WHEN Michelle Gass assumed the top job at Kohl’s in 2018, it was a textbook case of CEO succession. The retail chain, like most companies, had decided to pick an internal candidate and did so through a very public horse race that pitted Gass against a fellow Kohl’s executive.

As Gass begins her second stint as CEO this week, this time at Levi Strauss, her path to the top has looked very different. When Levi said in 2022 that Gass would leave her perch at Kohl’s to join the denim maker as president, the company all but assured her the top job. The public announcement underscored that she would take over within 18 months, and until then would work alongside outgoing CEO Chip Bergh to learn the ropes.

For those unused to reading the tea leaves of corporate press releases, this was a highly unusual one. It’s rare for a named heir to come from the outside. In fact, it’s rare for companies to pick an outsider at all; less than 20 per cent of companies do so, in part because the data shows they don’t perform as well as homegrown talent.

When boards do pluck a CEO from outside the company, it’s often viewed not just as a risky move, but as a failure of leadership. Why, after all, didn’t they have the foresight to develop the chops somewhere in-house? But in this case, the Levi board used a year-long transition to turn an outsider into an insider. It’s a bet that it will give them the best of both worlds – an injection of fresh thinking alongside a deep understanding of how the company works.

More of this, please. Not necessarily the exact Levi model, but more companies willing to shake things up when it comes to CEO succession. It’s the most important job corporate boards have, and all too often they fail miserably. Research has shown that the market value erased by bad CEO and C-suite transitions among the S&P 1500 is almost US$1 trillion a year. Nearly a third of directors say companies don’t spend enough time on succession planning. And getting it wrong has tainted the legacies of many otherwise exalted CEOs (hello, Bob Iger). 

Historically, the gold standard of succession has been the route Kohl’s chose: a good old-fashioned CEO bake-off. One of the highest-profile examples of the current era heated up last week when JPMorgan Chase CEO Jamie Dimon made some leadership changes in his top ranks. The horse race is arguably the fairest and most thorough model: Pit the best candidates against one another over a multi-year period, and see who comes out on top. But it’s also likely to breed company-wide paranoia and infighting – and can easily become political.

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Take the succession race going on right now at Johnson and Johnson. When Ashley McEvoy, once viewed as a CEO contender at the pharma giant, departed the company last month, The Wall Street Journal reported that her “surprising exit” came after she said in a Fortune interview that she would “absolutely” be interested in a CEO job. “Her public airing of interest in a CEO role didn’t go over well among J&J’s leaders,” including the current CEO, according to The Journal.

Best horse doesn’t always win the race

There are also plenty of examples that suggest the best horse doesn’t always win the race. Some of the most famous bake-offs in recent memory have not gone well. Case studies were written about AG Lafley’s meticulous handoff to Bob McDonald at Procter and Gamble; but after McDonald departed under pressure four years later, Lafley boomeranged back into the job. Jeff Immelt won the CEO spot at General Electric from Jack Welch in one of the most closely watched bake-offs in history, only for critics to later accuse him of nearly running the company into the ground. 

Even if they don’t end up quite that disastrous, horse races aren’t designed for the way companies need to operate today. Talk to executives, business school professors and recruiters, and they’ll increasingly tell you that management is a team sport. The world is too complicated to rely solely on the outdated idea of a superhero CEO, who has all the answers. But when top talent is passed over in a horse race, they inevitably leave, taking their skills and institutional knowledge with them – at the very moment when the company could most use it.

One of the biggest things Levi got right in its succession plan is actually pretty simple. It said not only that Gass would become CEO, but when. The capped transition period let the company attract a level of a talent that would otherwise be out of reach. It’s unlikely Gass would have left her job as a sitting CEO without the public promise that she would ascend to the throne. It also solved for a common problem with naming a successor in advance: The anointed executive leaves after getting tired of waiting around for the CEO to finally decide they’re ready to retire.

Too short of an on-ramp isn’t great either. If an external hire comes right in as CEO, they often have little time to prepare. In 2022, CEOs hired externally were announced only 1.3 months before their start date, a Spencer Stuart study found. That’s an absurdly short amount of time to get to know a company before being handed the keys. Now, Gass has more than a year at Levi under her belt, which is enough time to set her up for some early wins – what Dan Ciampa, an adviser to boards and chief executives during leadership transitions, says is the best indicator of a CEO’s future success.

Starbucks took a similar approach in 2022 when it named Laxman Narasimhan incoming CEO, giving him a six-month period to learn from Howard Schultz.

Gass is walking into a tough job at Levi, and her success is far from assured. The company said last week – just as outgoing CEO Bergh was on his way out the door – that it plans to cut up to 15 per cent of corporate jobs, and announced 2024 sales and profit expectations below analyst estimates. But at least Gass now knows what she’s getting herself into. And thanks to its succession model, so does the board. BLOOMBERG

The writer was previously a senior writer and editor at Fortune Magazine