CEO succession practices have witnessed a sea change over the past decade. In the not-so-recent past, anointing a successor- regardless of what official corporate policy might state-was often the purview of the sitting CEO. He or she assessed the field, handpicked one or more promising contenders, and winnowed them over time, eventually championing a nominee to the board, which then welcomed the victor into the fold.
While not exactly scientific nor communal, there was sound theory behind this methodology. CEOs, after all, are intimately familiar with both their management team members and the day-to-day challenges of running the company, and therefore best equipped to assessing the competencies of their replacement.
Or are they? In recent years, newly energized boards of directors have been taking a more aggressive role in succession planning, noted participants gathered for a roundtable discussion on CEO succession cosponsored by Chief Executive and Hay Group. Galvanized by increasing emphasis on governance, a bump in CEO turnover of nearly 60 percent, and near universal acknowledgement that designating a new CEO is the most significant decision a board will make, directors are increasingly seeking a more hands-on role in the process.
“All board members are more active these days, so they want to be more involved-particularly in something they see as one of the most important parts of their job,ï¿½VbCrLf asserted Joe McGrath, CEO of Unisys, who anticipates “a substantial differenceï¿½VbCrLf in how CEO succession is handled going forward. “We also have more active CEOs serving as directors, and they really want to be- and can be-very effective in giving counsel on this issue because they’re going through the process themselves.ï¿½VbCrLf
“We asked the board who would step in if the CEO should be hit by the proverbial bus tomorrow,ï¿½VbCrLf she recounted. “And the CEO was aghast when he heard who they had in mind. It wasn’t someone he thought remotely appropriate-and that, as you might imagine-raised a whole range of issues.ï¿½VbCrLf Avoiding that scenario, agreed roundtable participants, often comes down to process. Having a well-structured and defined succession plan is critical to seamless business continuity during both planned and emergency leadership transitions, noted John F. Brock, CEO of Coca-Cola Enterprises. “The final decision clearly needs to be the board’s, but there must be a very organized, orchestrated and coordinated process that management drives in a significant fashion,ï¿½VbCrLf he said. “Without that you are headed for a train wreck.ï¿½VbCrLf
Yet, despite the importance of an effective succession planning process, few companies give the methodology involved even a fraction of the effort devoted to processes in areas like audit, risk and strategy. In fact, only about 50 percent of public, private and nonprofit corporate boards participating in a survey by The Center for Board Leadership and Mercer Delta Consulting reported even having a succession plan in place, and nearly half of the respondents considered themselves “less than effectiveï¿½VbCrLf in the area of CEO succession.
The good news? More and more boards are now addressing the issue by forming succession committees dedicated to working closely with incumbent CEOs on plans for an effective transition. It’s a formidable task, requiring effort on several tricky and time-consuming fronts: continually monitoring current and future business needs, carefully nurturing a leadership pipeline, and ensuring that each potential candidate is given regular and meaningful board exposure. But recent events, from backdating scandals to terrorist threats, underscore the need to have a plan in place so that an internal candidate can take the reigns should a crisis occur.
Succeeding at Succession Building the leadership talent pipeline is no longer just an issue for human resources, agreed several CEOs, but rather a key responsibility of both the CEO and the board. “As CEO or any manager, you are the chief HR person,ï¿½VbCrLf argued Carlos Cardoso, CEO of Kennametal, whomakes a point of interviewing every potential hiree for second-tier and up management positions. “HR owns the process, but it’s managers who own the quality of the people they put in positions.ï¿½VbCrLf
Kennametal’s management program includes a succession plan for 50 spots dubbed as “critical positionsï¿½VbCrLf spread through multiple levels of the company. CEO Cardoso is charged by the board with ensuring that no more than 25 of those positions at any given time are without immediate successors in place. Ideally, he noted, those successors come from within. “Every time I have to bring people into the organization, that’s a reflection on me personally that I’m not growing my own people,ï¿½VbCrLf he said. “One of the things I learned a long time ago is that a good coach is one who makes a team with a losing record into a Super Bowl team.ï¿½VbCrLf
When it comes to the next CEO, developing a talent pipeline that will yield multiple internal candidates is viewed as even more critical. Insiders can step in immediately in the event of a crisis and have the added advantages of in-depth knowledge of the business and in dustry, an understanding of the company culture and a working relationship with its board.
“People who come from the outside hit companies like a ton of bricks,ï¿½VbCrLf asserted Steve Odland, CEO of Office Depot. “I’ve done it myself three times now and I can attest that it’s very hard to intersect with the culture and you end up doing a little destruction no matter how much you try to preserve.ï¿½VbCrLf
That insider advantage is gaining increasing recognition among board members at top companies, according to a recent study by Hay Group. Of 150 boards of leading companies surveyed, 77 percent reported preferring an internal CEO succession candidate. “About a decade ago it was decidedly toward an outside search,ï¿½VbCrLf said Behan. “That shift has implications for CEOs grooming executives and mentoring successors.ï¿½VbCrLf
At Target, a destination management program also ensures that high potential managers are steered into posts that will round out their work experience and sometimes fast-tracked through a promotion process. “It can be very tempting to keep someone in a job where they’re very successful,ï¿½VbCrLf noted CEO Bob Ulrich, who began his own career at Target (then Dayton Hudson) in 1967 and was appointed CEO in 1987. “But then at the end of the day, you’ll hear, ï¿½ï¿½Wait a minute. Target is merchandising- driven and he hasn’t had enough experience there.’ï¿½VbCrLf
Jeffrey Ettinger came to the CEO job through a similar process at Hormel Foods. “I was part of a very deliberate process where a number of candidates were given opportunities to do jobs in various functions,ï¿½VbCrLf he recounted. “At the time, I was told by my predecessor that my goal was to make everybody forget where I came from, which was the law department.ï¿½VbCrLf
Developing a strong internal pool, however, is a process that must be handled with care. Done well-as was famously managed by Jack Welch at GE and by McDonald’s, which lost two CEOs in rapid succession- the transition can be both transparent and effective. But missteps, such as narrowing the field too soon or choosing candidates too close in age to the current CEO, can lead to infighting and upheaval.
