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Most companies drop the baton when it comes to CEO succession. Here's what a few do right.

Imagine creating the perfect CEO. You’d mix the charisma of Herb Kelleher with innovation à la Andy Grove. Add a dash of Michael Dell’s salesmanship to Jack Welch’s ability to deliver on Wall Street’s expectations. Throw in Meg Whitman’s problem-solving skills and voilà-the ideal CEO. Okay, so you can’t build a superhero, but most companies don’t even come close. When choosing leaders more and more fail to find someone suitable. The consequences are severe.

A fumbled CEO succession hurts not just staff morale and business performance, but also stock price. The early departure of a replacement can also prove costly in severance pay and tarnished reputation. With so much at stake, it’s a wonder so few companies succeed at succession.

Richard Thoman lasted just over a year at Xerox, taking the tiller in April 1999 and relinquishing it in May 2000. (During his brief watch, Xerox’s market capitalization fell by around $1 billion.) Other short-lived tenures include those of Robert Nakasone, who became CEO of Toys “R” Us in 1998 and left 18 months later; Gregory Wolf, who lasted less than two years as CEO of Humana; and M. Douglas Ivester, who took charge at The Coca-Cola Co. in October 1997 and was pushed into early retirement in 2000.

The growing number of CEO failures stems from poor succession planning, believes Warren Bennis, professor and founder of the Leadership Institute at the University of Southern California’s Marshall School of Business. The root of the problem lies with how boards appoint successors. “Boards that go into rhapsodic overtures about leadership never really define what they mean by that word, nor do they pay enough attention to the human factor,” Bennis says.

Even when boards and senior executives invest a good deal of time and energy in vetting prospects, too often they fail. Senior managers spend an inordinate amount of time considering and naming potential replacements for themselves and their subordinates. Such an approach is often very expensive, bureaucratic and out of touch with organizational strategy, says William Byham, president and CEO of the Pittsburgh-based consultancy Development Dimensions International, which specializes in leadership selection. These handpicked backups, Byham estimates, fill fewer than 30 percent of senior positions.

Blame the human factors. Most bungled successions can be traced to five failings. First, many incumbents are reluctant to give up power, either hanging on too long or trying to foist like-minded successors onto their boards. Second, when appointing new leaders, boards often choose a safe replacement, rather than someone who will question the directors’ roles. Third, swayed by force of personality, boards frequently fail to define or adhere to an objective set of selection criteria. Fourth, many don’t look beyond the most visible senior management candidates, and therefore fail to identify strong potentials from the next generation of executives. Finally, short-term concerns-such as antsy shareholders-are allowed to dictate the succession timetable. Add to this the usual heady mix of egos, corporate politics and greed, and you have a recipe for trouble.

When a company is performing well, succession problems tend to be a by-product of the achievements of the incumbent. Ivester, for instance, was ousted from his job at Coca-Cola after a series of misjudgments. Leadership experts blame the aura of his predecessor, Roberto Goizueta, for Ivester’s failure. Goizueta dazzled directors into doing only a cursory vetting of his choice. “Did the board really take a serious look at Ivester’s capacity to work with people?” asks Bennis. “Did it examine his relationship with his peers and direct reports? I doubt it.”

Amid these widespread failures, a few companies seem to have mastered the art of succession. When Herb Kelleher, Southwest Airlines’ colorful and long-standing chairman and CEO, stepped down in June 2001, he was succeeded by a leadership double act. Colleen Barrett, a 24-year Southwest stalwart and former executive vice president of customer relations and corporate secretary, became president and COO, while James Parker, the former vice president/general counsel, took the mantle of CEO and vice chairman. Kelleher, 70, remains chairman.

Barrett, credited with building Southwest’s customer-focused culture, concentrates on the day-to-day running of the airline. She has worked with Kelleher since 1967, and has broad experience in all aspects of the business. Parker, who joined Southwest in 1986, concentrates on the financial and legislative aspects. Kelleher has not been an easy act to follow, a point Parker acknowledges. “Comparing me to Herb is like comparing a 40-watt light bulb to the sun,” he has quipped.

When a plan comes together


Five steps to replace a CEO

1 I Create a shared definition of leadership.

2 I Measure the soft qualities in candidates.

3 I Beware of candidates who act like CEOs; avoid being seduced by charisma.

4 I Recognize that real leaders are threatening: The safe choice may be the wrong one.

5 I Vet insiders with the same rigor as outsiders.

The same comparison has probably gone through Jeff Immelt’s mind. After all, Immelt, the CEO of General Electric, followed the legendary Jack Welch. Still, leadership experts consider GE’s succession process a model. GE prides itself on the bench strength of its executive pool. The top job was always going to go to an internal candidate. Welch’s retirement was meticulously planned and minutely observed, with media speculation focusing on three front-runners. In November 2000, Welch finally ended the agony by naming Immelt, the former head of GE Medical Systems. Welch stepped down as CEO 10 months later.

