Editor's note: CEO succession planning and the board's role in it are being evaluated by investment analysts, rating agencies and other investor services organizations to determine credit ratings and the overall quality of organizational governance (see "Reform, Investor Scrutiny and Succession Planning," Trustee, July/August 2010). In this article, the author's perspectives also underscore the importance of a robust CEO succession planning process for health care organization governing boards.
A crisis? Yes. I believe we have a real crisis with CEO turnover and succession. Please consider the facts.
Hospital CEO turnover averaged 14.6 percent between 2001 and 2008, according to American College of Healthcare Executives studies. The average increased to 17 percent between 2009 and 2010. Many believe this increase is attributable to the retirement of baby boomers and that this increase in the rate will continue for a number of years. In addition, according to our studies, the rate of involuntary turnover in health care management is approximately the same as general business — 30 percent.
With respect to CEO tenure, the median was 4 years and the mean was 6.2 years for community hospital CEOs in 2011. Fifty-eight percent of current CEOs have been in their positions less than five years. I would argue that four years is an inadequate amount of time to create and sustain permanent change within an organization.
As Philip A. Newbold, a well-known innovation expert and president and CEO, Memorial Hospital & Health System, South Bend, Ind., says: "If CEO turnover occurs too frequently, nothing that is tried, whether it is rock solid or not, will stick and make a difference. That is because by the time people are geared up for a new program, the CEO has left and the new person comes in with a different agenda."
In light of high CEO turnover, how are organizations doing at CEO succession planning? The answer, unfortunately, is not very well. A 2009 survey by the National Association of Corporate Directors reported that 57 percent of U.S. public companies had a formal CEO succession plan. The situation is much worse in hospitals. In a study of freestanding U.S. hospitals by Andrew N. Garman and J. Larry Tyler, funded by ACHE, it was found that only 21 percent routinely conduct succession planning.
This lack of commitment to hospital CEO succession planning clearly has negative implications for these organizations. An ACHE-funded study by Amir A. Khaliq, David M. Thompson and Stephen L. Walston found that 25 percent of U.S. hospitals took six months to a year to replace their departing CEOs, while 5 percent took longer than a year.
The study also illuminates the perceived effects of CEO turnover on hospitals. Cost cutting, service closures and staff reductions are often initiated after a CEO leaves. Furthermore, when the CEO position is vacant, community outreach, physician recruitment, development of new services and strategic planning are often postponed or halted during this period. In addition, other key staff members often leave the organization.
We also know that how the CEO is replaced makes a difference. In the general business world, the results are clear: Well-prepared, internal successors are far more successful and effective than outside successors. Joseph L. Bower, author of The CEO Within, and others believe internal successors do better because of their substantive knowledge of the company, its business and its workforce.
The aforementioned findings are further reinforced by the latest Booz & Co. analysis. During the last decade, 80 percent of departing CEOs in North America had been groomed from inside. Furthermore, these insiders produced superior regionally market-adjusted shareholder returns over outsiders. Finally, insiders' tenure exceeded outsiders' tenure by almost two years (7.9 years versus 6.0 years). In nine of the past 10 years, outsiders were more likely to be forced out of office than insiders.
While there has been no substantive research on how the type of succession relates to individual or organizational performance in the hospital field, the results of two minor studies are interesting. In an unpublished survey by ACHE of leading executive search firms' CEO placements in 2009, only 13 percent of CEOs were selected from within the hiring hospital or system. While organizations that promote from within may not be as likely to use an executive search firm, it appears the hospital field is far behind general business with respect to internal promotions.
While hospitals do not promote from within as much as general business organizations, it appears the better ones do. A study by Cejka Search, a health care executive and physician recruiting company, found that the top 100 hospitals in the United States, based on a series of clinical and financial performance measures, were 35 percent more likely to promote an insider to the CEO position than the average hospital.
So, what can be done to address this CEO turnover crisis? First, unless it is a turnaround situation, CEOs considering a new position with an organization should think about whether they envision staying there for five to 10 years. Only during an ample amount of time with an organization can CEOs make permanent improvements that will last after their departure.
Second, boards and CEOs must work together to lengthen median CEO tenure to five to 10 years from its current four years. To do that, they will have to work in tandem to improve CEO succession planning, which will enable them to select more successful candidates and reduce involuntary turnover. Given the controversial nature of many of the decisions CEOs must make, boards also must support CEOs over the long haul. The key to this is open and continuous communication and periodic evaluation by the board.
Finally, boards and CEOs must also work together to implement and sustain CEO succession planning. CEO succession is not simply replacing the CEO. As defined by Bower, it is the recruitment, development, selection and transition of an executive to the CEO position. These efforts need to begin as soon as a new CEO is hired.
Organizations need to prepare multiple candidates for succession and intensify their efforts within two years of a CEO's intended departure if it is known. Once a successor is identified, he or she should be intensely groomed for the position. Finally, it is important that on-boarding assistance be provided to the new CEO for at least one year. The goal of these efforts should be to always have an acceptable interim CEO and at least one viable, permanent replacement.
I am confident the above steps will lengthen CEO tenure, reduce CEO turnover and lessen its impact when it does occur. Given the challenges ahead, we need to address this crisis now.
This article was reprinted with permission from Healthcare Executive 26, No. 5. September/October 2011.
Thomas C. Dolan, Ph.D., FACHE, CAE (firstname.lastname@example.org), is president and chief executive officer of the American College of Healthcare Executives, Chicago.