Does your successor fit the big picture?
Succession planning--the preparation to replace one leader with another-- is one of the most difficult challenges organisations face oday. Few events in the life of an organisation are as critical, visible, or stressful as when the leader leaves. The eyes of every member, employee, customer, supplier, and stakeholder are focused on the outgoing executive director or CEO. How such an exit is managed reveals the character and effectiveness of that leader and association. OER provides an exhaustive insight into the art and science of succession planning
In recent months, a number of prominent companies around the world have announced changes at the top. The reasons have ranged from the unfortunate death of McDonald's CEO James Cantalupo to the un-ceremonial exit of Boeing CEO Harry Stonecipher over 'an improper relationship with a female executive'. Then there was also Sony, which staged a sort of surprise by announcing the replacement of native Nobuyuki Idei with foreigner Sir Howard Stringer. The most recent announcement, of course, is that of former Aer Lingus boss Willie Walsh taking over the pilot's seat from British Airways' Rod Eddington after he retires in September this year.
Of course, there are numerous reasons for a change at the top of the organisational stepladder - a new manager brought in from the outside; a key retirement; an executive waiting in the wings who finally gets his or her chance; the splitting of the chairman/CEO role into two separate positions; the departure of unsuccessful contenders... Whatever the reasons for a transition, it offers a brief window to create sustained organisational change. Beyond their obvious effects on individual careers, such changes are also opportunities--often not fully exploited--to alter the work culture of the organisation. Never more so than when the change takes place at the very top with the appearance of a new CEO. These 'appearances' are becoming increasingly common as more industries face discontinuities and more stakeholders assert their rights.
Succession planning has implications for an entire organisation. It is part of workforce planning, good management capability training, and performance monitoring. It is also connected to career development planning for individuals and other human resource issues. This leads to future sustainability of an organisation, its systems, structures, processes and the underpinning of organisational culture.
In the examples of corporate transitions cited earlier, all but one company have a common thread - every one of them had a firmed up succession plan in place. Sir Howard, earlier the head of Sony's successful Entertainment Business Group, was handpicked to succeed him by the outgoing Noboyuki Idei, who will still be part of the company as chief corporate advisor of Sony Corporation as of June 22, 2005, when the new management headed by Stringer takes formal charge. ''Sir Howard, an executive admired both within the Sony Group and in the wider business community, fully understands Sony's longstanding spirit of freedom and open-mindedness,'' said Idei while announcing the transition at the world's largest producer of consumer electronics.
On April 19, 2004, Charles Bell, who had been president and chief operating officer of McDonald's since January 1, 2003, succeeded chairman and CEO James Cantalupo, who died unexpectedly hours earlier of a heart attack. As Cantalupo's deputy, Bell had helped oversee a surprisingly swift turnaround of McDonald's operations in the US. In fact, in promoting Bell to president and COO, Cantalupo had signalled that he was prepping Bell to take his place when he planned to go back into retirement. On April 19, the McDonald's board convened in Orlando at 6:45 a.m., quickly endorsing the outfit's succession plan, elevating Bell, and leaving the rest of the top management intact. Cantalupo had been scheduled to give the keynote speech to McDonald's owner/operators at 9:30 a.m. Instead, Bell spoke at the convention at the end of the day, receiving a standing ovation.
British Airways last month announced the appointment of Willie Walsh as its new CEO. Previously CEO of Aer Lingus, Walsh begins as chief executive designate on May 3, 2005. Current CEO Rod Eddington will retire at the end of September at which time Walsh assumes his new position. Martin Broughton, the airline's chairman, said: ''Willie has an outstanding reputation in the airline industry around the world for the way in which he transformed the fortunes of Aer Lingus from a high-cost under-performing carrier into a successful and profitable entity.''
That leaves Boeing, where its board of directors asked for and received the resignation of president and CEO Harry Stonecipher earlier last month. Concurrently, the board appointed CFO James A. Bell, 56, as president and CEO on an 'interim' basis, with board chairman Lew Platt assuming an expanded role in his capacity as non-executive chairman. Although Bell is a 32-year veteran of the company who has served as Boeing CFO and as a member of the company's executive council since November 2003, he was neither groomed to be the aircraft-maker's CEO, nor is expected to be one for more than a few months.
Although Boeing's board claims to have a robust succession planning process in place, it announced that it was now 'accelerating' the search for a permanent CEO, a position for which candidates both inside and outside the company are being considered. Interestingly, James Bell, the man the company's board has entrusted with piloting the company in the interim, is not among the candidates.
Nothing succeeds like succession
The fact that the Boeing board had not firmed up a succession plan for Harry Stonecipher, who had intended retiring in any case in May 2006--and that Stonecipher himself had not designated and groomed a successor--exposes a weakness in many companies' strategic thinking. To be fair to Boeing's board, the exit of a Stonecipher, who was in fact called back from retirement a couple of years back, was indeed sudden.
