Inside CEO Succession

The Essential Guide to Leadership Transition

Thomas J. Saporito, Paul Winum

• Publisher: Jossey-Bass
• Year: 2012
• Print ISBN: 9781118203217
• eBook ISBN: 9781118218037
• Edition: 1
• Topic: Business
• Subtopic: Leadership
• Index: Business

A comprehensive guide to planning for CEO succession, from the experts at RHR

As the demands from stakeholders for consummate leadership and good governance from a company's board of directors, its CEO, and its executive team increase, how the process of CEO succession is carried out has become more critical than ever before. Yet, over the past several years, a growing number of CEOs have failed early in their terms, often with devastating consequences to their companies and stockholders. By far the most common problem is a lack of ownership of the CEO succession process. Inside CEO Succession provides businesses, leaders, and boards with the strategies they need to execute their responsibilities with a heightened level of professionalism and ensure the sustained success of the companies they serve.

Written by Dr. Thomas J. Saporito, CEO of RHR International, and Dr. Paul Winum, Senior Partner of RHR International, the lessons of Inside CEO Succession are rooted in RHR's long-standing history of bringing expert knowledge, experience, advice, and counsel to the issues related to CEO succession. The culmination of RHR's 65 years of experience providing expert counsel to the boards of directors of hundreds of companies, it explains how ego, role-relationships, power, and human dynamics associated with relinquishing leadership, preparing successors, and ceding power and authority to other people create undetected problems in the succession process and ultimately cause many CEOs to fail early in their tenures.

• Distills RHR's 65 years of experience helping businesses deal with CEO succession into one practical resource
• Presents strategies to enable boards to understand their role in succession planning and how to source leadership that best fits their organization's culture and requirements
• Brings together business acumen and psychological insight to help readers better prepare for more effective CEO succession

To be successful, CEO succession requires a well-defined course of action that ensures that a number of highly capable candidates are ready to assume the chief executive position whether through an unexpected event or a planned transition. Inside CEO Succession is designed to help boards comprehensively manage that process and effectively sustain their company's profitability.

Part I

Why CEO Succession Is More Critical than Ever

CEO succession is more than an important issue; it is fundamental to a company's sustained success. The disconnect between how important this issue is and the willingness of boards to tackle it can be attributed to the fact that it is a time-consuming process and many board members are ill-prepared to manage it.

Moreover, the psychological forces and organizational dynamics involving such issues as power, ego, legacy, and personal agendas have as much influence on the process as objective data, procedures, and timelines.

For the sake of business continuity and a company's sustained effectiveness, there are no reasons to ignore or give brief and inconsiderate attention to the selection and transitioning of a company's leadership. History has shown that a firm's capital and assets are not the ultimate determinants of its success or failure, but rather the firm's individuals who govern, lead, manage, and deploy those resources.

Chapter 1

From Checkers to 3-D Chess

“Business is a highly-charged and ever-changing environment. Businesses strive to evolve so they can maintain their fitness to compete. CEO succession has to start with, and run in parallel to, the incumbent's role if a business is to have any hope of keeping up momentum. Missing this nuance means it is doomed to making transitional decisions that could have a negative impact on the future.”

—James P. Hackett, CEO and president of Steelcase, Inc.

It is very difficult for a leader—any leader—to step down and hand over the reins of their company to someone else. Human nature being what it is, power is a most difficult force to surrender to another. Those who aspire to positions of leadership are ambitious, highly motivated, and exceedingly driven individuals, so any activity involving the interplay of personalities, emotions, ego, and legacy is going to present relational obstacles when planning and executing the transition from one chief executive to another. Given the ever-present undercurrent of these powerful social and psychological forces, CEO succession will always prove a most difficult reality for many CEOs to gracefully accept, and is one of the most challenging activities for a board of directors to oversee.

What has added to the complexity of CEO succession planning over the years are the demands of a rapidly changing and highly competitive business environment. The succession process itself, and the ramifications of transitional decisions, were far less complicated and consequential sixty-seven years ago when RHR International began advising and guiding companies in their CEO succession planning. The business environment then was far simpler when compared to the speed, complexity and uncertainty of the business world we live and work in today.

