Avoiding a Succession Crisis
A Majority of Large Firms Have No Plan for Replacing a Departing CEO
The rapid changes at Merrill Lynch and Citigroup highlight the problem many firms face as they consider succession. What we are seeing should be surprising and disturbing to us all: At investment banks of great importance, the board of directors has decided to change the leadership of the firm, yet there is great uncertainty as to whom the successor should be and how the process of finding a successor should be managed. There is something very wrong with this picture.
I would have been surprised by this situation before completing my latest research on CEO succession. But what I found is that many firms have not instituted a process for managing the development of potential leaders. Many have not even thought about the process of selecting a leader when the time comes for change. And as a result, they are as confused about who should lead the firm after succession as Merrill Lynch and Citigroup appear to be. One survey of human resource directors of large corporations indicated that 60 percent lacked CEO succession planning.
This situation is hardly optimal — not when global competition and technical change, in the context of an active market for corporate control, make the job of CEO about as tough as it ever has been. Companies need world-class efficiency, constant innovation, and a customer orientation. This requires a group of talented, dedicated people working as a team across business units and country boundaries.
To get that kind of organization you need continuity in leadership. Instead we find that CEO turnover is up, and that the number of outsiders brought in to do the job is increasing. How could this be? The answer appears to be as depressing as its consequences. Companies are not making the investment required to provide for orderly succession.
My research suggests that planning for CEO succession should be part and parcel of the way a company is managed. Grooming potential leaders is a process that takes years. It’s not an ad hoc event.
The key elements in this process are the way a company recruits; how it is organized; how it manages budgeting and planning; and how evaluation, compensation, and promotions are conceived and carried out. Moreover, success in today’s market requires a special kind of successor. He or she is what I call an “inside-outsider,” a truly talented insider who is liked and respected but who has somehow maintained the critical perspective of an outsider who sees the need for real change. Building inside-outsiders means managing succession to bring to the fore leaders who will challenge their strategic inheritance.
Since succession planning is so important for the vitality of corporations, why is it ignored? To begin with, 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.
Even among those CEOs who plan for succession, some manage in such an imperial fashion that the potential successors wither in their shade. And in their heart of hearts, some CEOs fear being surpassed.
Many companies think a horse race is all you need to pick a winner, without worrying whether the horses are fast enough for the decade to come. They pride themselves on being obsessive about managing for performance, on paying and promoting those who deliver while firing those who don’t. But often these kinds of companies think that developing general managers is a waste of time, HR an administrative task to be delegated and then ignored, and succession what you begin to worry about the year before the CEO retires.
Press descriptions of events at Merrill and Citigroup suggest that was exactly the culture at those firms. If so, it will take a decade to transform them.
Lastly, many CEOs are outsiders brought in to turn around or reenergize a company. They are generalists who know how to drive efficiency but are fundamentally unequipped with the knowledge of the industry or market that’s necessary to craft and implement an innovative strategy. When they leave (one source says three years is the reported average tenure for turnaround artists), profits may be better but the company is strategically weaker. And their turnaround has not involved investment in leaders for the future. As a result, there are no CEOs within.
Until that cycle is broken, another headline-making “sudden succession” is just waiting to happen.
— HBS professor Joseph L. Bower is author of The CEO Within: Why Inside Outsiders Are the Key to Succession Planning (HBS Press, 2007). Reprinted from The Wall Street Journal © 2007 Dow Jones & Company. All rights reserved.
