As CEOs face the axe, succession planning becomes vital
Amidst crumbling markets and daily updates on financial rescue missions, you might wonder why CEO succession planning should be a topic to focus on right now. But taking a closer look, it makes a lot of sense. It will not be surprising to find a number of CEOs who have presided over the current era finding themselves on the unemployment line once all the dust has settled on this latest financial tornado. Joseph Bower, Harvard Business School professor and author of The CEO within: why inside outsiders are the key to succession planning, points to one highly pertinent area that is both at the root of the financial crisis and an indispensable knowledge area for future executives: risk management.
‘Certainly at Merrill Lynch and at Citi, the reports suggest that you had chief executives who were not strong on risk management,’ comments Bower. ‘For a lot of us who live outside Wall Street, we find it unbelievable. Where’s the risk management? we ask.’ With so many people looking to point fingers and apportion blame, it is little wonder that CEO succession planning is coming under renewed attention. In fact, many people believe this is one of the board’s most important functions. But while it is easy to get rid of a CEO, it is not always easy to locate a successor who will do the job better. And while looking outside the company ranks for talent has traditionally been popular among many US companies, many experts believe looking within a company is often a better bet.
It’s what’s inside that counts
Early on in his book, Bower states, ‘As a rule, the best leaders are people from inside the company who somehow have maintained enough detachment from the local traditions, ideology and shibboleths so they have retained the objectivity of an outsider.’ Just identifying and prepping a good CEO doesn’t guarantee performance, but Bower’s studies indicate that inside-outside CEOs perform better. (See ‘Insider versus outsider attributes’, opposite.) He outlines a number of practices a company can engage in to improve its chances such as identifying a list of necessary skills and desirable qualities. Speaking from his own experience working on boards, he says, ‘It doesn’t take a lot of time.’
‘Getting the five or six things is pretty straightforward,’ he says, admitting it can be a little more trying to arrive at something ‘pretty’ that you can communicate to others. ‘There are what you might want as general characteristics of a leader: high integrity; intelligence; ability to speak clearly and simply; and work well with a team. And then you get to specific industry characteristics. And if we’re talking financial institutions, understanding risk is pretty central.’
Attempting to flesh out the precursors to the pervasive financial market scandal, Bower says, ‘What happened was that the business model of these institutions changed. I think what seems to have happened is they stopped looking at the quality of the underlying assets because they were not holding them very long.’ The collapse of the underlying real estate market broke the model. ‘The assumption was always that they could be sold,’ he asserts. ‘The nature of this crisis is that there are no buyers.’
Who has got talent?
Making sure to develop candidates who can weather the storm – and hopefully avoid it – is essential. But Bower says the succession process should take five to seven years, and begin at the talent development level. Instead of looking outside at the first sign of danger, significant benefits can arise from developing people within the company who have proven themselves on a number of levels. The outsider component of Bower’s ‘insider-outsider’ model comes from the identification of objectivity. ‘For the chief executive, it’s probably because you often find yourself in constructive disagreements,’ he says. ‘The person is tough and doesn’t always agree with you and is able to argue and has a view of the world that is different from yours.’
Framing the search for the right CEO in the current environment, Bower notes that ‘someone with good language skills and a good understanding of developing countries, who might have looked really attractive a year or two ago, would look less valuable right now than someone who had a strong understanding of financial markets and the balance sheet.’ The board has a central role in this respect, he says. It can offer a more detached view and a wide-ranging perspective.
Take your time
‘[At] the good companies that take succession planning seriously, succession is part of the senior development process, and it’s going on all the time,’ asserts Bower. Building this ethos into your company is important to the overall success, he adds, saying, ‘It’s a matter of looking at who’s in the pool and what kind of development they need for them to be attractive candidates when the transition comes. … The process needs to be managed by the general management,’ not just the board. The extent of board involvement, he continues, ‘largely depends on the relationship with the chief executive and the board.’
According to Bower, there are two essential components to the succession process. The first is ‘the name in the envelope: What would happen if the chief executive got struck by a truck.’ Usually known to a small number, including the lead director or sometimes a broader group like the nominating committee, this person is often close to the CEO, Bower says, mentioning the CFO or COO as common choices ‘because the goal there … is stability at a time of crisis.’ The other component is the longer-term question: ‘Who is going to lead the company when the current CEO retires?’
As for the board, he cautions, ‘You probably don’t want the board to be very actively involved until the list is down to a reasonable group.’ Once the governance and nominating committee is at a stage where it is deliberating over the final few, the board can have greater input but the CEO must be managing the process, stresses Bower. When the pool is small enough to tackle, regular discussions should begin occurring at least on a biannual basis covering ‘who they are, how they’re doing, what it looks like.’
Just because companies don’t need to look outside for CEOs doesn’t mean they don’t need help. The use of search firms is matter-of-course among corporations. ‘Boards are really worried about due process,’ says Bower. ‘If nothing else, they just need to be told their people are better than anybody else from outside.’ It is a good way to gain an objective view of the people within a corporation and the level of leadership talent they possess. As a side note, there are other strategic reasons to take on the services of a recruitment agency, some of which have nothing to do with the need to find a good candidate. If you have a high number of individuals you believe to be potential future CEOs, then taking on a consultant may be an effective way to prevent poaching. ‘One of the problems, a sad problem,’ confides Bower, ‘is search firms also are building their Rolodexes, so sometimes you hire search firms simply to establish non-compete. You have them signed up so they will not raid your own people.’
Don’t be scared, just be prepared
The succession process can extend throughout the company and carry different degrees of responsibility depending on the situation. For instance, Bower explains, ‘If the general counsel is one of the inside members of the senior management team, then they may very well be a part of the succession process. They will certainly in my experience play an important role in managing the formal process and in the last stages they are very important, particularly if you’re dealing with an outsider as there’s a lot of contractual work to be done.’
The thorn in the side of many succession programs is that CEOs often fear participating in what they believe is their own demise. ‘It’s very human,’ concedes Bower. ‘Part of it is the relationship between the board and the chief executive over time. … If there’s always been pretty candid conversation, then that’s not threatening. The problem is when you don’t have a situation like that, then the board says, Let’s talk about succession, and it is threatening. But the board has to do it.’
