Thursday April 24, 2014

Abrupt CEO Exits Stress Value of Succession Planning

Departure of Citigroup’s Vikram Pandit is a cautionary tale for boards.

The significance of having a solid CEO succession plan in place was underscored by the sudden departure of Citigroup CEO Vikram Pandit in the last week. Investors and analysts were reported to be surprised by how quickly the departure happened rather than the departure itself.

Vikram Pandit, former Citigroup CEO, attends a session at the World Economic Forum in 2012. (REUTERS/Christian Hartmann)

There had been rumblings of tension between Pandit and Chairman Michael O’Neill for months, and following Pandit’s exit, Michael Corbat took the reigns as CEO. Adding fuel to the fire, COO John Havens also resigned. Jason D. Schloetzer, assistant professor at the McDonough School of Business at Georgetown University, says that the dismissal of these executives demonstrates the power of the board. “When I saw that the president had also been dismissed, who is typically heir apparent, that suggests the board has quite a bit of power and that they had been preparing to dismiss one or both of these individuals for some time and had gone about this process without involving them.”

The Citigroup situation is a cautionary tale for boards lacking well-developed CEO succession plans. Succession preparation is a two-part process, Schloetzer says, that combines succession planning and crisis communications. However, not all companies have formalized both of these components. “When a firm experiences a big event, such as an unexpected CEO departure, a crisis communication plan becomes important, and many firms are unprepared for such a task,” Schloetzer explains. “Combine this with evidence that some firms lack a solid succession plan, it can create a difficult situation for the board.”

While an abrupt CEO departure can create a sense of disorder, Bonnie W. Gwin, vice chairman and managing partner of Heidrick & Struggles’ board practice in North America, stresses that clear communications that demonstrate a united message and support for the new interim or permanent CEO from the board will help ease the sense of instability. She also suggests succession planning be a repeat topic in the boardroom. “Once the board gets through the immediate situation, they should ensure that succession planning has a regular place on the agenda and that they are continually developing internal leadership talent as future CEO candidates,” Gwin says.

Although succession planning is essential for the long-term success of any organization, when a company has to handle an emergency CEO departure, this plan may not be enough. “Your three- to five-year plan for a successor becomes immediate and that person may not be ready,” Schloetzer explains. This is when having an emergency CEO succession plan may prove useful. Gwin suggests a best practice is to have “a name in the envelope” for times of crisis. “Having a smooth transition, even to an interim leader, is key to ensuring stability in the company,” she explains. “Boards really need to give thought to this on a regular basis so they are not caught without a plan.”

If there is no emergency succession plan, a board needs to be prepared to take some type of action, whether it’s appointing an interim CEO or naming a permanent leader. Schloetzer notes that another option is to create a management team, pointing to Wendy’s as an example when the sudden death of the CEO in 1999 led to the appointment of a five-member management team until a permanent CEO was named.

There is also opportunity for strategic planning in the midst of an emergency CEO succession. Schloetzer suggests boards use the opportunity to reinvigorate the routine succession process. He pointed to Gannett and Micron Technology as contrasting examples. When Gannett CEO Craig Dubow took a leave of absence in 2009 for health issues, the board used the time as an opportunity to ensure an effective succession plan was in place so when Dubow retired in 2011, the company had already developed a plan. Conversely, earlier this year when Micron’s CEO Steve Appleton, whose hobbies included flying stunt planes and racing motorcycles, died in a plane crash, the permanent CEO who was appointed had announced his retirement a week earlier. “At Micron, you might question the seriousness in which they took the succession process,” Schloetzer says. “If you look at some anecdotal evidence of stock price performance, Micron is lagging behind its competitors.”

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