Yet with all that has changed over the years in the conduct of business, the discipline of succession planning has not kept pace and advanced accordingly. The hesitant mindset of CEOs and boards—combined with the displacement of the critical tasks related to succession planning by the urgent matters of the day—have repeatedly proven detrimental to continuity of leadership and growth of many companies.

A Simple, More Predictable World

The years following World War II ushered in an economic boom and an end to the Great Depression. The post-war period also set in motion an explosion in consumer purchasing power, fueled by credit cards, shopping centers, the “golden age” of television, and the interstate highway system. AT&T was everyone's phone company, and the Big Three were the only three in North America.

Conducting business in the 1950s, 60s, and 70s was analogous to a game of checkers. Winning was simply a matter of staying one or two steps ahead of competition. Though every move had the potential to bring about a variety of counter-moves, the CEOs of many of the Fortune 500 companies at the time could comprehend the entire playing board at once and make short- and long-term decisions with a high degree of confidence.

The business environment was straightforward and, to a certain degree, predictable. Companies engaged in commerce primarily in their own country, encountered known competitors, served traditional market segments, and offered limited product choices.

Not that it was idyllic, but in that era, a company's stakeholders consisted of devoted, lifetime employees, loyal customers, dependable suppliers, responsive distributors, and moderately involved boards of directors. That period of economic growth was also accompanied by a relatively favorable media, limited government regulation, less litigation, and few, if any, activist consumer groups. Of course there were labor and management concerns, as we have today, but the point is, the times were simpler and any surfacing issues could be isolated and quickly rectified.

From the 1950s through the early 1970s, long tenures for chief executives were common and dismissals were rare events. Many CEOs ran their businesses for ten to twenty years and their personas were inseparable from that of their company's identity. During those formative decades of modern commerce, retirement was usually the only way long-serving chief executives parted with their companies. And when CEOs were ready to retire—often at a time of their own choosing—they had a good idea as to whom their successor would be, as did most others in the organization, including the board.

The role of the incoming CEO was to maintain the business. The belief was that if the incoming CEO could stay the course, steadily gain market share, and control spending, the company would thrive for decades to come.

For most companies at the time, the requisite skill set of a succeeding CEO centered on understanding the company's products, markets, distribution channels, and competition. That candidate was most likely already on the executive team and in consideration for the top spot. In the 1950s, only one out of ten successors was hired from outside the company, and by the 1970s, only one out of seven.¹

Boards of directors, at the time, were involved in overseeing major corporations, though their role in the CEO succession process was usually limited to being made aware of and approving the CEO's handpicked successor. If the CEO felt comfortable with the candidate, the board would take the CEO's lead. Board members would endorse the CEO's choice, but otherwise stayed on the sidelines and out of the process. They became involved only if a crisis—such as in the CEO's death—forced them to step in and name a successor.

Craig Sturken, chairman of the board of directors for Spartan Foods, Inc., remembers that business period as one of far less board involvement in CEO succession planning:

It was easy to be aligned with the CEO and the company's business strategy. There were no external constituencies as we have today, tracking and blogging our every move. The trajectory of the company was known to everyone in the organization and all of us on the board. We could see five to ten years out with a high degree of certainty and we easily approved the person the CEO recommended as his successor.

In those early years, there was little movement of employees from one company to another. As a result, employers knew a great deal about the personalities, talents, and skills of each executive. In the 1950s and 60s, Fortune 500 executives remained with their companies for an average of 24 years.² This stability epitomized the generational attitude at the time. The Silent Generation (1925–1942), born during the Great Depression and World War II made up over 90 percent of the workforce—vastly different when compared to the four generations at work today. They were labeled “silent” because of their withdrawn, cautious, and unadventurous orientation—understandable, given the hardships they encountered during their childhood years. They viewed work as an obligation and their sense of loyalty to their employer precluded them from leaving their companies for a better paying position elsewhere.³

Companies back then were not as interested in a potential successor's performance as they were in that person's character. Given the direct, linear path of business at the time, companies were content with sustaining success and advancing through incremental gains in the marketplace. As a result, employers spent more time shaping select executives to be market planners rather than market insurgents.

Dr. Alice Tybout, Harold T. Martin Professor of Marketing at the Kellogg School of Management at Northwestern University, notes:

‘Checkers’ is the perfect analogy for the way business was conducted in the United States and quite possibly was the mind frame of senior executives at most companies in developed and developing nations. Strategy involved linear moves that required a steady, trusted leader who knew the organization and its capabilities well. CEO succession planning was limited and boards accepted whomever the CEO chose as his successor. This approach worked reasonably well when the business climate was fairly predictable, as was the case through the 1970s. What many companies didn't realize, or prepare for, was just how much things could change in a few short years.

