Business Insight Zone

After my post from the other day, I came across this article on the topic of CEO succession.

Smooth transitions in executive suites a thing of the past in corporate America

Some of its information is good, but much of its analysis makes me grind my teeth. For starters, the headline stinks, since the real message of the article itself is that internal CEO successions are rarer than they used to be . . . although still more common than not. Excerpts follow, punctuated by my commentary.

Corporate governance specialists say that succession plans at many companies are sparse, and directors are increasingly turning to outside candidates when a chief executive leaves suddenly or is dismissed.

“The odds of it working out these days are so slim that what’s the point of having an heir apparent?” said Peter Cappelli, a professor of management at the Wharton School [...]

Cappelli may simply be conveying the outlook of boards, but whatever the case, I can barely hide my scorn for this viewpoint, which begs a huge question that goes unanswered in the story, namely: why don’t boards of directors take responsibility for changing this dynamic? The current dynamic exists for a set of reasons that could change — indeed, that does change over time. Board members are part of this change, whether they like it or not. It would be far better of them — for their companies, and possibly for their own consciences — to embrace this role.

In some cases, chief executives even seem to ax their heirs apparent rather than groom them. “We have a condition in which the industry is chopping up its own children,” said Roy Smith, a professor of finance at the Leonard N. Stern School of Business at New York University. “A CEO spends half his time hanging onto his seat. He doesn’t want to create a successor who is going to be there to push him over the side.”

Again, this raises an immediate question: why don’t boards take this bull by the horns? It is perhaps natural that CEOs, like monarchs of old, will resist threats to their thrones. At the very least, many CEOs display kingly or queenly egos. But this by no means excuses their practice of survivalism über alles.

A result is that for a variety of reasons, several prominent corporations that typically promote chief executives from within have turned to the outside to fill their top spot in recent years, including Boeing, Chrysler, Con-Agra, Ford, Hewlett-Packard and 3M.

In some cases this has been tonic, as when Alan Mulally went from the senior ranks of Boeing to the top spot at Ford. Whether or not he will ultimately succeed at Ford, and whether or not his peer Bob Nardelli will succeed at Chrysler, their hires represent the reversal of the pernicious long-term trend among Detroit’s Big Three of hiring only from within. That’s to the good. Hewlett-Packard also provides an interesting case, since it was steered far afield (at least according to many judges) by the outsider Carly Fiorina, before being steered back onto course by the outsider Mark Hurd, who is more a member of the H-P old school — in the sense that he is more like Mr. Hewlett and Mr. Packard — than many Hewlett-Packard lifers.

Thirty years ago, companies rarely looked beyond their own executives to find new chiefs, said Kevin Murphy, a professor of finance at the Marshall School of Business at the University of Southern California. In the 1970s, only 10 percent of new chiefs at Standard & Poor’s 500 companies came from the outside, he said. Now that figure is closer to a third.

Because of that, many boards are not forcing executives to train successors. About 24 percent of the directors surveyed this spring by Thomson Financial said they had not discussed a Plan B for their chief executive in more than one year. About 10 percent said they had never discussed it.

Three things here:

1. We see that the ratio of outside CEOs remains relatively low overall — under one-third — but still high in historical terms.

2. The writer has misused the phrase “Because of that,” or at least has left unanswered the question of chicken and egg. Is it true that many boards are not forcing executives to train successors because of the heightened rate of outsider CEOs, or is it, rather, that the heightened rate of outsider CEOs may be attributed to the practices of boards that do not force executives to train successors? I’m not usually one to parse syllogisms like this — I always hated debater-style nitpicking of logic — but this one is such a howler that it’s amazing the editors let it through.

3. The directors who belong in the 24-percent group, much less those who belong in the 10-percent group, are simply malfeasant. There is no way to be a good director of a publicly traded company and yet never have had a discussion about who would succeed a chief executive in the event of the unforeseen. As I’ve said before, people have heart attacks sometimes. People get cancer. People have debilitating injuries. Boards that duck these realities should be replaced.

“It’s one of the most basic questions: What happens if a CEO gets hit by a bus?” said Michael Mayo, an analyst at Deutsche Bank who covers Citigroup and Merrill Lynch and says both boards have fallen short in their succession plans.

“Back in the old days,” Mayo said, “a company would groom several successors, any of which could step in for the CEO on a day’s notice.”

The more I read of Michael Mayo, the more I find myself in agreement with him. Of course, he sounds provocative in this context simply by speaking common sense.

The other change in recent years, governance specialists note, is that directors are increasingly forcing out chief executives.

Last year, nearly one in three chiefs were dismissed or forced to leave, more than twice the level a decade ago, according to the consulting firm Booz Allen Hamilton. And directors often think a bad-news departure cannot be followed by a promotion from within.

“There’s this belief that, somehow, there is a savior on the outside that can fix your problems,” said Jeffrey Sonnenfeld, senior associate dean for executive programs at the School of Management at Yale.

The larger point to note here, I think, is that there are plenty of companies that do not face this scenario. They grow good leaders from within so that they have a good CEO and good lieutenants as potential heirs. Pursuing the course of building the leadership bench — it takes decades — is a big reason why General Electric and Procter & Gamble have been so intimidating to their opponents, and so successful, over the years.

Most analysts think Citigroup and Merrill, and other banks that may fire their chief executives, are not at risk of promoting a tainted underling, because there are so few finance executives who sit around wishing for that top job.

“It’s inherently the nature of the bank not to have four or five people in waiting because they’re too ambitious to wait,” said Adam Zoia, managing partner at Glocap, an executive search firm in New York. “I don’t think there’s anything new to that. What’s new is that the problem’s happening all at the same time, across the banks.”

The ambition part, I can understand. But what about the glaring exceptions to this rule? I note that Goldman Sachs hasn’t had the slightest problem in either (a) promoting crackerjack CEOs from within or (b) printing money. And that’s only been true for the past, oh, decades.

Murphy said directors often feel uncomfortable bringing the succession issue up with chief executives, who in many cases exert large influence over boards, sometimes as chairman.

In my opinion, this is a prima facie argument for separating the roles of CEO and chairman on every board. But that is a topic for another day.

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Thanks to Management Turnover as Change Agent for pointing me to this story.

Category: Executives, Management