Other companies also benefited from GE’s rigorous planning. Robert Nardelli, former head of GE Power Systems, who had been passed over for the top job at GE, was appointed CEO of The Home Depot, succeeding co-founder Arthur Blank. This highlights an important aspect of the succession conundrum: Different stages in a company’s development require different styles of leadership. Nardelli was deemed wrong for GE, but right for Home Depot as it sought to move out of the shadow of its founders. Bernard Marcus, who founded Home Depot with Blank, explained that Nardelli’s appointment was a result of a 10-year evaluation process. In the end, the top half-dozen Home Depot executives came to acknowledge that they were not ready to take the reins. Nardelli was seen as someone who would allow the homegrown talent to mature.

For companies like GE, identifying and nurturing a replacement from within is viewed as part of executive leadership. “Succession planning is about training the managers of the future and ensuring there are skills for the future,” says Alan Jones, group managing director of TNT Express, the European express-delivery company with 40,000 employees.

The emphasis at TNT Express is on creating an environment in which people commit to the company for the long term. “All senior positions are filled internally,” says Jones. “We equip people with skills and give them personal development to progress. If we take on senior people from outside it sends out the wrong message.” Three managing directors in TNT Express’ European operations who started off as truck drivers serve as proof. An inveterate note writer-20 per car trip, he estimates-Jones believes that personal communication from the leader to rising stars is vital, especially kudos for goals met.

Cary Blair, CEO of Westfield Group, has been working on succession planning at the 150-year-old private financial-services company for the past four years. Blair, 63, who recently celebrated 41 years with the organization, plans to retire in August 2003. He realizes no succession is failsafe, but is pleased with the way plans for his replacement are progressing. “First of all, the CEO has got to get him or herself mentally prepared, but then he or she has to engage the board in the search,” says Blair, who has been CEO for 11 years.

Blair pulled together a team including board members and a few other senior executives to begin discussing the qualities Westfield, which employs 2,300, needed in a candidate. They have met for full-day retreats a few times a year, and identified competencies they’d like to see, including language skills and a global mindset as well as “innate qualities that you can’t train for,” explains Blair. “We want our next CEO to have a more external than internal stakeholder focus-a corporate cheerleader, someone to meet the press and be constantly involved with big customers,” he adds. The search committee even talked about the candidate’s spouse’s role in the company.

They also decided the company needed a balanced team at the top. If, for instance, the new CEO was someone with an operational background, he or she would require a close relationship with an executive possessing strong financial skills and vice versa.

Throughout the process, Blair has coached prospective candidates. “I’ve been very careful to talk to them about their pluses and minuses at least once a month,” he says. Blair also involves his heirs in scenario planning. He considers “visioning”-an ability to see what’s coming and to make changes to adapt-the most important skill a CEO can have. Blair’s replacement will be named at Westfield’s annual meeting in February 2003.

GE, TNT Express and Westfield Group make a point of promoting from within, and that’s often the case at companies humming with self-confidence. Organizations in crisis or those seeking to widen their executive gene pool are more likely to look elsewhere.

Why Apple returns to its early CEO
Research by the recruiting firm Spencer Stuart indicates that internal CEO appointments are most common, but external hires are increasing. Bringing in a CEO from outside can be spectacularly successful. Louis Gerstner, who turned IBM around financially in the 1990s, is an excellent example. But importing expertise can also backfire.

Success is often rooted in context, so executives who have thrived in one company may flop in the next, warns Gurnek Bains, managing director of the London-based business-psychology consultancy YSC. “High-performing companies grow their own talent,” says Bains, who has studied internal and external successions. “People who head up high-performing businesses really know the business inside out and tend to have been there for a long time. In contrast, a large proportion of unsuccessful CEOs have been transplanted from one company to another.”

The computer company Apple is a case in point. Steve Jobs, then CEO, famously asked John Sculley, then president of PepsiCo: “Do you want to spend the rest of your life selling sugared water, or do you want a chance to change the world?” Recruited for his marketing skills and ability to boost brand awareness, Sculley joined Apple in 1983. His appointment was designed to free Jobs to concentrate on product development. But Sculley and Jobs clashed and Sculley removed Jobs from a key product-development project. Jobs then tried to mount a boardroom coup to regain control, which failed. Jobs resigned rather than be fired. Sculley was himself deposed in 1993 after a disastrous period that saw Apple’s market share plummet from 20 percent to just 8 percent. By 1997, Apple’s market share had fallen to 4 percent and Jobs had come back on board at the invitation of then CEO Gil Amelio. Soon after Jobs’ arrival, Amelio departed. Following a curious succession route, Jobs is CEO for the second time around and his return shows just how hard it is to find suitable replacements. He is no superhero, but he may be perfect for Apple, which is now making steady progress.


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