Succession In the Valley

Some, like Hyperion, get it right. Most others, unfortunately, don’t.

June 1 2005 by Chief Executive


In 1999, Jeffrey Rodek was brought in to salvage the wreck of Hyperion’s failed merger with Arbor Software. Rodek was a self-described numbers guy who had cut his management teeth during a 16-year stint at FedEx, but two years into his rescue operation at the financial reporting software maker, he decided the Santa Clara-based company could do better faster if it hired a chief operating officer who possessed the salesmanship he lacked. He found his man in 51-year-old Godfrey Sullivan, a former division president at design software maker Autodesk who also had spent 11 years at Apple Computer.

As soon as Sullivan arrived, Rodek went a step beyond making him a strong “No. 2″€¦quot;he began preparing him to take over the corner office. Ten months ago, Rodek, at the age of 51, packed up his office and headed home to Orange County, Calif., leaving Sullivan in charge. Rodek retains executive chairmanship of the board and is “the angel on my shoulder who’s there for a phone call, meeting or a piece of advice,” says Sullivan.

Hyperion thus became the rare Silicon Valley company to enjoy a smooth transition between leaders. If only more Valley companies, where tech execs take on the aura of Hollywood moguls, could say the same. Certainly, there are notable successes; semiconductor giant Intel has had smooth transitions in the corner office going all the way back to the 1970s, and at Adobe Systems, where CEO Bruce Chizen managed to shake up management without alienating the company’s founders, who were still on the board of directors.

But for the most part, the Valley is full of CEOs who came in sans premeditated transition plan. And it’s an industry where good succession planning is particularly important because of the rapid pace at which technology changes. If a company stumbles for even a quarter as a result of a poor transition, it can miss crucial shifts in the market. “Not having a plan undermines the CEO from the get-go and costs the organization an enormous amount of money,” says Jenny Chatman, professor at the University of California Berkeley, Haas School of Business.

The biggest obstacle to good succession planning in the Valley is often its greatest strength€¦quot;the strong-willed entrepreneurs who made their companies what they are. “The shadow of the founder is very long,” says Harvard Business School Professor Rakesh Khurana, who has studied CEO succession. Young programming wizard Larry Ellison turned a single-contract consulting firm for the Central Intelligence Agency into database giant Oracle. Scott McNealy turned a little computer company into Sun Microsystems. Steve Jobs was so critical to Apple’s success, the company hasn’t found anyone who could succeed him.

Therein lies the problem: the rock star CEO who is impossible to replace. “The vision and tenacity these people have€¦quot;they’re a rare breed who don’t lend themselves to succession,” says Geoffrey Moore, managing director of TCG Advisors, a corporate consulting firm, and the author of Crossing the Chasm.

That’s why controlling the influence of founding CEOs once a successor is hired is almost impossible. Tom Siebel, the founder of struggling Siebel Systems, stepped down in May 2004 and was replaced by IBM veteran Mike Lawrie, but after less than a year, Siebel’s board fired Lawrie and named George Shaheen, former CEO of Andersen Consulting and veteran Siebel board member, as the new leader.

Some say Siebel is waiting in the wings to return. “It’s Tom’s company,” said Paul Wiefels, managing director of the Chasm Group, a high-tech consultancy in San Mateo, Calif. “My sense is that Shaheen is a caretaker until Tom reasserts his leadership.” Siebel, who owns 10 percent of the company and serves as chairman, has told analysts he has no plans to leave the firm.

In Silicon Valley, many companies are pre-IPO and worry little about succession. They aren’t large enough to groom prospects internally and lack the big operational jobs required to train future CEOs, says Simon Francis, a partner at Christian & Timbers, the executive search firm in Menlo Park, Calif. TiVo’s cofounder Mike Ramsey, for example, stepped down as CEO in February, with no successor in sight.

Companies like Intel, which manage succession well, however, share some common ground: They plan for the long term, place a premium on executive training, identify talent early and limit the CEO’s stay at the top. Indeed, Intel almost makes succession look easy. The company appointed its fifth home-grown CEO in November 2004, picking 54-year-old Paul Otellini to replace Craig Barrett. Within a few months, the board was already planning for Otellini’s successor, says David Yoffie, a 16-year veteran of Intel’s board and Harvard Business School professor.

At its annual meeting in January, the board was in deep review of the senior management team and scanning a list of contenders for the top job. Yoffie says the board typically plans five or six years out. “We look at people who are in their late 30s and early 40s and think about their long-term career perspective,” he says. Once or twice a year the board also reviews programs for improving top managers’ skills, reviewing recent promotions and tracking career advancement. Focused sharply on grooming leaders from within, Intel trains its top managers to practice “two in a box,” a method of overlapping job duties to help execs who lack skills in certain areas to support each other. They learn new skills while also covering areas in which they lack experience.