But that is exactly where a defined and definite succession planning programme scores over thirteenth-hour headhunting. Had the aircraft-maker's board identified and announced a successor to the outcast CEO in advance, they wouldn't have to gamble on the abilities of the company's CFO to run the show in the interim - as well as avoid the HR dilemma it is bound to face once a new CEO is installed and Bell (ex-CFO or ex-CEO?) has to report to him.
The concept of succession planning has become an important part of many companies' strategic planning - but not in all companies. Too many think of succession planning as having application only in family-owned companies or in large conglomerates. In fact, succession planning should be a part of every company's strategic plan - the board/senior management's collective vision of where the company will be going in the future.
The reasons for this approach are fairly obvious: If there is no succession planning process, how will the company develop and nurture its human capital? How will it assure a continuing sequence of qualified people to move up and take over when the current generation of managers and key people retire or move on? How will the corporate boardroom be able to plan for the future of the company without some assurance that the key posts will be filled with people able to carry on and excel? Succession planning is much more important than the time many companies devote to it would indicate.
So what really is involved in succession planning? Succession planning is a part of the process of preparing for the future of a company. Does this mean one should only plan a succession path for a CEO? Corporate analysts suggest that virtually every key position and key person in an organisation is a candidate for a succession plan. The important impact is that it is virtually impossible to successfully promote someone unless there is a trained person to take over the position being vacated. To effectively implement a succession plan, a director on the board of a company needs to include/consider a number of elements:
What is the long-term direction of your company? Do you have an effective strategic plan guiding your course and direction?
What are the key areas that require continuity and development of the people resources within your company?
Who are the key people you want to develop and nurture for the future?
How does the concept of succession planning fit into your strategies? Are you concentrating your efforts in the areas where the returns will be highest?
What are the career paths that your most talented people should be following? Is each path customised to fit the abilities and talents of the people involved?
The point here is to be sure that a company doesn't do this by rote: a plan that is not dynamic, that does not include the consideration of the individuals involved, is not usually as effective as one that is tailored to each individual's needs and capabilities. Should one wait for openings to appear before promoting someone, or should one make opportunities for each individual as they grow and mature, so that one can keep them challenged and stimulated, and not lose them to other, possibly faster moving companies? An organisation's plan should be proactive, with people moving into different areas for experience and training before they are needed in critical positions, rather than reactive - waiting for openings to occur, then scurrying around to find an appropriate candidate at the last second.
What strategies should a board be considering for its company's succession planning process? First, realise that one size doesn't fit all. There are different approaches that may be used, depending on the situation in each company. In some cases, a company may have to move some people along quickly, in order to expose them to a broad range of experiences, and possibly to fill vacancies. In others, a deeper involvement in selected departments or disciplines may be indicated. Some of this will depend on the culture and processes of the company. In yet other cases, decisions about the process will depend on the individual's capabilities and competencies, and the structure and operations of the company.
In virtually all situations, the senior management's ability to educate and promote will depend on the capabilities and strengths of the people who currently occupy the key positions, and where they will be going in the future - what are they being groomed for? It may not be vital to have a succession plan for every position in the company, but certainly there are some key areas of responsibility that must be considered. These will vary by company and industry, but as a part of a strategic planning process, one important strategic issue should be the need for succession planning for certain, defined key positions. This issue should be revisited at least once a year, and more often if circumstances dictate.
Planning pros & pitfalls
The advantages of succession planning include:
An ongoing supply of well trained, broadly experienced, well-motivated people who are ready and able to step into key positions as needed
A cadre of desirable candidates who are being integrated into the company with positive goals established for them individually
A flow of these capable people through various departments with the goals of educating them into the culture and processes of the company
Alignment of the future needs of the company with the availability of appropriate resources within the company
Positive goals for key personnel, which will help keep them with the company and will help assure the continuing supply of capable successors for each of the important positions included in the succession plan
Defined career paths, which will help the company recruit and retain better people
Very likely, the continuous input of ideas to improve the internal processes and procedures of the company, as well as the opportunities to improve the offerings and services of the company in the marketplace
Recognise that all companies do not have to follow the same path either in the overall situation or even for each individual. Each situation should be analysed and optimised in terms of the company's and the individual's needs. In addition, there should be enough time allowed to groom the successors. They should not be expected to learn the jobs/responsibilities overnight. Time is the gift that good planning can bestow on the process.
Also, the successor and potential back-ups should be designated early in the process. Not only will this help the individuals involved, it will clarify the communication and help eliminate disappointment and possible departures of key candidates if they become disillusioned because they have not been informed they are being groomed for higher positions or if they feel they are not moving upward rapidly enough.
