CEO removals are often the boardroom equivalent of action movies—high-stakes affairs involving dramatic confrontations. But to be successful, the maneuvers require in-depth succession planning at the board level well in advance. In today’s environment of heightened CEO accountability, those in the boardroom can expect to engineer more and more leadership changes, sometimes gradually over the course of years, but, at other times, virtually overnight. According to Chicago outplacement firm Challenger, Gray & Christmas, CEO departures jumped to 1,322 in 2005, double the turnover rate seen in 2004 and even more than during the post-tech-bubble carnage in 2000.

"It’s almost a planning process that never takes a vacation. If you haven’t thought about who’s standing ready, then you’re in a crisis."

As recently as two decades ago, executive succession was a much different affair. CEOs handpicked their protégés and then secured the board’s stamp of approval. But times have changed, and now proactive directors have responded to increased shareholder scrutiny by pushing CEO transitions and long-term succession planning to the top of the agenda. Strong boards now choose to lead the process at every step, from developing contingency plans in case of an accident to grooming senior management for an eventual transition.

Despite rising turnover, however, few boards are truly content with their succession playbook, according to Roger Kenny, cofounder of Boardroom Consultants, a New York firm that helps companies select directors and plan succession. While many Fortune 500 companies have crafted succession strategies, smaller companies risk being caught by the unexpected. Many directors worry that they perpetually lack sufficient choices for the top post; this indicates that they need to work harder to develop a pipeline of management talent. While conventional wisdom suggests that internal candidates will perform better in the position of CEO than newcomers, contemporary boards recruit nearly as many successors from outside as from inside—a sign that directors are dissatisfied with their options within the company, says John Challenger, founder of Challenger, Gray & Christmas.

Perpetual Motion
Beginning succession planning early can make all the difference between a fluid transfer of power and a public battle for the top seat, whether it is a planned transition or, as in Keane’s situation, an emergency. "It’s almost a planning process that never takes a vacation," says Barbara Hackman Franklin, who sits as a director on the boards of Aetna, biotech company MedImmune and pharmaceutical firm GenVec. "If you haven’t thought about who’s standing ready, then you’re in a crisis. And sometimes thoughtful solutions go out the window in a crisis."

TOP VIEW To prepare for unexpected events and emergency situations, corporate directors must plan years in advance for CEO transitions. Experts advise boards to conduct succession planning by continually cultivating internal candidates, as well as establishing strategies for outside recruiting. While some transitions are voluntary, many others are not, and require candor and face-saving compromises to avoid the appearance of disarray.

According to Franklin, Aetna offers an excellent case study in advanced transition planning. More than two years before Jack Rowe, the executive credited with the turnaround of the insurance company, stepped down from his CEO position in February 2006, Aetna’s board began holding detailed discussions about succession at executive sessions. The directors closely followed the career of Ron Williams, the candidate who would ultimately succeed Rowe. Although boards often neglect succession planning during a company’s good times, directors should cultivate internal candidates three to five years before a planned transition and develop bench strength for not one, but two layers of management, says Peter Gleason, COO and director of research at the National Association of Corporate Directors in Washington, D.C.

Promoting execs through numerous positions within the company’s ranks remains the textbook method for deepening the CEO candidates’ professional experiences while testing their mettle. After a San Diego software company, Peregrine Systems, was forced into Chapter 11 by an accounting scandal, new CEO John Mutch hired James Zierick, a McKinsey veteran, to serve as second in command. Over the next two years, board members took turns mentoring Zierick, moving the executive through increasingly senior roles in strategy, marketing and field operations. "If I get hit by a bus tomorrow," Mutch says he told the board, "this is the person you put in charge."

Franklin says General Electric’s widely praised executive training program produced an enviable dilemma for the board in 2001: picking one of three eminently qualified managers who were all capable of replacing Jack Welch. In fact, the potential successors at GE were so highly qualified that after the board picked Jeffrey Immelt, the runners-up quickly found jobs heading other companies. Home Depot handed the reins over to Bob Nardelli, while Jim McNerney went first to 3M and then to Boeing.

