Why Boards That Lead Succeed

Ford: A Lesson in Taking the Wheel

In 2006, Ford Motor was facing a bleak future. It had never quite recovered from the massive recall of Firestone Tires in 1998-2001 and the economic downturn following 9/11. While William Clay Ford, Jr. temporarily restored confidence when he stepped up to the CEO position after Jacques Nasser’s ouster in 2001, the company’s financial condition and market share had steadily deteriorated. There were numerous problems: Ford’s manufacturing costs were outpacing its rivals; its acquisitions of Jaguar and Volvo had sidetracked management; market share was slipping to Volkswagen, Toyota, and even Hyundai; and operations were badly balkanized. Ford’s earnings skidded more than $12 billion into the red. To be sure, some of the problems were a direct result of a larger declining American auto industry. But whatever the cause of the ailments, it was up to the company’s leadership to find a way to stop the bleeding before it was too late.

The old governance model would have kept Ford’s directors mostly on the sidelines, leaving management to do the triage. But when Bill Ford warned the board that he would not be able to save the company on his own, the seasoned board, led by lead director Irvine O. Hockaday, Jr., former CEO of Hallmark Cards, stepped up to find a CEO who could. The search had to be both thorough and discreet. Hockaday turned to Robert Rubin, former co-chairman of Goldman Sachs and former secretary of the U.S. Treasury, and John L. Thornton, former co-COO of Goldman, to help. As Bill Ford told Hockaday, “You guys must have the best Rolodexes on the planet. You should be able to get anybody to come to the phone.”

The three carefully identified what the company needed: a CEO who would bring strong vision for the company’s future; an executional ability to strategize and execute an appreciation for the power of current and future technologies; and an experienced hand in harnessing complexity. He or she would also have to be CEO-battled-tested, and ready to take the reins firmly from Day One. It was Thornton who identified Alan Mulally, who had been with Boeing for three decades and was currently overseeing manufacturing.

After a series of discreet meetings with Mulally, during which timeHockaday updated both the board and Bill Ford in real time, the decision was made and Mulally was named chief executive of Ford in September 2006. He went on to successfully steer the company through the collapse of the U.S. auto market in 2008, the bankruptcy and bailout of Ford’s two archrivals in 2009 and the restoration of Ford’s reputation and earnings by the end of the decade.

In 2011, Ford’s income had soared to $20 billion, earning him the title of Chief Executive’s CEO of the Year. Ultimately, Ford’s directors were able to change the company’s trajectory by installing the right person to run the show. They did three things that are particularly instructive to other boards tackling the task of CEO transition:

1. The governing board actively directed the process. Three highly experienced directors took charge, but all board members pitched in to help. They didn’t wait for Bill Ford to come up with a solution; they took charge themselves.
2. The board’s leadership did not follow a formally designated process, nor was its foundation visible to the outside world, including the rating agencies. As Hockaday noted, “Effective leadership at the board level will relate to the particular state of the company and the dynamics of the board at a given point in time. A written-in-stone template about board governance is a distraction and maybe even risky.”
3. The recruitment process used in 2006 has provided a foundation for the board’s search for a replacement of Alan Mulally, who is expected to retire in 2014. The directors pioneered a leadership process of trust and transparency among themselves and with the executive team that will serve the company well as it searches for Ford’s next chief executive.

Good succession habits begin well before the CEO plans to depart—a good five years before, ideally. It can take that long to groom inside talent, research external candidates; and, if necessary, bring in an external candidate at a level reporting to the current CEO to be readied for the job. When Michael B. McCallister, CEO of Humana, announced in 2011 plans to retire in 2013, William J. McDonald, an executive at Capital One Financial Corporation and chair of Humana’s organization and compensation board committee, wasted no time work- ing on a long-term plan. Succession is all about “lead time, lead time, lead time,” he observed. “The board is accountable for the succession process and must stay out in front rather than waiting to hear from the CEO. If the board waits for the CEO, it is too late.” That’s why the board brought in Bruce Broussard as president and COO in 2011, in anticipation that he would take over when McCallister retired, which is just what happened.

Similarly, Johnson & Johnson brought back Alex Gorsky, who began his career with J&J, several years before CEO Bill Weldon was expected to retire, giving him a range of roles with significant responsibility, including group chairman and worldwide franchise chairman for Ethicon in the medical devices business; worldwide chairman of the surgical care group; and vice chairman of the executive committee. He was then a natural replacement for Weldon in 2012 when the longtime CEO stepped down.