Rethinking the Role of No. 2

In recent years I have had a number of engagements with new and existing CEOs. They wanted me to help them arrive at a new structure for the top of their organizations. While they came from different industries, they all had one thing in common: none of them wanted a Chief Operating Officer or COO.  They all thought it was too soon to commit to a successor. But if there is no COO, then we have two problems. The first is the wide span of control that would result for the CEO. The second is the lack of a thought partner for the CEO. This person is useful to help the CEO contemplate the whole enterprise. Today’s companies are complex multi-business, multi-country organizations. One person – no matter how smart – has trouble getting his or her mind around the total global enterprise. The CEO needs help in thinking about and managing the entire company. In wrestling with the issue, I have developed some thoughts on how to structure leadership.

One option is to have a COO who is not going to be a successor. Is there someone who is as old or older than the CEO who has the internal focus and operating skills of a COO? This type of COO would be a beneficial compliment to the externally focused and strategic CEO. Besides, I always thought that a COO did not automatically have to be a possible successor to the CEO. The roles require different skill sets. While I think that the non-successor COO is a viable alternative, I have had no takers for this option. It is hard to find the right person, and many CEOs prefer not to have a layer between them and the businesses.

If all of the businesses report directly to the CEO, then what do we do with all of the corporate functions? Another alternative structure is the Chief Administrative Officer (CAO). Under this model all or most functions report to the CAO. Sometimes the CFO or maybe HR will report directly to the CEO. Danone has adopted this model. They have appointed a Vice Chairman through which all of the functions report. The difficulty with this model is first to find the right kind of person. What is needed is someone with a good relationship with the CEO as well as the stature and respect from the functions. A strong person is also needed because the CEO will go directly to the General Counsel on legal matters. The CAO cannot be concerned if the CEO “goes around” the CAO to the experts.

The second issue is that the CAO role creates a grumpy group of functional heads. Everyone wants to report directly to the CEO but everyone cannot. Having a respected CAO can help. Having an active Executive Committee of all business heads and all functional heads can help. But at the end of the day, the functional heads are going to feel one down to the businesses. And that may be fine.

A third option is to use various forms of an Office of the CEO as a substitute for a COO. General Electric used such an office during the Welch years. When Reg Jones and the board of directors chose Welch as Chairman and CEO, they also chose two vice chairmen (VC) who could work well with Jack. They chose a team to run the company. Welch continued the model throughout his tenure as the VCs came and went. The VCs all had some common features. First, they were either contemporaries of or older than Jack. They were not successor candidates but could become the CEO if something happened to Jack. So there was little competition among the members of the Office. The VCs were people who could work with Jack as a team in an Office concept. Second, it was clear to everyone that the business heads were the succession candidates. And third, the skills of the VCs reflected GE’s priorities at the time and filled in Jack’s flat spots. For example, Paolo Fresca, an Italian, became a VC when GE implemented a globalization initiative. Jack had very little international experience. When GE Capital became half of GE’s revenues, Dennis Dammerman, the CFO, became a VC to help Jack manage the financial services businesses. Robert Wright became a VC when NBC-Universal became a big part of GE. So at all times the Office was a team that reflected GE’s strategic priorities and compensated for Welch’s lack of experience in some areas.

The businesses and the functions reported to the Office. Some fluid arrangements were used. The HR and CFO functions usually reported to the CEO. At one point, Welch chose three or four businesses that were undergoing a transformation and they would report directly to him. The VCs would divide up the other businesses and functions. Then in one-and-a-half to two years, Jack would choose another three or four businesses. Toward the end of his tenure, when Welch was busy choosing his successor, all of the businesses reported directly to him. Since none of the VCs were candidates, all of the active candidates were running businesses. The VCs were active advisors. When Imelt was chosen as the successor, then and only then, was there a COO.

A fourth model is to create a number of groups of profit centers, and each group then reports to the CEO. For example, General Mills has two COOs, one for the U.S. and one for International. Hewlett-Packard has three groups, one each for Enterprise Systems, Personal Systems, and Printing and Imaging. General Electric is currently using four. In essence, rather than appointing one COO, this model creates three or four COOs. It puts more brains against the company’s strategic challenges. The issue in this model is managing the interpersonal dynamics of the talent that sits around the table. Often the CEO, the CFO and the strategy head think about the enterprise as a whole. The leaders of the profit centers focus on their piece of the business. The questions then are, “To what degree does this group need to become a team?” and “How do we get these people, many of whom are successor candidates, to work as a team?” If the strategy of the company is to operate as one integrated company, like Cisco, IBM and Nokia, then teamwork is essential. The CEO should have an active operating committee or strategy council. The bonuses should be based on company performance. But if the company is a conglomerate like GE and United Technologies, less teamwork and more group-by-group discussion is needed. Bonuses can be based on group performance.

As suggested above, another alternative is to use management processes rather than structure to create the equivalent of a COO. One of my clients acquired another company in another industry. However, the industries were converging. Initially the CEO and a couple of staff groups were doing all of the integrating. No one had experience in both industries so a COO candidate could not be found. What we did was  create an active operating committee, which is co-led by top people from each industry. The CEO has frequent discussions with the co-heads and occasionally attends the sessions. But the intention is to delegate operating decisions to the committee. A COO candidate will eventually emerge out of this process and he or she will then become the COO of the merged company.

As I reflect on my experiences, I tend to think of each of these alternative structures for leadership as being temporary. Depending on the tenure of the CEO, we can often string the options together as a sequence. For example, the businesses could report directly to a new CEO. Then three or four groups could be formed, each of which would be led by a succession candidate. When a successor is finally chosen, the winner could become the COO. It seems to me that we need a rich set of options including those listed above. Rather than choosing a single person, there are many alternatives available when filling a COO role. The best option for any company should both capitalize on the set of competencies in the leadership team, and match the current challenges facing the company. A dialogue needs to take place with the board about these options. Too often, the board pushes for a COO. Most boards seem to have only one model for structure: the CEO/COO model. I would rather see a well-reasoned sequence of moves to eventually arrive at a COO. We do not always need a permanent COO structure.