“Never underestimate the need for alignment, both within the senior team as well as the board, and maybe even outside stakeholders as that becomes more and more important,ï¿½VbCrLf urged Zev Weiss, CEO of American Greetings. “That alignment is always more difficult than it seems.ï¿½VbCrLf
Succession in the Boardroom
While the days when CEOs filled board seats at will are long gone, succession practices in boardrooms are faltering as it becomes more challenging to fill vacant board seats. A dearth of available candidates coupled with rampant director turnover has made recruiting directors with management experience, relevant industry knowledge and financial expertise a challenge.
The increased time commitment and perceived financial and reputational risks related to board service is leading more and more CEOs to restrict their service to one board seat or to opt out altogether. What’s more, many also discourage management team members from taking director seats. Director seats once heralded for providing up-and-coming management talent invaluable experience are now seen as a commitment that busy executives cannot afford.
“I want to adopt a policy that none of our people can serve on boards,ï¿½VbCrLf said Milton Sender, CEO of Daymon Worldwide. “It takes 12 days a year to be on a board today, plus travel time. You have to focus on your business, and being a director is so tough today that it’s not worth the time commitment.ï¿½VbCrLf
The challenge of filling board seats with high-value directors has even led some companies to loosen director qualification policies. “We used to limit directors to 15 years of service, but we extended that to 20 because it’s so much tougher to get directors these days,ï¿½VbCrLf reported Bob Ulrich, CEO of Target.
If anything, CEOs expect the boardroom exodus to intensify. “I’m as fixated on the succession of my board as I am on that of my team,ï¿½VbCrLf Rodney O’Neal, CEO of Delphi, told roundtable participants. “The rules are changing when it comes to board members. Today’s CEO will have to spend considerably more time on director succession.ï¿½VbCrLf
Gene E. Bauer is managing director of U.S. operations in the Kansas City, Missouri, offices of Hay Group, a global human resources management consulting firm headquartered in Philadelphia.
Beverly Behan is managing director of the board effectiveness practice in the Jersey City, N.J., offices of Hay Group.
John F. Brock is president and CEO of Coca-Cola Enterprises, a marketer, distributor and producer of Coca-Cola products based in Atlanta, Ga.
Carlos Cardoso is CEO of Kennametal, a metal-working and tool production company based in Latrobe, Pa.
Theodore L. Chandler Jr. is chairman and CEO of LandAmerica, a provider of real estate transaction services based in Glen Allen, Va.
Milton Cooper is chairman and CEO of Kimco Realty, a real estate investment trust based in New Hyde Park, N.Y.
J. P. Donlon is editor-in-chief of Chief Executive Magazine, based in Montvale, N.J.
James Eiting is chairman of Midmark, a medical equipment provider based in Versailles, Ohio.
Jeffrey Ettinger is chairman and CEO of Hormel Foods, a manufacturer and marketer of branded consumer food products in Austin, Minn.
Harry Gould is chairman and CEO of New York City-based Gould Paper, a supplier of specialty paper and packaging products.
Joseph L. Herring is chairman and CEO of Princeton, N.J.-based Covance, a drug development services companies.
Graham Martin is managing director of global practices in the U.K. offices of Hay Group, a global human resources management consulting firm headquartered in Philadelphia.
Joseph W. McGrath is president, CEO and director of Unisys, an information technology consulting firm based in Blue Bell, Pa.
John Minasian is vice president and dean of Rensselaer at Hartford.
Ann Mulvale is CEO and director of Oakville, Ontario-based Mulvale Associates.
Ron Naples is chairman and CEO of Quaker Chemical, a global provider of process chemicals and technical expertise based in Conshohocken, Pa.
Steve Odland is chairman and CEO of Office Depot, a Delray Beach, Fla.-based office supply retailer.
Rodney O’Neal is president, CEO and director of Troy, Mich.- based Delphi, a supplier of mobile electronics and transportation systems.
F.J. Pollak is president and CEO of Miami-based TracFone Wireless, a prepaid cell phone provider.
John Ryan is chief executive of the Center for Creative Leadership, a global provider of executive education based in Greensboro, N.C.
Milton Sender is chairman and CEO of Stamford, Conn.-based Daymon Worldwide, a manufacturer of private-label consumer products.
Vickie Tillman is executive vice president of credit market services at New York City-based credit rating agency Standard & Poor’s.
Bob Ulrich is CEO of Minneapolis, Minn.-based retail giant Target.
Zev Weiss is CEO and director of American Greetings, a Cleveland, Ohio-based creator and distributor of greeting cards.
Maggie Wilderotter is chairman and CEO of Citizens Communications, a telecom company based in Stamford, Conn.