Next?

A lot of organizations have been saying this lately as the top dog walks out, is ushered out, or retires. What's the problem? Why should anyone care?

In short, we (any business, church, insitution, etc.) may not be lining up leaders the way we should. Not stockpiling leaders is a surefire way to increase risk when selecting the next head of the organization. We should care because turn-over in organizations is painful and costly. There is a better way. Below is an analysis of an article (with some info from other sources) that does a great job outlining the problem. I originally wrote this in February of 2005, shortly after the article appeared in the Harvard Business Review and an excerpt was included in the Wall Street Journal.



A Review and Analysis of Ram Charan's:
Ending the CEO Succession Crisis

Introduction

CEO turnover is rising; CEO tenure is falling. While some companies can boast of successful CEOs over long periods (Colgate-Palmolive’s Reuben Mark has been at the helm for 20 years), this is clearly an exception to new and disturbing rule. In 1995, the average top exec held his or her post for 9.5 years, according to a report from Booz Allen Hamilton. Less than ten years later, the average has decreased to 7.6 years (Charan 2005).

Two of every five new CEOs fail in their first 18 months (Charan 2005). The string of failures in some companies -Coke is on its third CEO since Goizueta’s death in 1997 (Foust 2004)- has caused alarm to the extent that governing boards no longer have the luxury of seeking a successor, but the need to secure a savior.

The symptoms are prevalent. The discussions of Carly Fiorina’s ouster from Hewlett-Packard in every major media outlet in recent weeks have highlighted them. With Ms. Fiorina out and only rampant speculation about who can or will step in, it is clear: solid CEO succession plans are not exactly in tact.

The Problem

No one would dare argue the importance of stability at the top of an organization. Consider this job description: A chief executive is “…to lead a hugely complex organization over many years through an unpredictable progression of shifting markets and competitive terrains”. If the future of a corporation rests securely on the shoulders of its top gun, why, then, would “almost half of the companies with revenue greater than $500 million have no meaningful succession plan” in place (Charan 2005)?

Where leadership development does exist within an organization, it is often ineffective. The real trouble lies not in the fact that too many CEOs are being replaced, but that too many CEOs are being replaced badly (Charan 2005).

Executive Development

It’s easy to state that new leaders need to be developed, difficult to provide the proper opportunities for them to grow, and daunting to actually locate them within an organization. Consider this: in a company with 70,000 employees, there may be 3,000 who are considered leaders. Only 50 to 100 of these could fill one of the top ten posts, and likely 5 or less would ever be considered for the corner office (Charan 2005).

Finding these five would be difficult enough without the added need to identify them in enough time to properly train and develop them to lead the organization. The multifaceted nature of the position requires that the chief executive have experience in direct responsibility of complex profit and loss centers. An ideal progression would move a candidate methodically through management positions over a single product, customer segment, country, several product lines, business unit, and then, division (Charan 2005).

If, ideally, a CEO were to hold the top spot for a decade, an appropriate age to undertake the post would be between the age of 46 and 52. Take in consideration the desired progression mentioned above, and the age to begin the trek through the program would be around 30 (Charan 2005).

Looking Outside

Even if internal candidates for CEO have the necessary experience required to assume the position, they are not always the best choice. If the exiting CEO has been extremely problematic, close ties to the top could cause trouble for a candidate associated with the previous management team. Of course, if a company lacks the proper development process to identify future CEOs, they will have no choice but to look outside the company (Charan 2005).

Successful recruiting from another company is even more difficult, as outsiders typically have a tougher road to hoe than insiders. Ms. Fiorina was the first outsider to lead HP, and she was out in just over five years (Elgin 2005). Gil Amelio left Apple within 17 months. Richard Thoman was out at Xerox in just over a year. According to Booz Allen Hamilton, 55% of CEOs in North America appointed from outside the company who departed during 2003 were forced out, compared to only 34% of insiders. Still, public affairs firm Burson-Marstellar reports that roughly a third of Fortune 1,000 companies are run by external recruits (Charan 2005). Discussions surrounding Ms. Fiorina’s replacement have surfaced two internal candidates and nine external candidates (Elgin 2005 and Lublin 2005).