But developing a company’s next leader requires the full cooperation
of the current CEO, who holds crucial insights into the company’s needs, as well as the weaknesses and strengths of the management team. A threatened CEO could mislead directors about how capable current management is or even refuse to hire seasoned executives. Mutch says this is why in 2001, before he joined Peregrine, he was offered the number two job at Computer Associates but given a low compensation offer. "If Sanjay Kumar had hired me, there would have been somebody in the organization capable of replacing him," Mutch says. (Kumar was sentenced in November to 12 years in prison after pleading guilty to securities fraud and obstruction of justice.)

Intricate Dismounts
Pascal Levensohn, the founder of San Francisco–based Levensohn Venture Partners and a governance expert who studies the relationship between directors and start-up CEOs, is accustomed to treading carefully in delicate situations. CEOs often turn over at the companies with which he works—these are new ventures, after all—but at these young firms, the mechanics of removing an executive, frequently the company’s founder, and installing a CEO from the outside can become especially tricky, even dangerous. Smaller firms usually lack succession plans because of scarce resources, so in a combative transition, an influential CEO can turn management against the board, damage customer relationships or simply immobilize the business while fighting the board’s decision.

Leave the executive a dignified exit path while remaining wholly honest about why the directors took such action.

At one of Levensohn’s companies, a CEO took passive-aggressiveness to new heights, offering to resign whenever he did not like the directors’ suggestions—a threat which occurred at least twice during every board meeting. "He would get very angry and say, ‘If you don’t want me to do it my way, then you’re telling me to quit, and I should leave,’" Levensohn says. When the company’s financial performance fell off three months later, the board finally dismissed the executive. Later Levensohn discovered that the CEO had forbidden senior management to speak to the board.

In hindsight, Levensohn now recognizes the warning signs that appeared long before company performance actually suffered. Directors should be attuned to negative CEO behavior such as rejecting board suggestions, disengaging from daily operations and trading calm for emotion. "When you’ve got the red flags—missing the numbers—then the house is already on fire," says Levensohn, who believes that problems begin when CEOs harbor inappropriate expectations about their roles. An entrepreneur, for example, may need to understand that he eventually needs to step aside for a CEO experienced in leading more mature companies.

Michael Greeley, founder of venture capital firm IDG Ventures, found it necessary to terminate the CEO of a struggling company IDG had funded. Ironically, Greeley consistently defended the executive to the point where he was the only board member willing to give the CEO more time. He harbored a sense of loyalty to the executive because he had personally recruited him. But after multiple quarters of mixed results, Greeley finally agreed to fire the CEO—and he quickly put away his emotions. He called the outgoing executive into his Boston office on a Friday afternoon in June 2006 and told him, "We’re going to make a change with the CEO position." The board’s decision was not up for negotiation, but Greeley made a point of asking for the entrepreneur’s cooperation. He told the CEO: "I want you to own the decision so you can say your company is going through another phase of development and you’re not the right guy anymore." Greeley offered the executive a seat on the board, which enabled him to save face while ensuring a smooth transition for the technology start-up. Six weeks later, the board tapped an industry veteran to take the helm of the company.

In his early days as a venture capitalist, Greeley admits that he sometimes made the mistake of casting blame or wavering in his decision to fire a CEO. By now he has learned to leave the executive a dignified exit path while remaining wholly honest about why the directors took such action. "You still go through shock and disappointment, but this way you go through them faster because you can understand why," he says. The lesson he imparts: candor above all.

But even with a transparent process that produces a smooth exit and qualified successors for the board to consider, directors still agonize over the difficult decision to let someone go. Some boards are even experimenting with behavioral tests for their prime candidates, including videotaped simulations of a day as CEO of a fictitious company, complete with analyst briefings, crisis situations and meetings with senior executives. In 2003, Waste Management, a refuse and recycling services provider, hired human resources consulting firm Personnel Decisions International to assess its top three candidates in live situations. What the directors saw led the previously divided board to a unanimous conclusion, says Pastora San Juan Cafferty, professor emeritus at the University of Chicago and a director for companies such as Kimberly Clark and Waste Management. "The outcome was a very happy one," Cafferty says. "We found a CEO and we identified an ideal COO candidate. We came out with a team that is working very well for us."

Michelle Tsai is a Jersey City, N.J.–based freelance journalist who writes about business, technology and Asia.