Clear communication and a consistent message from all board leaders can minimize this drag on organizational performance.
Phase 2 of the succession planning process involves forming a committee of the board to oversee the process, if one hasn’t already been seated, and to consider whether the board will hire an executive recruiting firm or consultant to assist with the process.
With the stakes high for finding the right leader, complicated regulations, community visibility and significant cost, most boards decide that hiring an expert to assist them is the right path. Although the cost of engaging a recruiting firm can be significant, boards must take care that they do not embody the old saying, "penny wise, pound foolish." Boards are well-advised to understand early in their process that this will be an expensive undertaking and their goal should be to find the right CEO and set him or her up for success rather than seeking to save money.
Boards should take time to consider several executive recruiting firms or consultants before making their selection. Whether through a formal request-for-proposal process or multiple firm interviews, board leaders should check the references of the firm by talking to board leaders or CEOs at other organizations. Making sure that all board or committee members have weighed in on the potential partner is critical as well. Board leaders must walk the careful line of working to build consensus while avoiding delays if there is not complete consensus. Although unfortunate, it’s possible there may be one or two outlier board or committee members.
At this point, boards should give serious thought to offering a long-term bonus compensation plan for its retiring CEO and executive leaders. Ensuring continuity of the executives other than the CEO during a CEO recruitment process can be critical to maintaining organizational momentum. When done well, the long-term bonus compensation process can galvanize the organization’s senior leaders to see the transition as a time of opportunity and positive challenge to their leadership instead of an anxiety-filled time to be spent polishing one’s resume and beginning to seek a new position elsewhere.
The third and final phase of the succession-planning process involves interviewing candidates, and selecting and hiring the new CEO. But the process doesn’t end with the executive's first day on the job. Boards have an obligation to ensure that a transition plan for their new chief executive is in place to carefully monitor progress toward his or her goals, providing regular constructive feedback on how the transition is going. Many boards hire their new CEOs without clear job descriptions and without clear metrics for what success will look like. This is a bad move. Lack of clarity about the board’s expectations and metrics for success can be attributed to many failed CEO placements.
While there are no guarantees for success in the CEO succession-planning process, too many fail because a plan is not developed, measured and followed. This is a high-cost, high-risk moment. Set a process, work the process, be clear with goals and intentions, and be prepared to work collaboratively with fellow board members, any external experts you select, the candidates and the community. While daunting, this is a task that the board can navigate with confidence. It’s critical to the organization’s strategic direction and success that you do.
Paul Kirincic is board chair of Marin General Hospital, Greenbrae, Calif. Karma Bass (kbass@viahcc.com) is principal of Via Healthcare Consulting in Carlsbad, Calif.
How should the board approach finding and hiring a new CEO?
With care: Boards often underestimate the trauma that change in the chief executive position can inflict on the organization, staff morale, organizational culture and strategic momentum. This is true even when the change is necessary and welcomed.
As a process: Savvy boards start by assessing where they are currently with respect to strategic and succession planning, and identifying the course that will take them where they want to go. They use this process as their touchstone, checking in with it when things seem messy or complicated, which they will.
By taking responsibility: While consultants and executive recruiters can make excellent partners, the board must never forget that it is in the driver’s seat and act accordingly.
— Paul Kirincic and Karma Bass
One hospital’s journey
In 2010, Marin General Hospital in California was once again under community control. After a separation from the hospital chain that had been engaged to run the hospital years earlier, at midnight June 30, the hospital was returned to the control of the community through the Marin Healthcare District Board — five elected representatives who had managed the hospital in the past and who held responsibility for the health care needs of the community.
At the suggestion of an external consultant, the district board created a new hospital operating board, charged with the oversight of running the hospital on a day-to-day basis, with the hospital CEO (hired earlier in the transition process by the district board) reporting to the new board. This board comprised community members with the experience, expertise and knowledge of managing a complex hospital. The process of becoming a stand-alone, community-run, nonprofit hospital in the age of consolidation and strategic partnerships had begun.
After two years of stabilizing the hospital’s operations, the board, the CEO and the management team began developing a strategic plan that would address the strategic opportunities the hospital faced, from stabilizing revenue streams to financing and building a new wing. Once the plan was completed, the board then turned its attention to stabilizing the management team. While the board had implemented a strong pay-for-performance annual compensation plan for the top executives and their direct reports tied directly to the annual goal-setting process, it was time to consider a long-term compensation plan.
By 2014, the board had developed a compensation plan tied to the completion of a new wing, at which time the CEO would retire. The conversations were frank and direct. Based on the mutual trust between the CEO, the board and the board chair, an agreement was reached to put into place a long-term compensation plan that would reward the CEO and the team for bringing the hospital wing into service on time, on budget and with a new culture. Additionally, the plan would coincide with the CEO’s planned retirement. By the start of 2015, the board had locked in the CEO and key members of his staff until the hospital rebuild project was completed, midyear 2020, with measurable, competitive goals.
After this plan was put into place, the board began discussions on what would happen in 2020 when the CEO retires. An internal candidate was identified and, in 2016, a three-year plan was implemented to determine whether the candidate would become the board’s choice to replace the CEO. Measurements were developed, expanded responsibilities were planned to give the candidate an opportunity to gain experience, and regular reviews with the executive committee and full board were begun as part of an open and inclusive process to work together for the future of Marin General Hospital. The board anticipates committing to a yearlong transition plan for this candidate in 2019 or, alternately, initiating an external search for additional candidates.
— Paul Kirincic and Karma Bass