Succession in Practice
While CEO succession is much in the news, it is often discussed from the point of view of board members, [...]
April 14 2009 by Beverly A.Behan Jeff Kirschner And Susan M.Snyder
While CEO succession is much in the news, it is often discussed from the point of view of board members, consultants and search firms. To understand the perspectives of today’s CEOs on succession planning, we spoke with 18 sitting CEOs, one recently retired CEO and one sitting chairman, as listed in the sidebar on p. 30. To gain varied perspectives on this important topic, we spoke to CEOs from a variety of industries and different company sizes, with our sample group admittedly weighted towards larger public companies. Nine of the CEOs we interviewed had been internal candidates promoted to the CEO role, six were outside hires and three were board members who stepped into the CEO role in unanticipated circumstances. They shared practical suggestions on how to make CEO succession work more effectively for the company, the board, potential candidates and the CEO.
The New Role of the CEO in Succession Planning
All agree that the days of CEOs controlling the succession process are largely gone. “I still see sitting CEOs that want to control the process of both developing and selecting their successor, but those days are coming to an end,” says Ed Kangas, retired CEO of Deloitte Touche Tohmatsu.
“I think the days of the imperial CEO are long gone but while they lasted, succession planning was a subject that a CEO could defer,” noted James Cornelius, CEO of Bristol-Myers Squibb. “In today’s world of governance, it’s impossible to defer what is probably the most important decision, namely who will be the next CEO.”
Most describe an effective CEO succession process today as a partnership between the board and the CEO. While the ultimate decision rests with the board, the CEO nonetheless plays a critical role in the succession process. “The board is the ultimate decision maker about who the next CEO should be,” explains Don Shippar, CEO of Allete. “The CEO, however, needs to weigh in on issues about what’s important in the CEO job, and the criteria for someone to be successful in that job, and should help the board to come to agreement on these things.”
A similar view is expressed by Bill Mitchell, CEO of Arrow Electronics: “I see the role of the CEO working with the board on succession planning as being essentially a ‘first among equals.’ The board should give guiding direction on CEO succession planning, but it’s the CEO who has to drive the succession planning process forward. After all, the CEO knows the job – he/she is in that job. He/she also works with the executives every day.”
Andrew McKenna, chairman of McDonald’s, echoes the importance of the board/CEO joint working relationship on succession planning. “Succession planning involves a combination of the board and the CEO working together,” he says. “They have to be aligned: The CEO needs to know how the board is thinking and the board needs to know how the CEO is thinking about this important issue.”
Mentoring CEO Candidates
Many pointed out that one of the most critical roles CEOs play in succession planning involves mentoring internal candidates and preparing them for leadership. “I think one of the key duties of a CEO is to ready candidates to succeed as his/her successor,” asserts Steve Odland, CEO of Office Depot.
“The CEO really leads the candidate development process,” agrees Alan Wilson, CEO of McCormick. “And that takes a lot more than just sitting in your office. You need to actively work at this, which could involve making global trips, doing some things socially and really taking people under your wing to expose them to the intricacies of the job.”
Planning requires the CEO to find appropriate “stretch assignments” for the candidates to help them round out their leadership capabilities, as Bill Johnson recounts doing as CEO of H.J. Heinz. “I created an Office of the Chairman so the top four to five candidates can see the inner workings of this company,” he says. “I send them out with just our head of investor relations to the street. They’ll make presentations, they’ll meet with shareholders. When I’m not there, they represent the organization. I want to understand how far I can stretch them. And I know the investors well enough that I hear back not only from I.R. but from investors, too, about how they did. Four of the candidates are running each of the four major cross-company task forces, which allows me to assess how good they are at coalescing people that don’t report to them directly, building teamwork and momentum.”
Formal executive assessments are increasingly becoming an important feature of the CEO succession planning process. “We do 360 [reviews] with all of the executives, including me,” reports Carlos Cardoso, CEO of Kennametal. “As a result of those 360s, there’s coaching and feedback.”
Peter Sodini, CEO of The Pantry, finds value in “using an external consultant to test all of our senior people,” while Graham Edwards, CEO of Midwest ISO, describes the use of “templates and a matrix to identify the leadership skills we want, how long it will take people to get there and the gaps.”
Participating Companies and CEOs
The CEO also needs to find opportunities to give the board meaningful exposure to internal succession candidates. Phil Urban, CEO of Grange Insurance, underscores the challenge that boards face in making a CEO decision from the limited exposure most get to prospective candidates: “The board just sees snippets of potential future CEO candidates in their roles and yet they have to make a decision about which of them is the best future leader based on this narrow window. That’s like a young man taking a young woman to the prom, to homecoming and to dinner at his parents’ house and then having to decide if she’s the woman he wants to marry.”
