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New research reveals where boards and senior leaders need to direct extra attention following the departure of the CEO.

Few events test a board's mettle like turnover in the chief executive officer position. The board is responsible for guiding the recruitment process for the new leader, choosing the best candidate, maintaining effective governance during the transition period and reassuring stakeholders throughout the process. And, as the level of CEO turnover continues to increase, trustees should assume that they will participate in this process at some point during their service.
 
New research into CEO turnover events explored how provider organizations handle these transitions. Health system executives and board chairs were asked to what degree they were able to meet organizational needs in nine strategic areas during the transition. The areas are:

  • financial performance;
  • operational performance;
  • maintain direction and momentum through the transition;
  • completion or carrying-on of major projects or initiatives;
  • mentorship for executive track employees;
  • rapid response to organizational needs;
  • maintaining objectivity and transparency;
  • recruitment of replacement executive;
  • solving difficult problems.

Boards and executives answered survey questions by choosing from five options: we are significantly worse off; we lost ground; we maintained our position; we made slight improvement; and we are much better off. For the purpose of this article, "we are significantly worse off" or "we lost ground" are considered as negative outcomes, while the last two responses, "we made slight improvement" or "we are much better off" are considered as positive or favorable outcomes of the turnover event.

Study results reveal the areas in which other organizations have experienced difficulty. Trustees can use this information to identify areas to prioritize and, perhaps, seek external assistance during a leadership succession to prevent damage to the organization.

Transition Challenges

Survey respondents reported that, during a leadership transition, their organization fared worse with completing or continuing major projects or initiatives; maintaining direction and momentum; mentoring; responding rapidly to organizational needs; and solving difficult problems.

The first two areas — completing or continuing major projects and maintaining direction and momentum — are related. It is not unusual for an organization to lose momentum during an executive transition. In fact, some turnover is caused by disagreement between the board and the executive on the direction of the organization.

Still, losing momentum on key strategic projects can damage an organization. For example, construction projects have strategic and financial risks associated with delays; information technology development that falls behind schedule can lead to reimbursement penalties. The same is true of clinical quality- and patient satisfaction-improvement initiatives. It is critical for the board to have a clear vision of the organization's priorities during the transition and a plan to ensure that these priorities receive the attention they need.

Additionally, the high percentage of boards reporting that maintaining direction and momentum suffer during this transition is linked to hospitals' failure to develop succession plans. A research report published by the American College of Healthcare Executives in 2004 revealed that 21 percent of freestanding hospitals conduct managerial succession planning compared with 64 percent of private-sector organizations. A robust succession plan should designate an interim leader, either from inside or outside the organization. Without this, other administrators may be reluctant to innovate or take risks that could bring them to the attention of the board. In some cases, operations executives fear for their own jobs because, while they do not know how the transition will impact them, they know that additional turnover usually follows the appointment of a new permanent executive. ACHE in 2006 published a research report found that high secondary turnover of members of the senior executive team occurred within one year of a CEO's departure. By retreating to their comfort zones, executives remaining in the organization inadvertently may facilitate the loss of direction and momentum.

In addition to internal problems caused by turnover, there are external threats. The 2006 report found that competitors frequently take advantage of turnover events by recruiting physicians, employees and patients, and developing competing facilities. New CEOs report negative effects as a consequence of their predecessors' departures in such areas as employee morale (14 percent) and medical staff relations (14 percent). This is accompanied by increased marketing by competitors in the hospital's service areas (35 percent).

Mentorship of upcoming leaders also suffers during a leadership transition. Loss of mentorship can lead to expensive, time-consuming problems down the road when the board and senior administrators require leadership and management competencies that have not been developed within the organization. The departing leader's mentees also are at risk of leaving the organization.

An organization's problem-solving capacity decreases during a transition event. This makes it important for the board to keep focus on key strategic initiatives and to ensure that the organization has the skills to keep strategy on track. If not, the board should look for interim resources that bring the required capabilities.

Finally, given the survey respondents' other priorities, it's not surprising that response time to organizational needs suffers. The board and senior leaders likely have their hands full managing the transition.

Positive Developments

There are a number of areas where organizations report doing better as a result of a transition. Recruitment was near the top of the list of how decision-makers felt they had improved their organization during a transition. About half of the respondents indicated that they had engaged an executive recruiter to assist with the recruitment process.

Among CEO and board chair survey respondents, two-thirds stated that they had been involved in a decision about the use of an interim executive. A majority stated that they knew someone who had used an interim executive, while nearly half reported having used an interim executive in the past. This finding suggests that respondents are happy with the recruitment process and its results. While a succession can be stressful for a hospital and its board, the majority of respondents reported that the organization was better off as a result of using an interim executive during the transition than it would have been otherwise.

The next area in which boards and executives felt their organizations fared better was in financial performance. This may indicate that decision-makers were unhappy with the direction of the organization prior to the CEO's departure and are happier with the results following the succession process. And, in spite of one-third of respondents reporting difficulty with problem-solving, nearly one-fifth reported that through the transition they had improved their organization's problem-solving ability. This illustrates how highly valued problem-solving skills are to boards and executives and how these skills should be prioritized when considering transitional and permanent leadership.

Respondents reported maintaining momentum as both a problem and an area of improvement. As with problem-solving, it appears that organizations either perform very well or they suffer setbacks with momentum and problem-solving during a leadership transition. As a result, the board should focus on these skills in potential candidates to replace a departed executive. Trustees should keep in mind that the evaluation of a potential replacement executive's experience and skills should occur within the context of the specific needs of the organization, not in comparison to other candidates. As the board may have learned from the leadership transition, an executive who is perfect in one situation may not be appropriately suited when circumstances change. In fact, more than one-fifth of respondents reported that the reason for their last executive succession event was that the organization had outgrown the incumbent's capabilities.

CEO turnover can be traumatic to a hospital or health system, and how the board and senior leaders manage it can have profound effects on the organization far into the future. If the board focuses on mitigating key risk areas while increasing concentration on areas of potential improvement, it can minimize the chance that the organization will suffer a setback as a result of a transition.

Raymond A. Snead Jr., Sc.D., FHFMA, FACHE (r.snead@comcast.net), is an independent interim executive specializing in the support of executive transitions in health care organizations, Valdosta, Ga.