Possible pitfalls of succession planning include:
Lack of a formal written plan for each key person or position. A rigid, inflexible plan NOT tailored to the needs and abilities of the personnel involved
Too long a wait for real movement/promotion, potentially resulting in the best people leaving due to apparent inertia in the system
Too superficial an approach, with the corresponding lack of real understanding of the procedures, processes and requirements of each area the individual is exposed to during the process
Selection of unqualified or unmotivated people for inclusion in the succession plan. Quality of the individuals selected is paramount to the success of the process.
Resistance from above to the grooming of strong candidates.
What are the benefits of good succession planning? With a well-thought-out succession planning process, a company can earn a number of clear pluses:
A well-trained, involved and potentially deep stream of capable people who are well versed in the breadth and depth of the company.
A continuous stream of people who are constantly reviewing, questioning and refining procedures and processes, helping to improve the quality inside the company, as well as improving the offerings of the company out in the market place.
An increasing reputation as a good, challenging, stimulating place to work, which could result in the company's ability to hire better people.
Succession by strategy
As in the deployment and utilisation of any strategic resource, the development of a company's key people must be considered as the top management plans for the future of a company. It is certainly worth considerable time and effort to discuss the company's needs and current capabilities thoroughly, as a strategic issue, and possibly as a part of internal development strategy. If a company does not have a formal procedure for succession planning, the board or top management must mandate the development and installation of a process that fits the needs and preferences of the company.
Some of the questions to be answered while firming up a succession planning roadmap include: What does the company need to do to get the best from its people, to position and educate them so they may best contribute to the company's and their long-term success, and to assure a flow of competent, well-educated and experienced people for the company's future?
How long should succession planning take? Realistically, succession planning is never finished. On a regular basis, each company must look at its needs and resources to determine where it needs to have successors in place or in the process of learning the requisite disciplines. Each company needs to determine how long a candidate should be involved or exposed to the training needed. Each individual should have a concisely determined path towards the goal set for him or her. That path may be changed as needed and as events determine; so, monitoring and updating should be a part of every succession plan.
Over what time period should one plan? To be realistic, succession must be planned years in advance of expected needs. To properly train a successor, the firm needs sufficient time to expose the people to the full spectrum of opportunities within the firm, as well as any desired or required outside education/experience expected. For example, if someone is expected to be a general manager, the number of departments, the types and ranges of technologies and processes, and the level of knowledge about the company procedures and policies, markets and customers, suppliers, employees, contractors etc. will determine the time and depth of involvement. Additional factors, such as past experience and current knowledge that the individual brings to the process, will also affect the succession time frame. Skilfully done, succession planning will bring the peace of mind that senior management should have, based on the understanding and expectations of its future leadership.
Managing the family business
How should privately held corporations handle ownership considerations versus management and operating considerations? Situations in which ownership and operations or management responsibilities are vested in the same people can be devastating to a family or closely-held corporation if not handled wisely. While difficult, the duties of management and the family/stockholder relationships must be kept separate for the good of both the stockholders and the corporation.
Private relationships that interfere with the effective operation of the company can only be harmful and non-productive. Nepotism can be either positive or negative, depending on the capabilities of the individuals involved. It is rarely neutral. Business considerations should take precedence over family considerations when it comes to the welfare of the company. Private, family matters should never interfere in or be a part of the business. Failure to adhere to this advice can often lead to unfortunate or even calamitous situations that can tear a closely held company apart.
These may be difficult situations, and may require an impartial source to mediate. In any case, clear, objective, unambiguous guidelines and goals should be set in writing so that the junior members of the family firm may have specific expectations of where they might go, how they are expected to progress, and the standards by which they will be judged. Family considerations must be kept outside of the on-the-job evaluations, or the entire process can become quite unsettling and less than objective for the individuals involved.
Where possible, outsiders (to the family) might be involved in the mentoring and development processes to help the development of the younger generations. This can bring a degree of objectivity that parents and children can often find difficult to maintain in situations where the younger generation works for and will eventually succeed the senior people. Settling this issue is potentially the key to the effectiveness and even survival of some privately held firms. In other words, owners of closely held businesses require guidance from their business advisors to ensure continuity of management and ownership in succeeding generations during the lifecycle of the business.
Entrusting the management of the business to the proper person(s) may determine the ultimate success or failure of the enterprise. Yet, determining which family members are to share in the financial success (or failure) of the business is a separate question that must be answered. Those family members to whom a business owner may wish to transfer the ownership of the business upon his death or retirement (for example, to his children equally) may not be equally capable of running the business.
For this reason, the business advisor might consider separating management control from ownership of the enterprise in designing a proper succession plan for the family business. There are a variety of different control devices that can be implemented for this purpose. Having a working knowledge of these business succession techniques can be an important tool in strengthening an advisor's relationship with the business owner and add value to the planning process. The flexibility afforded by the corporate laws and bylaws can be successfully used to:
Divide equity ownership equally among the owner's children;
Separate management control from ownership of the corporation; and
Give non-voting and inactive shareholders a voice only on fundamental corporate matters.
