Succession without tears: what does it take to manage a smooth leadership transition?

by Pellet, Jennifer

Chief Executive (U.S.) • Oct-Nov, 2007 • ROUNDTABLE

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, hand-picked 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.

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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," asserted Joe McGrath, CEO of Unisys, who anticipates "a substantial difference" 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."

In the best of cases, such greater director enthusiasm leads to a collaborative effort that results in a seamless and successful transition. But it can just as easily bring about a tug of war that sows discord and disruptive politicking throughout the organization. As an example, Beverly Behan, managing director of the board effectiveness practice at Hay Group, recounts recent work on a corporation's emergency succession plan.

"We asked the board who would step in if the CEO should be hit by the proverbial bus tomorrow," 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."

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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," he said. "Without that you are headed for a train wreck."

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 effective" 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.

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"Right now, if I got hit by a bus, it would be a serious problem," said Brock, the first outsider to take the helm of Coca-Cola Enterprises. "But at my very first board meeting 15 months ago, I made finding my successor a No. 1 priority. And we're making some good progress. We will have identified several candidates for CEO succession within the next three or four years."

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," argued Carlos Cardoso, CEO of Kennametal, who makes 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."

Bob Ulrich, CEO of Target, also interviews lead candidates for positions several layers down from the top. "People are more serious about the process and do a lot more vetting if they know I'll be talking to the candidate," he noted. "They don't want to have the occasional turndown where I say I felt the person lacked leadership or doesn't have the appropriate background."

Kennametal's management program includes a succession plan for 50 spots dubbed as "critical positions" 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," 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."

Inside Track

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 industry, an understanding of the company culture and a working relationship with its board.

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"People who come from the outside hit companies like a ton of bricks," 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."

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," said Behan. "That shift has implications for CEOs grooming executives and mentoring successors."

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," 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, 'Wait a minute. Target is merchandising-driven and he hasn't had enough experience there.'"

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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," 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."

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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," urged Zev Weiss, CEO of American Greetings. "That alignment is always more difficult than it seems."