Over the past year, the Fortune 1,000 has seen a significant jump in the number of directors being appointed as the CEOs of companies on whose boards they serve: Ten directors stepped in as permanent CEOs from October 2009 to October 2010, compared to only three tapped as chief during the 12 months prior. One additional director was named interim CEO this year, bringing the total for the past year to 11, according to research from Heidrick & Struggles. In August alone, three directors sat down in the CEO's seat: Dan Akerson at GM, Fred Chang at online retailer Newegg, and James Shelton of nursing home pharmacy giant Omnicare (OCR).
So why has the number of directors being tapped for CEO posts more than tripled in the past year?
"The main reason is a lack of proper succession planning by companies," says Anita Skipper, corporate governance director of Aviva Investors. "The need for prompt management changes during the financial crisis may also have compounded the trend. Boards are more risk-averse. If no one from management can quickly step into the CEO's position, the 'safe' alternative is to choose someone well known to the board, who understands the strategy and business, and may have previous experience as a CEO."
Furthermore, adds John Weckenmann, senior counselor of international client development for Ketchum's Global Corporate Practice, "Boards are being held more accountable and when a CEO steps down, it has become natural for the board to draw from within its own ranks to fill the CEO position. Presumably, there's a greater sense of assurance in doing so, 'We know what we're getting', as well as a greater sense of ownership of the situation, 'We're not going to leave this to chance.' "
Oversee the CEO Job Search, Don't Join It
So what's the upside of putting a board member into the top job?
"The new CEO takes less time to get up and running, which likely translates in to higher profits for shareholders," says Gordon Burnes, vice president of marketing of OpenPages, an IBM (IBM) company. Then too, it's relatively easy to install a board member with an interim appointment, giving the board a few months to figure out if the person is right for the job and what the alternatives are, says Robert Mittelstaedt Jr., dean of the W.P. Carey School of Business at Arizona State University. "If the board decides to go another way, it looks normal that the interim person steps out of the role. This is not nearly as bad as bringing in an outsider quickly to later find out you made a mistake," he adds.
However, having a board member step in as CEO is really a stopgap measure: It may make sense in isolated situations, but better succession planning is the long-term answer, says Burnes.
Bill Ide, partner at the law firm of McKenna Long & Aldridge hopes the current trend is short lived.
"Boards need to oversee and not have members competing to be the next CEO," she says. "Succession planning must get stronger and CEOs must be subjected to stronger oversight so the failures of management in late 2008 and 2009 do not occur with the need for a quick fix of inserting a board member as CEO. This is one of the worst ways to fill the CEO seat."
Indeed, the trend of directors stepping into CEO roles could become dangerous, adds Skipper of Aviva Investors. "The CEO is unlikely to push for a succession plan, and any board directors hoping they will be the next CEO are unlikely to do so either," she says.
Then too, boards that pick their own members for CEO roles risk disillusioning internal candidates who were passed over, and who may actually have a better grasp of the business, says Burnes. Companies may also miss out on the fresh perspective they could have gotten by bringing in an executive from outside the organization, adds Weckenmann.
Internal Candidates Should Be on the Radar in Advance
Truth is, the qualities that make for a good director may not be the same as those that make for a good CEO. "Companies do not often recruit board members with the same skill set and criteria as are used in recruiting a CEO," points out Nicole Sandford, a partner in Deloitte & Touche's Board Advisory Services practice and Northeast corporate governance leader.
Is this the best way to fill the CEO seat? It's a question worth serious examination, especially considering that the average time in one of those top jobs is believed to be less than five years, according to John Alan James, corporate governance expert and professor at Pace University's Lubin school of Business.
"It's best to be ready to name a permanent CEO, but that is never going to be possible 100% of the time," says Scott Chaikin, CEO of Dix & Eaton, a communications consultancy.
One lesson which emerges from this trend is that companies need to make a much greater effort to introduce their internal CEO candidates to the board in advance, and to establish their credentials -- otherwise boards will increasingly look to those they know, which will mean more CEO candidates emerging from among the outside directors," says Peter Hagan, managing director of consulting firm LECG.
Paul Winum, leader of the CEO Succession practice at consulting firm RHR International, says CEO succession should be a continuous process and part of the standing agenda of every board. "Board members and executive staff should always be cultivating CEO talent from within their organizations and benchmarking that talent against talent outside the company," he says.
Lastly, there is this take-away message for executives, says Deloitte & Touche's Sandford: "Treat board members with the respect owed to representatives of company shareholders and to -- potentially -- the next CEO. He or she may just wind up running the company some day."
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