Dispute resolution
Regardless of the control technique implemented, the business advisor must always consider the possibility of future conflict due to the nature of the family business and the varying personalities of its directors, officers, and shareholders. Courts are an expensive forum in which to resolve these disputes. Therefore, including dispute resolution methods in succession planning can be critical to the success of the business in future generations. An outside board of directors or advisors can be created to offer non-binding advice and recommendations to the corporation.
Alternatively, an outside board could be given the power to make binding decisions on any significant disputes that may arise. In addition, buy-sell agreements need not be limited to controlling the ownership of stock upon death, disability, etc... Such agreements can also appoint a third- party arbitrator to break a voting deadlock and can even obligate a dissenting shareholder to sell his shares to the corporation upon the occurrence of specified events.
Unless appropriate planning is implemented to control the ownership and management of the closely held corporation, succession planning for a business owner cannot be completed with any assurance of predictable results. Creative corporate governance techniques can be used successfully to resolve the possibly contradictory objectives of passing the family business to the next generation while ensuring continuity of management and control.
The role of the CEO
The cost and risk to an organisation of an outside CEO appointment is high. Good succession planning can smooth the transition from one CEO to the next. While it is the board's prerogative to appoint a CEO, it is the CEO's responsibility to develop a cadre of potential successors. Whether you are a newly appointed first-time CEO or an experienced CEO reappointed for a further term, the question of succession should be addressed virtually from Day One. The average tenure of a CEO today is only around five years; so, time is of the essence. What are the key steps and when should they be implemented? While there is no definitive answer, the following may be a useful guide:
Agree strategy with board
Strategy is, of course, fundamental. Without an agreed longer term (five years, typically) strategy, the competencies required of the senior management team cannot be determined. It is this competency set against which the managers must be appraised. Past history may not be fully indicative of future success, as the fund managers are so fond of saying.
Appraise senior management
This will not be easy for a CEO appointed from outside the organisation, but even an insider must now look at his/her former peers and subordinates through CEO eyes. The inevitable personal prejudices must be put aside and an objective view taken. Some outside help, such as a formal management appraisal (including 360 degree references) by a reputable consulting firm, may be appropriate to supplement the CEO's own views.
Implement succession process
To be successful, the succession planning process must be endorsed by the board and the senior executive team. Executives identified as 'high potential' should be given challenging jobs to ensure they develop as quickly as possible. This may also involve a review of the organisation structure to ensure sufficient development roles exist. Some specialised leadership training, additional opportunities for appropriate education and the appointment of a coach or mentor should be seriously considered. It is important to instil a culture that celebrates achievement and support of high achievers without being 'elitist'. The tendency has been to 'cut down the tall poppies' and to look at the lowest common denominator rather than strive to reach the highest. Once the critical few are 'under way', attention must be turned to the next level of potential successors. This requires a talent management program.
Develop talent management
The enterprise requires generalists at the top. This means giving executives broad exposure to the organisation. Moving managers between functions or functional managers into line roles (or vice-versa) are not easy decisions to make in this world of increasing specialisation. Developing talent from the more junior managerial ranks is, however, important as developing the senior high-fliers. A talent management program that addresses the three areas of recruitment, development and retention is key. The third key element, retention, needs special attention. Opportunity and culture typically play a bigger role than remuneration. This applies both to internal perceptions and to attracting top-class individuals from outside.
Delegate more, encourage entrepre neurs
While the CEO is ultimately responsible, s/he does not have to be a 'one-man-army'. True delegation offers the best opportunity for any CEO to meet realistic board expectations in both the short and long term. For the potential CEO candidates to prove themselves, they must be encouraged to try things without the fear of punishment for failure. Controlled entrepreneurship can lead to new ideas and/or fresh ways of looking at things without going outside.
Review succession with board
The board should, of course, be kept apprised of developments on an ongoing basis and given exposure to the possible CEO candidates. As the time for retirement (or other trigger) approaches, however, an in-depth review should be held with the board to evaluate the pros and cons of each potential successor. Once the preferred candidate has been selected, the transition process can begin. To minimise the disruption of succession, it is important for the incumbent CEO to ensure, as much as possible, that all the difficult aspects, such as the integration of a major acquisition, a significant write-off or downsizing, etc. are well under way before s/he steps down.
Selecting, mentoring and measuring the next generation of enterprise leadership is the CEO's responsibility. It is a controllable activity and a critical one. CEOs can probably apply the old 80:20 rule to the balance between internal and external appointments, but their development and retention are equally critical. Without a formalised succession planning process, it is clear an organisation can suffer badly.
© Oman Economic Review 2005
