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Planning ahead - the importance of good succession planning

Categories: Boardroom, CEO
Planning ahead - the importance of good succession planning

Planning ahead - the importance of good succession planning

Pictured: Alan Mulally, chief executive, Ford Motor Company, with Bill Ford, the company's executive chairman and former president and CEO

When it comes to succession planning, good governance involves much more than just drawing up a list of names, write Gary E Hayes.

There’s an old saying that comes to mind when thinking about succession planning and strategic planning as two separate board initiatives: “If you don’t know where you want to be, any road will take you there.” You just might not like where you end up.

While the selection of the company’s CEO may be the most critical function of any board of directors, effective and responsible governance entails far more than merely naming the heir to the corner office. In the post-Sarbanes-Oxley environment of heightened board accountability, legitimate succession planning cannot be perceived as a mere check-off item done in a vacuum. As with leadership development, it is very much part of the broader mandate of strategic planning, and must be approached accordingly.

This new era of heightened accountability for good governance has spread far beyond the American legal landscape and is now influencing board behaviour throughout the industrialised world. It is even impacting developing societies like the BRIC (Brazil, Russia, India, China) countries where asset managers, hedge fund leaders and private equity firms are all scrutinising boards and management teams as they carefully weigh investment decisions in these uncertain financial and economic times.

Ireland itself has felt the impact, not only in the boardrooms of its banks and financial institutions – even prior to the financial upheaval of recent years the difficulties of firms like Elan Pharmaceuticals have heighted both the Government’s and the public’s scrutiny of board behaviour and fiduciary responsibility. Today there is a separate section on the Elan website devoted to corporate governance.

With respect to the leadership of an organisation, the role of the board is to ensure that it has a competent and effective leader at the helm – the CEO – and also that the company has the requisite process in place to identify, reward, evaluate and strategically nurture talent below the CEO for future growth. The keyword there is ‘strategically’, as that underscores the intrinsic link with overall business strategy. While it may seem common sense, it is staggering how many Fortune 500 companies fail to take this view, judging by their governance behaviours.

Cautionary tales

A look at how two major companies – Disney and Morgan Stanley – fumbled their prior CEO transitions and how the press captured the fallout over several months for the world to see presents a cautionary tale. Both boards were harshly and publicly criticised for mangled CEO changes that can largely be blamed on the lack of correlation among succession planning, leadership development and strategic planning. Indeed, in both cases, the prior CEO had pushed out all credible internal successors, with no reasonable plan in place to create new apparent successors within a realistic time frame.

When Walt Disney company president Frank Wells died in a helicopter crash, chairman Michael Eisner tapped his friend Michael Ovitz in an ill-conceived attempt to hire a ready-made successor, as if the vision, traits and expertise that made him a stellar leader at talent agency Creative Artists Agency were totally transferable. 

Disney and its shareholders would learn that was not the case. Ovitz did not have the right credentials or    leadership style to lead the multi-line entertainment and communications company. He was gone within 14 months, with a US$140m severance payment. 

A subsequent 10-year lawsuit brought against the board was triggered by the multimillion payout Ovitz received. However, the board’s true liability arose from its failure to uphold its responsibility to ensure that there was a thorough process and plan in place to identify and select the appropriate CEO to fulfil Disney’s strategic priorities. Its risk resulted from an inability to demonstrate that it used what the lawyers termed “proper business judgment” in the hiring and compensating of Ovitz. Every board member of every public company in the US should be asking themselves whether they could pass a similar test. 

For Morgan Stanley’s board, its governance shortcomings and liability exposure became alarmingly evident after then-chairman and chief executive Philip Purcell fired several executives, each of whom had strong credibility as a potential successor. All received staggering severance packages. Many of those he fired had been his allies and were, according to some whispers in the press, being rewarded for their loyalty. Purcell himself was heading out the door. While it was the severance deals that were the lightning rods for the public lashing and ill will toward the board, it was the badly fumbled CEO succession process that created the crisis.

The right approach

The potential financial risk and reputational damage caused to a company – and to its individual board members – by inadequate planning for leadership transitions are largely avoidable when boards exercise due care and diligence in the execution of their duties.

There are two key components involved. First, it must adhere to an articulated process for talent selection according to fully vetted criteria wholly aligned with the company’s long-term vision and strategic plan. Second, succession planning must have at its core a systematic, documented approach to the ongoing development of leadership talent that is based on these criteria.

General Electric (GE) and Goldman Sachs were once hailed as examples of organisations where abundant leadership talent was cultivated to ensure successful and orderly CEO transitions. Their key stakeholders would no doubt say otherwise today. GE is still experiencing significant business turmoil and management turnover, while the press reports weekly on the draining of the talent pipeline at Goldman as a flood of partners continues to leave the firm.

On the other hand today, IBM is a company noted for its flawless hand-off of the CEO reins from one tried and true executive to another, and rightfully so, while Ford Motor Company achieved what has resulted in an extremely effective succession from the ultimate internal CEO William Clay Ford, Jr, to a leader from a different industry, Alan Mulally.

While it is the CEO’s prerogative to select the people who will share the executive bench and take on the top functional roles, it is the board’s responsibility to provide the ‘road map’ that ensures he or she adheres to those criteria that match the company’s strategic priorities. 

During the past decade Jill Kanin-Lovers has served as an independent director on five public and private corporate boards and while doing so has chaired three searches for new CEOs at these companies. She stresses two points in fulfilling a world-class standard of governance.

“A board must insure that a company has in place a robust process for developing new talent at multiple levels throughout the organisation.

“The criteria used to choose a CEO must clearly reflect the strategic future of the firm and be applied in a fair and transparent manner to all candidates considered for the role.”

Boards that fail to practise a holistic and forward looking approach to succession planning, leadership development and strategic planning face an increased likelihood of shareholder opposition to their decisions, particularly when millions in severance monies for departing executive leaders are involved. These actions may range from proxy fights to lawsuits, but all are disruptive to the lives of the board members and the reputations of the business.  Few would deem that a risk worth taking.

Gary E Hayes, PhD, is managing partner at Hayes, Brunswick and Partners.

This article first appeared in the Summer 2012 issue of Irish Director magazine

Categories: Boardroom, CEO