Why Is Succession So Badly Managed?
Online forum now closed. CEO and other leadership talent may be best developed within a firm rather than imported, says Jim Heskett. If such people—insiders with an outsider's perspective—provide answers to the need for such things as continuity, intimate knowledge of the organization, and a fresh look at the business, why don't we see more of them?
Should CEO succession processes be certified? Respondents to this month's column agree that CEO succession is badly managed, perhaps accounting in large part for the fact that few "inside outsiders" ever make it into the job, despite their often useful qualifications. There were many theories about why this is the case as well as suggestions for how to fix the process. Some even argued that the idea of planned, orderly CEO succession has inherent flaws that can't be fixed.
Both boards and their CEOs were cited as reasons for the problem. Phil Clark asserted, "Sadly, many corporate boards are not willing to do the work," suggesting that unless this is made grounds for dismissal, directors are not likely to apply themselves to the task. Edward Hare added that "one needs to get to know an individual, their values, and their real, not hyped-up talents. In today's breakneck world, who has the time for such things?"
Several cited the difficulty of selecting a new CEO, particularly from within, given the changing nature of the needs of a modern corporation. As Veronica Serrano put it, "it is easier to get from the outside what the business needs at any particular moment." She also posed the problem of finding insider "CEO material willing to wait in the sidelines." Andrew Campbell commented that "you often have to reassess your succession plan when the time actually comes. This makes Boards reluctant to put a lot of effort into succession …." C.J. Cullinane pointed out that "if the style or background of a capable insider does not mesh with the CEO, (insiders) seldom get to a position where the Board of Directors can evaluate them." Wesley Calvert said that "the strong tendency to hire top-level management from outside is a natural outcome of the belief that almost any of our competitors has better people than we do." And Lowell Kuehn posited that "the outsider is all promise, while the insider is a known property with some established weaknesses."
CEOs came in for their share of the criticism. Patrick Duffy summed up the gist of many other comments by pointing out that "few CEOs want to accept their mortality."
Suggestions for improving the process were varied and quite creative. Michelle Malay Carter suggested that "it is only when organizations institutionalize the idea of regular face time between employees and their managers once-removed (that) high potentials 'suddenly appear' … So in the case of the board, they should be accountable for assessing potential and long term development of the CEO's direct reports." Sakthi Prashanth proposed that "the board could tie the CEO's exit package with the grooming of a successor." B.V. Krishnamurthy said that "the ultimate solution may be … similar to the job rotation concept of the Japanese companies in their heydey. In this scenario, a number of CXOs would fulfill the role of the CEO by rotation." Santhanam Krishnan opened yet another avenue of thinking by asking "… how can one expect formal 'succession planning' in organizations unless it is forced as a part of corporate governance codes?" Ramachandran Iyer took this idea one step further by saying, "Perhaps the existence of a succession plan should be included in every BCP (Business Continuity Planning) assessment that is conducted by an audit firm for publicly-traded companies."
Given the general importance of succession and the degree to which the process is badly managed, on which nearly every respondent agreed, is it appropriate to consider the idea that succession processes should be certified? If so, what should be the dimensions of the certification? What do you think?
A high-profile company fails to meet market expectations. The board, with limited knowledge of the inner workings of the firm, fires the CEO but appoints an acting CEO while a talent consultant is hired to begin a search for a replacement. Given the natural bias of the search firm and the board's recent bitter experience, the replacement is often the CEO of another prominent firm, a person with a good track record but an "outsider" with limited knowledge of the business. The cycle is begun again. Sound familiar? It should. It's unfolding in two of the largest financial institutions in the world, Merrill Lynch and Citibank. And it has taken place with increasing frequency in large companies around the world, even including Japan where continuity, consensus, and culture have been honored for so long.
The questions posed in many of these cases include: What did the board know when? How could it have anticipated and helped avoid the situation? While these are interesting questions, Joseph Bower, in a recently-published book, The CEO Within: Why Inside Outsiders Are the Key to Succession Planning, poses other questions that represent equally important challenges to CEOs and their boards of directors. They include: What are the CEO and board doing to acquaint themselves with leadership talent inside the firm? Is the board insuring that the CEO is building a cadre of insiders ready to assume positions of leadership when needed? Has the board encouraged the development of what Bower calls "inside outsiders," those with somewhat detached views of the company's strategy but with intimate knowledge of how to get things done inside the organization?
Bower's analysis of the leadership and performance of S&P 500 companies in the U.S. leads him to conclude that "insiders perform better than outsiders" whether the company was performing well or poorly at the time of their appointment, but "especially when the company had had poor prior performance." But he worries about the "cognitive and emotional baggage" that insiders bring with them as a result of their long employment in the organization. His solution, based on an intensive examination of a number of case studies, is the "inside outsider." This executive avoids, in his view, some of the shortcomings of both insiders and outsiders. He or she has successfully led portions of the business, such as international ventures, which are away from the purview of headquarters. Headquarters has given them full responsibility for performance with little direct oversight, and allowed them to develop a more objective view of the enterprise and its strategies. This enables them to entertain ideas for new directions while leading with the credibility, the understanding of the organization and its culture, and a good knowledge of its talent that "outsiders" have to accumulate over time, often with some difficulty. Exhibit A among "insider outsiders" is Jack Welch at GE, who at the time of his promotion to CEO had been a member of the organization for a number of years and was making his mark running a non-core business, plastics, with a management style that was very different from his predecessor, Reg Jones. His selection culminated a careful process in which Jones nurtured a talent pool of successors and involved the board in identifying finalists for the job.
If "inside outsiders," on balance, provide answers to the need for such things as continuity, intimate knowledge of the organization, and a fresh look at the business, why don't we see more of them? Does their identification and development require complex processes that often don't exist? (The respondents to a poll of 1200 HR managers indicated that 60 percent did not have a CEO succession plan in place.) Are CEOs reluctant to initiate plans that require substantial effort and potentially foster executive competition? Have boards abdicated one of their most important responsibilities, substituting "executive search" for succession planning and development? What, if anything, can CEOs, directors, and shareholders do about this? What do you think?
To read more:
Joseph L. Bower, The CEO Within: Why Inside Outsiders Are the Key to Succession Planning (Boston: Harvard Business School Press, 2007).
Interview with Joseph L. Bower, Growing CEOs from the Inside