Leadership Succession: How To Avoid A Crisis
“A person who does not worry about the future will shortly have worries about the present”
Ancient Chinese Proverb
Who would have thought that an announcement of leadership succession could actually move markets? Yet on December 21, 2010 The Wall Street Journal reported that, “…3M rose 97 cents, or 1.1 percent to 87.34 following reports that the company is working with Chief Executive George Buckley on a succession plan.” Actually, the board of directors had been working with the CEO on this issue for more than a year, in anticipation of Buckley’s retirement in February 2012, when he will reach his 65th birthday (Hagerty & Tita, 2010).
3M, along with several other large, globally integrated firms like IBM, General Electric, Procter & Gamble, and ExxonMobil, takes leadership development and CEO succession extremely seriously. At a time when the average CEO tenure is just 6 years (Boyle, 2009), it’s also the time to ask this important question: Shouldn’t more boards and managers nurture a stable of successors instead of waiting for a crisis to force their hands?
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Unfortunately, 3M’s approach is more the exception than the rule among companies both large and small. One might expect that large, global companies would surely have succession plans in place, but that is often not the case. As recent examples, consider the plight of Citigroup, Merrill Lynch, and Bank of America. When their chief executives left abruptly, the board of directors had to scramble to find replacements because there were succession plans were not in place. Other large firms, such as Morgan Stanley, Coca-Cola, Home Depot, and Hewlett-Packard also botched the CEO-succession process (George, 2007).
According to a December 2010 Korn/Ferry Executive Survey of global companies, nearly all – 98 percent – regard CEO succession planning as an important piece of the overall process of corporate governance. That’s the good news. The bad news is that only 35 percent of those same companies have a succession plan in place and are prepared for either an unexpected or a planned departure of their CEOs (Korn/Ferry Survey, 2010). In health care, the situation is even worse, as fewer than 25 percent of health care organizations have succession plans in place (Davis, 2007).
If succession planning is so important, why do so few firms have a plan?
Why do so many boards wind up looking outside the company for new leadership? In part, they do so because personality, ego, power, and, most importantly, mortality lie at the heart of succession planning (Ogden & Wood, 2008). Said one expert, “Some CEOs find the prospect of succession downright depressing. For them it means failure or organizational death. They love the job; it is their identity. They think of building a cohort of potential leaders, not as the path to growth and prosperity, but as a sure route to lame-duck status.”
Moreover, some boards tend to look the other way on the succession question when the CEO makes the numbers and is singularly focused on pleasing Wall Street the next quarter (see Nocera, 2010), or when he or she purges talented subordinates rather than prepares them to take over. There are several other, more concrete obstacles to leadership-succession planning: poor dynamics between the board and the CEO; the lack of a well-defined process; poorly defined ownership of succession-planning responsibilities; a scarcity of internal, CEO-ready talent; and an inability to assess objectively any potential internal candidates (Ogden & Wood, 2008). Certainly boards are not serving shareholders when they let barriers such as these get in the way of leadership-development and succession-planning efforts.
Ideally, careful succession planning grooms people internally (Bower, 2008; Boyle, 2009; Byrnes & Crockett, 2009; Reingold, 2009). Insiders know the culture, the people, and the nuances of both. Consider Xerox, for example. When the firm named Ursula Burns CEO in 2009 she became the first African American woman to lead a major U. S. corporation and the first female CEO to take the reins from another woman, Anne Mulcahy. Such a pattern might surprise some observers, but not those who understand the Xerox culture, which has celebrated diversity and promotion-from-within policies for more than four decades (Bass, Cascio, Tragash, & McPherson, 1976). Indeed, a major advantage of insider succession is that it motivates senior-level executives to stay and excel because they might get to lead the company someday.
On the other hand, there are also sound reasons why a company might look to an outside successor. Boards that hire outsiders to be CEOs feel that change is more important than continuity, particularly so in situations where things have not been going well (Keller & Carey, 2011). As one observer noted in the context of the Citigroup and Merrill Lynch CEO searches, “. . . when there’s a major failure in performance, then you don’t want [to promote] the person you have groomed, even if you’ve done great succession planning. You want somebody with a fresh perspective” (CEO Succession, 2007).
Bill George, the former Chairman and CEO of Medtronic, argues that boards spend far too little time building sound succession systems. Lacking well-tested candidates, they presume that an outsider can quickly transform the company and its culture. To be sure, outsiders have some clear disadvantages: They don’t know the company’s culture, the key players, and the subtleties of the business. Moreover, they have to spend valuable time building trust. Or, like former Home Depot CEO Robert Nardelli, they bring in an entirely new team, which causes morale problems (George, 2007).
What does the research on CEO succession tell us about the relative merits of outsiders versus insiders?
Outsiders versus insiders
One study of 228 CEO successions (Shen & Cannella, 2002) defined inside successors in two ways: (1) as followers who were promoted to CEO positions after the planned retirements of their predecessors, or (2) as contenders who were promoted to CEO positions following the dismissals of their predecessors. Focusing on the CEO’s successor alone, however, without considering other changes that are taking place within top management, provides an incomplete picture of the subsequent effect on the financial performance of the firm.
The researchers found that turnover among senior executives has a positive effect on a firm’s profitability in contender succession, but a negative impact in outsider succession. That is, outside successors may benefit a firm’s operations, but a subsequent loss of senior executives may outweigh any gains that come from the hiring of outsider successors.
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