When a CEO leaves because of performance problems, the company typically recruits someone thought to be better equipped to fix what the departing executive couldn't--or wouldn't. The board places its confidence in the new person because of the present dilemma's similarity to some previous challenge that he or she dealt with successfully. But familiar problems are inevitably succeeded by less familiar ones, for which the specially selected CEO is not quite so qualified. More often than not, the experiences, skills, and temperament that yielded triumph in Act I turn out to be unequal to Act II's difficulties. In fact, the approaches that worked so brilliantly in Act I may be the very opposite of what is needed in Act II. The CEO has four choices: refuse to change, in which case he or she will be replaced; realize that the next act requires new skills and learn them; downsize or circumscribe his or her role to compensate for deficiencies; or line up a successor who is qualified to fill a role to which the incumbent's skills and interests are no longer suited. Hewlett-Packard's Carly Fiorina exemplifies the first alternative; Merrill Lynch's Stanley O'Neal the second; Google's Sergey Brin and Larry Page the third; and Quest Diagnostics' Ken Freeman the fourth. All but the first option are reasonable responses to the challenges presented in the second acts of most CEOs' tenures. And all but the first require a power of observation, a propensity for introspection, and a strain of humility that are rare in the ranks of the very people who need those qualities most. There are four essential steps executives can take to discern that they have entered new territory and to respond accordingly: recognition that their leadership style and approach are no longer working; acceptance of others' advice on why performance is faltering; analysis and understanding of the nature of the Act II shift; and, finally, decision and action.

Advising CEOs sounds like a dream job, but doing so can be perplexing and perilous. At times, the questions you must ask yourself--about your own motivations and loyalty--can be thornier than the organizational problems that clients face. David Nadler knows, because he has been asking himself such questions for a quarter century while advising the chiefs of more than two dozen corporations. If you're an adviser to CEOs, recognizing the pitfalls of your role may help you sidestep them. And understanding a problem's nuances and implications may help you uncover a solution. The challenges facing consultants include: The loyalty dilemma: Is my ultimate responsibility to the CEO, who pays for my services, or to the institution, which pays for his? Today's shorter CEO tenures and greater board oversight have diminished the top leader's power and autonomy; it's now routine for a CEO adviser to have conversations with directors about the CEO's performance. To defuse loyalty issues, the adviser should raise them with the executive at the outset of the relationship. The overidentification dilemma: How do I immerse myself in the CEO's worldview without making it my own? CEOs can be enormously persuasive, but if you don't push back, you're not doing your job. The trick is to ask probing questions without shaking the CEO's confidence that you fully comprehend the forces that shape her views. The friendship dilemma: If the CEO and I like each other, can we--should we--become friends? A successful, long-term advisory relationship with a CEO requires a strong personal connection; in some cases, that becomes a friendship. But the best relationships are characterized by the participants' clear-eyed recognition of each other's frailties--tempered, of course, by genuine affection and easy rapport.

Companies facing new requirements for governance are scrambling to buttress financial reporting systems, overhaul board structures--whatever it takes to comply. But there are limits to how much the outside can impose good governance. Boards know what they ought to be: seats of challenge and inquiry that add value without meddling and make CEOs more effective but not all-powerful. A board can reach that goal only by functioning as a high-performance team, one that is competent, coordinated, collegial, and focused on an unambiguous goal. Such entities don't just evolve; they must be constructed to an exacting blueprint--what the author calls "board building." In this article, Nadler offers an agenda and a set of tools for boards to define and achieve their objectives. It's important for a board to conduct regular self-assessments and to pay attention to the results of those analyses. As a first step, the directors and the CEO should agree on which of the following common board models best fits the company: passive, certifying, engaged, intervening, or operating. The directors and the CEO should then analyze which business tasks are most important and allot sufficient time and resources to them. Next, the board should take inventory of each director's strengths to ensure that the group as a whole possesses the skills necessary to do its work. Directors must exert more influence over meeting agendas and make sure they have the right information at the right time and in the right format to perform their duties. Finally, the board needs to foster an engaged culture characterized by candor and a willingness to challenge.

This is an MIT Sloan Management Review article. In recent years, leaders at such high-profile companies as Xerox, Procter & Gamble, Lucent, Coca-Cola, and Mattel have flamed out early in their tenures. Why did such promising and previously successful individuals fail so quickly in the CEO role? And why is such failure happening today with relatively high frequency? The individuals in charge bear some of the responsibility, of course. But the authors' research also uncovers other major forces at play. First is the impact of the predecessor CEO's actions on his or her successor's performance. Although outgoing CEOs do not intend to contribute to the failure of their successors, their personal needs and actions can lay the groundwork for derailment. A second force is often the succession process itself. The outgoing CEO may be responsible, having failed to prepare a successor adequately; and the board is also often guilty of lack of oversight. Third, new CEOs often have narrow expertise and are unable to set a proper context as leaders. The authors explore these issues and offer advice to outgoing CEOs, directors, and incoming leaders that may help them avoid the troubles that some companies have faced in making a leadership transition.

In ever more turbulent environments, executive leadership matters as never before. Organization speed, flexibility, and the need to execute discontinuous change require sharpened leadership skills. Charismatic leaders are important. These relatively rare leaders provide vision, direction, and energy for their firms. However, charisma is never enough to build competitive, agile organizations. Charismatic leadership must be bolstered by institutional leadership through attention to details on roles, structures, and rewards. Further, as most organizations are too large and complex for any one executive or senior team to manage directly, responsibility for managing in turbulent environments must be institutionalized throughout the management system.

The use of organizational control systems may backfire easily on management. A system cannot control performance; it can only provide information to the manager and often the information is misleading. Two major approaches are usual for control strategies. The external control strategy stresses supervision and makes employee manipulation of results difficult. The internal motivation strategy develops participative goal setting and rewards overall job performance. When choosing either strategy, a manager should consider four issues: consistency between strategy and managerial style; organizational climate, structure, and reward system; reality of job performance measures; and individual differences among subordinates.