It’s a common belief at Intel and elsewhere that a large public company that hires an outside CEO is admitting bench failure. Truth is, going outside can bring mixed results. Intuit is doing just fine under Steve Bennett, a former General Electric executive, who joined the company in 2000 and works closely with company founder and chairman Scott Cook.

Apple, on the other hand, has had a disastrous history with outside CEOs. Jobs personally recruited Pepsi president John Sculley to take over as CEO in 1983. Sculley fired Jobs and then resigned a decade later amid layoffs and declining profits. Another outsider CEO at Apple, former National Semiconductor CEO Gil Amelio, resigned in July 1997, after a rocky 17-month tenure set the stage for Jobs’s heroic return.

All told, Silicon Valley companies could do a much better job of training their top managers so they will eventually qualify for the CEO’s slot, says Dennis Carey, a CEO recruiter at consultancy Spencer Stuart in Philadelphia, Pa. For one, they could tie a piece of the CEO’s compensation, such as a bonus, to succession planning. The board and CEO should discuss, as Intel does, where the company stands with succession plans twice a year, Carey recommends. They should also evaluate their top dozen or so executives, tack their pictures to a white board at a board meeting and discuss their development tracks, accomplishments and skill gaps, says Carey, author of CEO Succession: A Window on How Boards Can Get It Right When Choosing a New Chief Executive. A new CEO should also start planning for his own succession immediately after he starts the job and consider training more than one person for the company’s top jobs.

Grooming From Within
Naming a CEO’s internal successor, however, can be tricky business. Some CEOs avoid it for fear that valued execs waiting to move up in the ranks might leave the company if they aren’t named successor. Although attrition is often inevitable, it can be a morale-busting blow to watch top talent walk out the door, particularly within a company that’s already struggling. Nonetheless, speculating over who will be the next CEO is sport within most companies. At Sun Microsystems, COO Jonathan Schwartz is McNealy’s probable heir. At Oracle, Ellison’s successor is assumed to be president Chuck Phillips. At design software maker Adobe Systems, CEO Bruce Chizen named Shantanu Narayen, 41, to the newly created position of president and COO in January. The San Jose-based company won’t comment on whether Narayen is the CEO-in-training, likely because Chizen is only 49 and has only been CEO of this profitable, well-run company since 2000. “Succession planning is vital for software companies like Adobe,” Chizen notes via email, “where so much of the company’s assets are tied to its internal talent and the strength of its culture.”

Adobe can afford to take its time with succession, says Steven Ashley, an analyst at Robert W. Baird & Co. in Milwaukee, Wis., who follows the company. “When you have success there’s no pressure,” he says. “One benefit of innovation has been their ability to control succession. If you don’t innovate properly and your company is floundering, that’s when people are forced to make moves.”

Still, that’s not a good reason to delay indefinitely; many solid companies have found themselves in the lurch after a CEO’s unexpected departure or untimely death. Yet many CEOs avoid succession planning because, like most people, they prefer not to think about being replaceable. Cisco CEO John Chambers, for example, avoided drafting a succession plan until a few years ago, points out the Haas School’s Chatman. “Most organizations are concerned with day-to-day events and don’t have time to think through scenarios that might not be pleasant,” she says.

Hyperion CEO Rodek didn’t worry about an exodus when he hired Sullivan; after two tumultuous years, Rodek was the most senior of 15 top executives at the company, but he himself had no obvious successor. After Sullivan was on board, he went to work proving his mettle as COO. The company had some top executive openings to fill. Sullivan hired five of the six, including a chief marketing officer and a newly created head of sales. “He made the decisions,” Rodek says. “It had to be his team.” Then Sullivan branded the company, clarifying Hyperion’s market as “business performance management,” and clearly defining its competition. After the company acquired Brio in 2003, Sullivan handled the integration and planning. Sullivan said he and Rodek, who brought him to board meetings as often as possible so members would get to know him, worked hard at the transition. “You check your ego at the door and you do what needs to be done,” Sullivan says. “There’s no star power here.”

But that sort of closeness between an outgoing and incoming CEO isn’t for everyone. Defining roles and responsibilities can lead to outright tension. “It got to the point where it was uncomfortable,” says George Garrick, CEO of Wine.com, who worked side by side for several months as CEO of PlaceWare in 2002 with the outgoing CEO. Though it was a “friendly parting,” Garrick says it’s hard for employees to see two bosses around the office. “It’s also not a good idea for an incoming CEO to get too much advice from the outgoing one,” he adds. “If that was what the board wanted, there wouldn’t be an outgoing CEO.”

Hyperion’s Sullivan says he has the best of all worlds today. “I have a chairman who was CEO for six years who lets me run the business,” he says, though he adds that the next CEO at Hyperion should ideally come from within. “You always do better to groom from the inside.”

Spoken by a true outsider.