Consider the following. According to Booze Allen Hamilton’s fifth-annual global study of CEO turnover, 15.3 percent of chief executives at the world’s 2,500 largest public companies left their jobs in 2005, a 4.1 percent increase from 2004 and quadruple the rate of departure seen in 1995.
Data from Weber Shandwick’s annual “CEO Departures” study is more encouraging — it reflects a significant change from the alarming CEO departure rates that occurred between 2000 and 2005. This study shows that in the first three quarters of 2006, only 49 CEOs in the 500 largest revenue-producing U.S. companies left their jobs, compared with 58 of 500 CEOs in the same period in 2005.
Whether this decline in CEO turnover will sustain or revert to the high in 2000 is an open question. But what we can be sure of is that there will always be some level of turnover at the top, bringing with it a fragile and critical leadership transition that must be expertly planned and executed.
This predictable circumstance begs a more fundamental question: What must incoming CEOs know and do to achieve organizational stability during a time of natural upheaval?
Although many management experts suggest the success or failure of a leadership transition depends on the successor CEO’s skill in managing change, it more likely depends on the successor’s ability to manage change systemically.
What this means is that the most effective successors will have the ability to see the organization as a set of interrelated activities and resources rather than as isolated activities to be tackled individually or resources to be so narrowly defined that their usefulness is unwittingly limited.
Although the ability to understand a leadership transition systemically is important and admirable, capitalizing on it by putting it to use is all that matters once the successor is handed the reins.
A basic principle of thinking systemically states that a past solution easily can become a problem in the present. The following example of declining sales of a popular product illustrates how this can easily happen.
At a meeting with the executive vice president of sales, a new CEO learns excessive inventory costs for one of the company’s most successful products had been a serious problem, but within the last few months, it has been corrected by a new division manager appointed by the former CEO.
But now a new and unexpected problem with the same product has surfaced: Despite its initial success, sales have dropped off dramatically, and field representatives are now spending 30 percent of their time responding to complaints from customers who have lost patience with consistently late shipments. Inventory costs remain low, but profit margins are being seriously eroded.
Without the benefit of understanding the interrelatedness of activities in a sales cycle, the previous leadership understandably defaulted to more obvious explanations, either that the product itself was flawed or that a competitor had gained market share much more quickly than expected.
Thinking about the problem from a systems perspective, however, the new CEO can offer a different explanation and approach to a solution. Lowering inventory costs (initially a way to increase margins) resulted in angry customers and ultimately declining sales. His suggestion to the executive vice president of sales is to review the complete sales cycle with his team, this time focusing on how each activity in the cycle will affect other activities in the cycle.
In the early days of his transition, the new CEO has not only gotten to the core of one of the company’s most serious problems but also has introduced to his team a new way of thinking.
Building a management team is perhaps one of the most critical and difficult challenges for a new CEO, and it is particularly difficult if that person inherits a team — inheriting a management team that is reluctant to discuss difficult and sensitive issues because such discussion is neither politically not culturally acceptable is a widespread phenomenon. For new CEOs who understand the dangerous consequences of avoiding critical issues, building the skill of discussing the “undiscussables” can be critical to their success or failure in delivering the company’s strategy.
A systems perspective requires explicitness — it requires that people ask and understand “the thinking behind the thinking.” Revealing a rationale for an idea or an assumption that is the basis for a suggestion can uncover flawed thinking and potentially poor decisions.
New CEOs who can skillfully guide their team toward testing and questioning assumptions, a process fundamental to thinking systemically, might not win a popularity contest in the first 100 days, but in the long run, they will have a team whose decisions are transparent and whose consciences will be clear.