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Corporate culture and the CEO

More boards are including cultural considerations in discussions on CEO succession, says Deloitte report
/ 05:04 AM February 04, 2019

Soon after Steve Jobs announced that he was stepping down as CEO of Apple in 2011, the company’s shares fell by 7 percent in after-hours trading.

Despite the tech giant’s consistently strong performance—it was the world’s most valuable company based on market value around the time of Jobs’ announcement—the market was shaken by the thought that the visionary leader who had turned Apple’s fortunes around was making a permanent exit. The question on everyone’s mind was, “Who could possibly replace him?”

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Apple’s case is proof of just how consequential a role a CEO plays, particularly in shaping corporate culture.

Organizational culture—that set of shared beliefs, values and ways of working—prompts people to perform in ways that serve the organization’s purpose and achieve its goals.

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More than any other executive, the CEO determines how culture plays out in an organization.

Often, though, when boards consider candidates for the CEO post, cultural considerations are overlooked in favor of past performance, industry experience and status in the business community, increasing the chances of a poor fit or even disaster.

As the body responsible for overseeing the CEO post, how can boards ensure that incoming leaders are a good cultural fit for their organizations?

Deloitte’s Global Center for Corporate Governance talked to a number of our own leaders who work closely with boards and senior executives to get their insights on how cultural fit can be factored into CEO succession plans.

The center also interviewed leaders from the private sector who either chair a board or are directors to get their thoughts on best practices.

Raise the board’s cultural awareness

A board that has a keen appreciation for the importance of organizational culture will not take it for granted when searching for a new CEO.

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To enhance that appreciation, boards can tap human resources or external advisers who—through confidential interviews, focus groups and data analytics—can help them see where policies and procedures are working well or causing frustration.

Boards also need to be apprised of how management communications and behaviors are shaping the culture and whether that culture is supporting the organization’s strategy and goals.

Sustain board engagement in the succession process

According to Deloitte’s report, more boards are in fact including cultural considerations in their discussions on CEO succession.

Instead of talking about who could replace the CEO, some boards are focusing on what leadership qualities the organization needs.

Ideally, boards actively monitor the leadership pipeline and treat succession planning as an ongoing practice, regardless of the current CEO’s tenure or performance.

One board chair Deloitte spoke with said she used a “three and three” rule of thumb—look three years ahead and have three internal candidates in mind. Board members should be able to have candid discussions about these potential candidates, future needs and executive development.

Broaden CEO candidate criteria

When boards look for a CEO, they usually focus on a candidate’s financial and operational performance.

More discerning boards would look at how that performance was achieved, which usually involves the interplay of CEO, culture and performance.

In this age of disruptions and innovation, it’s also important to look beyond performance to characteristics such as agility, creativity and ethical outlook.

Assessing a candidate’s personality type and temperament will give the board insight into how he or she will likely lead others, collaborate with peers, consider risks and manage change.

This will, in turn, give the board an idea if the candidate will be a cultural fit or not.

Oversee internal talent development

Internal candidates have the advantage of already being familiar with the organizational culture.

But in order to have a deep pool of talent to choose from, boards should make sure a robust internal senior executive development program is in place.

The most effective programs follow a 3-E model, which stresses the importance of an individual’s development along three key factors: expertise, which comprises skills, capabilities and functional knowledge; experience, which focuses on broadening the individual’s knowledge of the company by, for example, having him or her work across different units/divisions or handle special projects; and exposure, which might mean sending candidates on overseas assignments to learn more about different markets, methods, customs and perspectives, and to test their ability to adapt in a cross-cultural environment.

One of the board chairs Deloitte spoke with talked about having three candidate categories in her organization: ready now, ready in one to three years and ready in four to six years.

Support the CEO before, during and after the transition

The board’s responsibility over CEO succession doesn’t end when the new leader is installed.

Even if the new CEO comes from within the organization, he or she will still need support, especially in shaping company culture.

The board can help the CEO manage time, talent and key relationships and it should also provide clear, constructive feedback, especially during the beginning of the new CEO’s tenure.

If an organization has brought in a new CEO to effect a cultural change, the board can help the CEO and the rest of the executive team craft a formal program by setting goals, encouraging certain actions, reinforcing the right behavior and enabling candid conversations at all levels.

One board chair Deloitte spoke with recommends a transition time frame of more
than three months but less than a year.

In her case, she was brought in from the outside to become the CEO of an Illinois-based ingredients solutions company that wanted a cultural shift toward innovation.

During her transition, the outgoing CEO, who had formally retired, was available to her for eight months as a consultant.

This allowed her to tap the previous CEO’s expertise, experience and knowledge even as she worked to shape the company’s new culture.

Apple, as everyone knows, looked inside for its next CEO and appears to have continued the culture its founder established.

In its official statement soon after Jobs’ resignation letter was made public, the board expressed its “complete confidence” in Tim Cook’s abilities to lead the tech giant.

The board has a long list of priorities but perhaps nothing is more important than deciding on who leads the organization.

Being proactive in establishing a solid CEO succession plan that takes culture into consideration will help ensure that Boards are ready and well-equipped to act when the critical and inevitable time comes for the changing of the guard. —CONTRIBUTED

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