In the Boardroom

As the caretakers of the organization, board members are clearly not as effective as desired in replacing their leaders. This could be due to the lack of time spent on the issue. When asked by Mercer-Delta to compare time spent today on key issues with time spent on key issues a year earlier, most board members reported spending less time on CEO succession than any other activity. To compound matters, members of boards and search committees have no experience working together on search and succession plans (Charan 2005).

Recruiters

The lack of time spent on succession and lack of experience conducting searches by boards forces increased responsibility on executive recruiting firms. Recruiters can never understand the needs of a client board more than the client board. Unfortunately, lack of board experience also translates into lack of direction for the recruiters, forcing the recruiters to develop their own criteria for replacing the chief executive. The result is often a standard list of qualities that may not properly relate to the needs of the organization (Charan 2005). Consider the following near disaster.

One recruiting firm presented a list of six potential candidates for CEO to a board, with one candidate pushed far more than the others. The recruiting firm only provided the board with a one and a half page summary of the top candidate’s leadership skills and union, customer, and government connections, as well as an outline of his ascent through the organization. One member of the search committee researched the candidate’s financial performance history and found a poor return on investment for the previous four years. The committee rejected the top recommendation from the recruiting firm and went with the third choice on the list of six. In the first three years, Candidate #3 helped take the firm’s stock from $24 to $108. Candidate #1 was placed by the recruiting firm at another, much larger company. He was fired after six months (Charan 2005).

Success Stories

Not all organizations lack effective development plans. General Electric has long been considered a leadership factory, for other organizations as well as their own. GE’s succession strategy includes an intense annual review (Session C) in which 20-25 leaders within the company are evaluated by two human resource executives from outside the leader’s business unit (Charan 2005).

The Thomson Corporation’s top managers have three annual meetings. A corporate initiative review in February, a strategy session in April, and a management development discussion in June. Following the June session, the top three executives devote eight full days to listening to senior leaders report on the high potentials within their business units. Because the same people are present at the strategy sessions and the leadership development meetings, everyone is aware of the type of talent the business requires (Charan 2005).

Common Threads

Successful leadership development plans happen in conjunction with strategy development. The current CEO should be closely involved in candidate recommendation and review and should facilitate discussions between the rising leaders and the board. The board members, in turn, should be getting to know the potential candidates personally. Additionally, they should devote a more substantial amount of time to succession. Several sessions per year should be devoted to the review of at least five candidates, inside and outside the firm. Finally, when a new leader must me named, the board should develop nonnegotiable criteria required for the next CEO. This will allow the directors to maintain control over the search, and to effectively guide the recruiting firm assisting the in the process (Cahran 2005).

The future leaders should well defined, so that their strengths and experience can be evaluated against the current needs facing the organization and those tied to the future growth of the company. Should the candidates talents and gifts not match the specific criteria laid out by the board, the leader should be removed from the list of viable candidates (Charan 2005).

The process should be ongoing. Says Bob Joy, senior vice president of global human resources, “If you start five years or even ten years before the CEO is going to retire it may be too late.” In fact, choosing the next CEO is not an isolated decision, but ultimately a combination of thousands of decisions by multiple people every day over a period of years (Charan 2005).

Applications for Aspirants

How does it all play into the plan of a rising star? While the board and current organizational leadership are charged with locating the future leaders within their and other firms, the graduating MBA or developing employees can take steps to improve their chances of being considered for a top job. It is obvious, but early success is a huge help. If you are to be identified around 30 as a potential future candidate for CEO, there is little time to waste demonstrating your effectiveness within the organization. Set out to do well, do well early, and do well in a variety of functional areas of the business. Seek out increased responsibility in the complex arenas, specifically focused on profit and loss. Demonstrate your ability to lead and inspire, but ultimately to make your company money. If your organization does have a development program in place, use the reviews as a chance to identify areas in need of refinement. More than anything take note of your firm’s strategy and work to develop a skill set that matches the needs necessary to grow the business.

References

Charan, Ram (2005, February). Ending the CEO Succession Crisis. Harvard Business Review.

Foust, Dean and Byrnes, Nanette. (2004). Gone Flat.[WWW page]. Retrieved February 10,
2005, from www.businessweek.com.

Lublin, Joann S. and Clark, Don. (2005, February 10). What Hewlett-Packard Seeks in a
Successor to Fiorina. The Wall Street Journal.

Elgin, Ben. (2005). Can Anyone Save HP? [WWW page]. Retrieved February 10, 2005, from
www.businessweek.com.