Next in Line: When Key People Leave,
Who Picks their Replacement?
Author: Jennifer D. Duell
Date: September 23, 2006
Succession planning is serious business. If done badly, it can be very costly, if not downright disastrous. Consider RadioShack Corp. The electronics retailer was forced to oust CEO David Edmondson just months after he took over the top spot after discovering that he lied on his resume about his academic record and that he allegedly had several drunk driving arrests. The ousting happened to occur simultaneously with poor financial performance.
RadioShack's board of directors appointed president and COO Claire Babrowski as interim CEO and during her stint, CFO David Barnes resigned to go on to a new position. The board passed over Babrowski for the top position, hiring Julian Day, a former Kmart Holding Corp. executive. And, in late August, Babrowski resigned from her post.
"A bad succession plan - or worse, not having one at all - can cost the company and its shareholders millions of dollars," warns Bev Behan, a partner with Mercer Delta Consulting LLC in New York. "An endless number of bad things can happen."
That's why boards of directors are getting more involved in succession planning. "Boards are now realizing that picking corporate leadership is one of the most important decisions it makes," Behan notes, adding that a company's leadership is directly connected to its performance. "They are getting much more engaged and a lot more hands on with succession since shareholders, investors and employees are holding them accountable for the performance of the company."
Putting the Board in Charge
The mean tenure for CEOs has dropped to less than eight years from 11.4 years in 1995, according to a Booz Allen Hamilton study. In fact, CEO departures doubled in 2005, with 1,228 departures recorded, up from 102% the previous year, according to Challenger, Gray & Christmas.
So, what does this mean for board members? They have to oversee more executive transitions during their tenure. "Boards are struggling with the succession process because they used to interact with executives on a sporadic basis," Behan says.
But, the largest and most successful companies in the world are approaching succession planning differently than they used to, Behan says. "The time when the CEO chose his own replacement and the board just accepted it is over," she contends.
Only 11% of boards operate in this model today, according to a study conducted by the National Association of Corporate Directors (NACD) and Mercer Delta Consulting LLC. "The Role of the Board in CEO Succession" is a study that queried executives and board members at companies ranging from $3 billion to $151 billion. The study includes Starbucks, McDonald's and Microsoft, among many others.
Today, nearly 70% of boards are involved in CEO succession in some form or another, but the study found that roughly half of all boards would prefer to have total responsibility for succession planning, particularly for the CEO. What's behind the shift? Behan says that board members have realized that they have on-going responsibility after an executive transition occurs. "We've seen a lot of high-profile CEO transitions that failed - the former CEO went riding off into the sunset, and the board was left holding the bag," she explains. "Now, they want to make sure the new person is the right person."
Plan for the Future
There are two different kinds of succession: routine and non-routine. With a routine succession, a CEO retires under normal circumstances or leaves because of an acquisition or merger. In contrast, a non-routine succession occurs when a CEO is forced out by the board or resigns because of company performance, legal reasons, a personal crisis, a new position or an unexpected death.
It's important to think about whether or not it's possible for there to be continuity between the original leadership and the follow up successor, says Paul DiMarcio, CEO of DigitalHatch Inc., a management consulting firm based in suburban Atlanta. For example, in cases where there's some emotional element attached to the leadership 0 Michael Dell at Dell Inc. or Steve Jobs at Apple Computer Inc. 0 the exit of a leader often is a prelude to a large loss of human capital and intellectual property.
Regardless of the circumstances, succession planning should begin at least three to five years before a transition is expected. Unfortunately, most companies do little if any advance planning, according to Dan Baker, co-author of What Happy Companies Know and founding director of the Canyon Ranch Life Enhancement Program. "Succession is not an event, it's a process," he asserts, adding that it takes time to identify, assess and develop people.
Although 61% of corporate boards would like to start the succession planning process three to five years out, only 22% of companies do so, according to the NACD and Mercer Delta study. In fact, 56% of boards wait until there's less than two years before an expected departure to start talking about succession.
The succession plan should be developed with the company's future strategies in mind, says Billie Blair, Ph.D., president and CEO of Leading and Learning Inc., a management consulting firm based in San Bernardino, Calif. "In our minds, succession planning is all part and parcel of strategic planning," she notes. "Companies need to make an effort to look at what they will look like in the future and what sort of people they're going to need."
Experts suggest that companies think about the skills that they will need in the next few years, identifying gaps in experience so senior leaders can develop a plan to develop and acquire the necessary skills, qualifications and experience.
"We're trying to align our development strategy with where we are trying to go as an organization, making sure our people are prepared to deliver our complex business strategies," says Annette Law, organizational development manager with UPS in Atlanta.
But, many experts caution against choosing new leadership that mirrors existing leadership. "It's very dangerous to make the assumption that what worked yesterday will work tomorrow," says David Wiseman, president of Predictive Index Utah, a division of PI Worldwide, which designed a personality profile to measure work-related behaviors and motivators.
Avoid the Horse Race
One of the most important elements in succession planning is developing adequate "bench strength" - sports jargon for having plenty of quality players. "It's far better to have multiple candidates in your succession plan," asserts Steve Joyce, practice leader for human resources with Atlantabased advisory firm The Hackett Group.
In fact, effective succession planning does not just evaluate C-level people, says Dan Wolff, managing director of Dewar Sloan Consulting in Traverse City, Mich. and author of Prepared and Resolved:ﾂﾾﾠ The Strategic Agenda for Growth, Performance and Change. "The plan should look at least three to five levels deep from the top of the organization because it's at those levels where leadership skills are developed," he suggests.
Today, board members prefer to groom internal candidates rather than looking for a "corporate savior" outside the company, Behan notes, adding that in the 1990s, most succession plans focused on external candidates.
UPS is one company that prefers to promote from within. "We try to look at the entire leadership pipeline and talk about the developmental needs that we have for our people," Law says. "When we're looking at those top levels, we try to get at least three people ready to step in right now."
It's far cheaper to develop people internally than it is to lose them or be forced to bring in people from the outside and get them up to speed, says Tim Schoonover, a career manager with OI Partners, a Cincinnati-based global career management and leadership solutions firm.
But, most companies - and boards especially - have trouble evaluating the next generation of leaders, says Liz Bywater, Ph.D. and president of Bywater Consulting Group, a management firm based in Yardley, Pa. "People are usually assessed by their past performance, which is not always an indicator of future success," she warns.
Experts recommend that companies implement a formal assessment process to prevent favoritism, which makes it easier to compare candidates. However, Blair recommends that companies bring in an independent third party to do the appraisals, as that may be less threatening to the executives and provides an objective viewpoint. "As you start identifying the pool, you're going to want to avoid any suspicion of favoritism," she says.
No matter what, companies should avoid a horse race when it comes to succession planning, Behan says, pointing to a previous succession process at General Electric where all the potential successors were named. "In cases like that, you end up losing talent when people are passed over," she notes.
But, some experts contend that companies should clue in their employees when they're in line for the executive suite. "If someone is a high potential candidate for a job, you should tell them," says Alan Weiss, author of The Unofficial Guide to Power Management and president of the East Greenwich, R.I.,-based Summit Consulting Group Inc. "They'll be more committed to developing better skills, but also making sure that the company is successful."
You may also read this article on www.execdecision.com.
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