In the 1950s and 60s, there was a sense of confidence within the business community that almost any market problem could be solved and any challenge overcome. Companies such as GE, AT&T, Procter & Gamble, HP, and IBM became known as “academy” companies, patterning their development of leaders after the military model of bringing in new recruits, moving them through a series of jobs and training exercises, then advancing those who continue to perform well.

However, by the middle of the 1970s, CEOs and their boards began to realize that conducting business was becoming more difficult and less predictable. The economic upheavals of the 1970s—energy shortages, inflation, and the beginnings of international competition with companies such as Toyota, Nippon Steel, and Sony—revealed that corporate leadership had become somewhat inbred, habitual, and lethargic. Whether the result of being stuck in outdated traditions, fearful of risk and failure, or merely absorbed in denial, CEOs and their boards—across a number of industries—were slow to respond to the challenges they faced, and their companies’ profits and share prices began to decline.

Capture the King

By the 1980s and 90s, business had become more like a game of chess. Lateral moves were no longer enough to sustain a company's success. The game of simple battles had morphed into a game of campaigns with marketplace skirmishes occurring simultaneously and on different fronts.

Many companies were, for the first time, playing on a global stage, entering new markets, appealing to unfamiliar cultures, and contending with deep-rooted, in-country competitors. CEOs and their executive teams required newer skills including broader vision, cultural awareness, strategic alignment of resources, and thinking three or more moves in advance—a more challenging game, but still comprehensible.

Against this backdrop of dramatically changing market dynamics, compounded by more companies engaging in mergers and acquisitions as part of the business strategy du jour, the task of CEO succession became increasingly challenging, requiring greater deliberation, more attention to diverse talent retention and development, shorter tenures, and greater collaboration between the board and the CEO.

Proper CEO succession now necessitated an ongoing, well-administered process, a discipline few companies had to contend with prior to the 1980s. That requisite level of process and planning pushed against the demands of time and resources for many organizations. That reality, coupled with the need for growth in foreign markets, forced many CEOs, more than ever before—and in many instances for the first time in their company's history—to search outside the organization for their successor.

By searching externally for candidates, CEOs were conceding that their companies had a failed internal succession planning process and had not devoted enough time to talent development.

According to Michael Useem, director of Wharton's Center for Leadership and Change Management, “The trend line from 1970 to 2000 shows a slow but steady increase in the number of companies that look to the outside in the case of a departing CEO. At the start of that period, one in seven new CEOs at major companies came from outside the firm; by the end, one in four.”⁴

As Tim O'Donovan, retired chair and CEO of Wolverine Worldwide Inc., sees it,

From time to time, a company may face performance issues or the need for a significant shift in strategy. In those circumstances, it may be preferable and even necessary to look to an outside leader to be the catalyst for change and reinvigoration of the company.

The fast-changing business landscape of the 1980s and 90s forced many CEOs and their companies to shake off their denial and complacency in the face of change, attitudes that disabled American Express, Citibank, Digital, General Motors, IBM, Kodak, Tandy, Xerox, and so many others.

How quickly things changed. In 1980, Sears’ marketing plans did not even mention Wal-Mart as a competitor, yet by the end of that decade, Wal-Mart had passed both Sears and Kmart to become America's largest retailer, and by 1992, employed more people than GM, Ford, and Chrysler combined. After Mercedes’ sales in the United States dropped 24 percent in 1991, its top management finally conceded that it had to change its strategy because of Japanese competition. Until then, Mercedes’ management refused even to acknowledge the existence of competition in its high-end market sector.⁵

Prior to the late 1970s, boards relied on the CEO to define and set the strategic direction of the company....

Table of contents

• Cover
• Praise for Inside CEO Succession
• Title Page
• Copyright
• Acknowledgments
• Foreword
• Introduction
• Part I: Why CEO Succession Is More Critical than Ever
• Part II: The 10 Key Dimensions of Effective Succession
• Epilogue: Perspectives on the Future
• Appendix: Ten Questions a Director Should Ask
• About RHR International
• References
• Index