Boards must pay more attention to succession planning
Bennett’s ouster follows a string of other high-profile CEO farewells over the past year where boards let many months pass before appointing a permanent successor. Ron Johnson’s dismissal from JC Penney after only 18 months raised many questions given the company’s decision to bring back Johnson’s predecessor, Myron Ullman. That shows either a lack of any long-term strategy or the board’s disavowal of the input of activist investor William Ackman, who pushed for Johnson’s recruitment from Apple, and a return to its former strategy, depending on one’s perspective.
Only at Groupon was the departing CEO eventually replaced by an insider – co-founder and executive chairman Eric Lefkofsky – and that took nine months. After Andrew Mason was fired in February 2013, the company appointed Lefkofsky and another board member to the office of the chief executive to fill the gap while the board looked for a permanent CEO.
Research released last July by the Conference Board’s Governance Center shows that more than a quarter of S&P 500 companies that replaced their CEO in 2012 did so from outside the firm, compared with 19 percent in 2011.
In this month’s Directors Notes, the Conference Board reports that the average company claims to spend a paltry ‘two hours per year in the boardroom on succession-related issues, and estimates it would take 90 days to name a permanent successor.’ That sounds like a major lapse in governance, given not only possible hits to the stock price and company’s reputation during the interim period, but also the lack of preparedness for any operational crisis.
The two-hours-per-year bombshell is among the results of a survey the Conference Board conducted last fall together with the Institute of Executive Development and the Rock Center for Corporate Governance at Stanford University. The findings highlight the board’s low involvement in the development of senior executives one level below the CEO, who could be candidates to succeed the chief executive.
Asked how well non-employee directors understand the strengths and weaknesses of senior executives below the CEO, just under 9 percent of respondents say extremely well, 46 percent say very well and 33.5 percent say moderately well. A combined 11.4 percent say slightly well or not at all.
Just two thirds of directors say they know the full senior management team in a professional manner, while nearly 20 percent report knowing more than half of the team and nearly 14 percent say they know less than half of them. More than three quarters of non-employee directors say they don’t formally participate in performance evaluations of senior executives below the CEO.
To rectify this, the Conference Board recommends requiring the CEO to create and implement a formal talent development program for his or her direct reports, which the board should ensure is done. It also suggests boards be kept apprised of the efforts the CEO and each senior executive make together to identify and address that executive’s blind spots or other shortcomings. Directors might also volunteer to serve as informal mentors to senior executives and even meet with them periodically ‘in the context of their everyday work environment’, with the CEO’s approval.
This advice aligns with the recent focus on hands-on boards that governance professionals have been advocating. If CEOs are wary of talent development programs because they feel insecure, that’s also something the board needs to know.