How Boards Can Give Their CEO More Time to Think about Succession

One straightforward approach involves reducing their number of direct reports.

By Peter Lane and Raj Pherwani

No one would quibble with the notion that chief executives need to spend more time developing the kind of talent that can replace them someday. Hard data shows this task may be among a CEO’s most important: When Bain & Co looked at 23 high-growth companies in 2001, we found that only a small minority – less than 15% – systematically tried to develop leaders by advancing the right people through the right jobs. The leadership of these pioneering few averaged shareholder returns of more than 10% a year above their cost of capital over a 10-year period. But the one in four companies that placed little emphasis on cultivating leaders averaged returns of less than 1% a year. This wake up call raises a question: Where does a harried CEO find the time to set up a school for CEOs?

One straightforward approach involves reducing their number of direct reports. Indeed, simply slashing face time can pay handsome dividends. One think tank, for example, has found an inverse relationship across all management ranks between span of control and revenue growth.[i] Companies that averaged 1 boss to 6.5 direct reports had a 20% rate of revenue growth, while those with 1 to 8 ratios averaged less than 5% revenue growth.   

Yet all approaches to simplifying life at the top are not created equal. Merely reducing spans without managing the expectations of key executives who don’t make the CEO’s inner circle can create more problems than it solves.  An effective approach unpacks today’s complex matrix relationships and creates the right amount of exposure to the CEO -- at the right time and for the right people. 

As boards ponder ways to increase the effectiveness of time-starved chief executives, one method to consider goes under the rubric of Office of the CEO (also called Office of the Chairman, in some cases). This device aims to streamline a company’s reporting structure around day-to-day operational and strategic decision-making instead of comprehensive processes. The OOC gathers together the two to seven guardians of a firm’s make-or-break investments in time, talent and cash. It uses a two-tier reporting structure. (See chart below.)

Direct reports to the OOC drive operations and major business units and meet weekly with the CEO, while executives who drive functions report separately to the CEO  and on a less formal and frequent basis. This reduces the static common to reporting structures of large companies, like shared accountability and dual reporting, and increases the CEO’s time to attend to day-to-day operations, strategy and succession. It also signals confidence in the functions (often those related to marketing, financial control and the development of policy and support processes), which are trusted to report less frequently. For all reports, both functional and business unit, the net effect is clearer focus–and shorter meetings.

For CEOs seeking more opportunities to nurture talent, an OOC has proved a boon to improving succession planning. Several companies we studied have used the model to set up a horse race -- creating one or several “close to CEO” positions to help CEOs mentor the highest potential candidates for the top job. Companies we have tracked that used the OOC in this manner -- most famously, General Electric -- saw no dip in stock price during their most recent CEO transitions.   

Companies are also finding that the OOC structure also can be used as a longer-term approach to improve organizational performance. At a large technology company we studied, P&L accountability had long been focused on the CEO. In response, the firm designed and implemented an OOC to drive accountability and decision-making deeper into the organization, spreading the P&L pressure across five business unit heads, rather than at just the CEO level.

If you think the OOC may be a good fit for you, start by defining roles and responsibilities around improving decision-making, rather than by drawing boxes with lines of authority. If, as a top executive, you can chart who you need to recommend, influence and agree to your firm’s “bet-the-company decisions,” you have begun to draw a circle around the handful of reports you ought to handle. Just as importantly, you’ll also be identifying those people in the organization who might be able to fill your shoes when the time comes.

[i]Saratoga Institute