It's become common practice that when a CEO leaves their position, it's assumed that they will continue with the company as a member of its board--maybe even as chairman. There are multiple benefits to doing this, including creating a sense of continuity in the company for staff and shareholders and rewarding the outgoing CEO.
But there are also some significant downsides to moving a former CEO onto the board--which can make this a more complicated scenario than you might think.
Let's start with the positives.
One of the best reasons to promote the former CEO to the board is that they have a lot of inside information about the business--something that many board members simply lack. Having an insider can serve as an asset to the other board members as they fulfill their duties to monitor and maintain performance. It enhances the entire board's ability to fulfill its fiduciary duties.
Another reason to promote the former CEO to the board is to reward them for doing a great job in growing the company and its share price. Transitioning to a board role is a great way for the former CEO to stay involved with the company in a positive way while also receiving some compensation.
A third upside for the former CEO serving on the board is that there is significant research that indicates it makes it easier for the board to assess the performance of the new CEO more accurately. By tapping the insights of the former CEO in terms of what's possible, or not, they can better assess the decisions made by their successor.
While the upsides to promoting the former CEO to the board sound promising, it's critical to acknowledge the significant potential downsides that come with that decision as well.
The first is that shareholders may not view the succession process favorably. CEOs will typically name their successor before moving onto the board--rather than waiting for the board to name a replacement. This sends the message to shareholders that the CEO controls the succession process by naming their preferred individual rather than allowing the board to potentially make a different selection in a more open selection process. Even though some 86% of all successions are insiders rather than outsiders, it can still rankle shareholders when the entire process happens behind closed doors.
But the potentially bigger negative consequence of naming the former CEO to the board is that they can severely inhibit the kinds of choices the new CEO can make. That might include terminating pet projects started by the former CEO and even firing underperforming executives that were in the former CEO's inner circle. The research is clear that the incoming CEO does not take on some of these difficult moves with their former boss on the board.
As a result, new CEOs usually add to an existing agenda rather than making the tough choices to cut existing operations and people--which can then hurt the firm's performance. We only need to look at examples where, after the former CEO transitions off the board, the new CEO immediately starts cutting those projects and people they were reluctant to tackle before.
So, what's the answer?
It turns out that there is a third option you can employ to help ease the pain of succession between CEOs: you can hire the former CEO as a temporary consultant to the board. Making this move helps bridge the information gap without putting the former CEO in a position where they can suppress the power and decision-making of the person they are succeeding.
If you are in a position of considering whether to name a former CEO to your board, don't do it. The better option is to name them as a consultant before letting them move on. In the end, by making this choice, your new CEO and your shareholders will thank you.