Joe Herring, CEO of Covance, offers some insights on how he’s addressed this challenge. “From very early in my tenure as CEO, I have been looking for ways to give the top candidates, who might one day be my successor, exposure to the board,” he says. “I’ve had them attend board meetings and dinners. I’ve also had board members make site visits to see them and their teams where they work.”
At Becton, Dickinson and Company the top three candidates spend one-on-one time with board members. “They present at board meetings but also have informal time with board members, where they spend an hour or two and have lunch so the board members get to know the candidates on a more personal level,” says CEO Ed Ludwig. “Board meetings are important but they tend to be very structured and business driven. Getting to know management members better through one-on-one informal interactions is an important step that both the board members and candidates find valuable.”
Working with the board is probably one of the most essential components of any CEO’s job. Yet most internal candidates have relatively little board experience. As such, building a succession candidate’s capabilities in working with a board was viewed as a critical area that CEOs need to focus on in preparing their successors. “I had 23 years of experience when I became CEO and was prepared in many ways, but I wish I had more experience with public boards before I became CEO,” says Andrew Liveris, CEO of Dow Chemical.
The majority of CEOs we interviewed strongly endorsed the idea of having succession candidates sit on another board. “I found the experience of sitting on another board extremely valuable,” explains Wilson. “It allowed me to see how different CEOs work with the board, how different boards work together. It exposed me to different consultants, different audit firms, different ways of doing strategy and succession planning – and all the things that a board is responsible for. I think it is a key development exercise for my successor to get exposure on another board.”
Bill Mitchell discovered that if he wanted to give his top candidates board experience he had to play a role in helping them find boards to sit on: “You can’t just hope the phone will ring from the search firm,” he says. “I think that’s something very important that CEOs can do as part of mentoring their successors – actively helping them find a position on another board that will give them the valuable experience of sitting on the other side of the board table.”
However, Herring expressed reservations about having succession candidates serve on outside boards. “I’m not a fan of having your top candidate sit on another board,” he says. “I know of two instances where this happened and within six months, the candidates were offered jobs by the companies on whose boards they were serving.” To give internal candidates exposure to board issues, he recommends sending them for director training and having them sit with the corporate secretary to go through the by-laws, committee charters, etc., which, dry as it sounds, provides context for how the board operates.
How Soon to Plan
Interviewees emphasize the importance of an early start. Liveris, who studied 22 CEOs early in his tenure of becoming a CEO himself, says, “One of the things I noticed immediately was that the very best CEOs set in motion a succession process on Day One.”
“Three or four years is actually a really short period of time when you’re talking about grooming executives to become CEO,” notes Mitchell. “We started this process six years ago, shortly after I became CEO. I would urge most CEOs to start working with their boards on CEO succession planning five years before they expect to be doing a CEO transition.”
That said, Cardoso asserts that having CEO-ready candidates within the organization well before an opportunity might be available for them to ascend to the CEO role can create flight risk. “If the candidates are ready for the CEO position prior to that position being available, you run the risk of losing those candidates,” he says. “They go on to other opportunities because they’re ready to be a CEO. I think you have to create a challenging environment internally to keep these kinds of people engaged so that their jobs continue to be exciting for them. Even then, you may see them go if the right offer comes their way.”
Internal vs. External
Nearly all feel it is incumbent on the CEO to ensure that there is an internal candidate pool developed for the board to consider, so as not to be forced to go outside. “When it comes to the CEO job, I don’t care what company it is or what the culture is, if you haven’t developed someone to take your place – and done so effectively – you’ve failed in your job as CEO,” says Jim Skinner, CEO of McDonalds. “You’ve failed the board and you’ve failed the shareholders.”
However, some express concern about the board becoming too doctrinaire in the need to have a set number of internal candidates as a best practice. “Many boards now judge their effectiveness by whether they have a pool of two internal CEO candidates,” explains Urban. “My concern is that this can lead to a’box-ticking’ approach rather than a substantive approach. For example, just having two names of internal candidates would meet this test. But the real test should be choosing a future CEO with the right capabilities to be a successful leader of the organization.”
The vast majority of the CEOs we spoke with expressed a preference for an internal candidate as a successor. “I believe succession should come from within for about 80 percent of the cases,” says Odland. “I liken it to merging on a freeway. It’s really helpful if somebody can merge on a freeway at speed and not be disruptive to the flow of traffic. Often, people from the outside have trouble doing that simply because they don’t know the history of the company, they don’t understand the culture and they don’t know the people. There’s a big learning curve for that individual that inevitably slows things down and can take the company off track. So I think the bias of boards should typically be to develop people internally and ready them for the CEO position.”
