7 Myths of CEO Succession

Selecting the chief executive officer of a company may be the single most important decision that a board of directors can make. The CEO is responsible for decisions that impact corporate performance, including strategy, organizational design, and incentives; in addition, he or she also influences workplace productivity and culture.

But how reliable is the process that companies use to identify and develop future leaders?

Below, Professor David Larcker, Stephen A. Miles, and Brian Tayan (MBA ‘03) highlight and debunk seven common myths about CEO succession. (Read the full Stanford Closer Look Series case study here.) 

Myth #1: Companies Know Who the Next CEO Will Be
A 2010 study shows only 54% of companies are grooming a specific successor to the CEO position.

Myth #2: There is One Best Model For Succession
Companies generally use one of four approaches: CEO-in-waiting; internal development; external recruit; and inside-outside approach. (Learn more about each one here.)

Myth #3: The CEO Should Pick a Successor
The CEO should advise on succession, but the final decision rests with the board.

Myth #4: Succession is Primarily a “Risk Management” Issue
Succession planning gives companies the opportunity to build value.

Myth #5: Boards Know How to Evaluate CEO Talent
Research shows a significant percentage of directors – 21% – report having only moderate or little understanding of the strengths and weaknesses of the current CEO.

Myth #6: Boards Prefer Internal Candidates
Directors tend to view insiders as junior executives and therefore less qualified than external candidates who currently have CEO experience.

Myth #7: Boards Want a Female or Minority CEO
“Diversity” ranks high on the list of attributes that board members formally look for in CEO candidates, and yet female and ethnic minorities continue to have low representation among actual CEOs.