However, several CEOs pointed out that an external candidate can be preferable in certain circumstances. “When you have a high growth company, it can be preferable – in some cases even inevitable – that you will have to find someone from the outside who has broader experience in a larger organization in order to take the company to the next level,” says Peyton Patterson, CEO of NewAlliance Bank, who was hired to the CEO role as an outside candidate.
“I think we, as CEOs, have an obligation to develop inside candidates,” says Miles White, CEO of Abbott Laboratories. “But a company may choose to go outside for any number of reasons. Maybe the company has an insular culture and they want to break that. Maybe they want to bring a different perspective in for any number of reasons. Maybe the business model is changing and they need someone who understands the new model to come in. If you went outside because you had no internal candidates, then I think that’s a failure. But if you went outside for any of the reasons I outlined, it is not. You should at least have the choice.”
Some CEOs noted that madcap or smaller companies have particular challenges in developing internal candidate pools. “It can be a real challenge to get people ready to become CEO in smaller companies because there are simply not enough leadership opportunities that can be provided to senior managers,” says Ron Naples, CEO of Quaker Chemical.
Shippar pointed out that “in a small or mid-size organization, you’re typically working with a small pool of potential candidates. That can be particularly challenging because if someone isn’t doing well, there are fewer Plan Bs.”
When asked what worries them most about CEO succession, CEOs typically express fears about creating a “horse race” dynamic and losing valuable executives who were ultimately unsuccessful in securing the top job or who choose to leave because they feel they are “out of the race.” Ludwig experienced horse race dynamics during the process by which he was chosen for the top job and is looking to avoid it: “When it comes to my own succession, I’m concerned because the executive team is having such great success; you don’t want to break up the team that’s getting stuff done,” he says. “I don’t want to set up a beauty contest or a bake-off like I went through because it creates a win/lose scenario. The key is to do it professionally, make a decision and then move on. This is the approach we took in determining my successor as president, effective in January 2009. I’m very pleased that other members of the top team are staying on to help run the company.”
Some CEOs experienced the downsides of a horse race firsthand. “There was a day when three of us were called into the CEO’s office and told there was going to be a horse race for his job,” says White. “It was of undefined duration. People who had collaborated in the past immediately started to line up behind their candidate. And I would say that real decision making stopped because nobody knew who was ultimately going to own the results of any decisions. Big strategic issues and other major decisions were deferred. I think it creates a lot of unnecessary distraction, speculation and politics in a company.”
The fallout of a horse race can also present significant difficulties for the people involved to continue to work together once the race is over. Ron Naples notes that one of the challenges for any internal candidate who becomes CEO is “to develop a whole new relationship with people who were formerly your peers.” He points out that this can be even tougher if there is “baggage with these other people.”
“It is always a difficult situation when you were peers and now you are a direct report,” agrees Liveris. “I have formed a very strong opinion from my own experience that a failed CEO candidate in a competition really can be disruptive when that shift occurs. The new CEO should really do his/her best to put in a new team without the legacy candidates as part of it.”
While the role of the CEO in succession planning may have changed, today’s CEOs feel their role in succession is more important than ever – in partnering with the board on succession, developing a pool of candidates and mentoring candidates to the point that they can successfully step into the CEO’s shoes. They emphasize the importance of starting early, incorporating formal assessment tools into the succession process and avoiding public horse races along the path. They recognize the CEO’s role in giving the board meaningful exposure to succession candidates and in giving candidates experience in learning how to work with a board.
Most of all, they underscore how important this decision is for the companies they lead – and urge all CEOs to make sure this item is getting onto the board agenda. As Graham Edwards, CEO of Midwest ISO, stresses, “I would expect the board to address the issue of succession planning with the CEO. But if they don’t do it, it’s incumbent on the CEO to bring it up with the board, start the conversation and get the succession process moving.” It may well be one of the most important conversations the CEO will ever have.
Beverly A. Behan is the managing director of the Board Effectiveness Practice of Hay Group. Jeff Kirschner, Ph.D. is a senior consultant in the Leadership and Talent Practice of Hay Group. Susan M. Snyder is a senior consultant in the Leadership and Talent Practice of Hay Group. The authors thank their colleagues at Hay Group, especially Kathleen Cavallo and Peter Prichard, for their significant contribution, to the research for this article.