With more emphasis than ever on staying afloat, CEO succession is being re-examined and new strategies are being devised to identify and foster internal candidates. Stephen Miles and Theodore Dysart, managing partners at Heidrick & Struggles, led a Directorship roundtable on innovations in executive succession planning.
The first challenge, according to Miles, is that boards need to move beyond the initial feeling that there are no great candidates within a company. While there may be well-suited external candidates, looking within first may be the best solution. “Get over the paradox that no one inside appears to be perfectly qualified for the position at first glance,” he advised. “Succession planning requires a board to consider the future needs of the company.” And that means keeping a close eye on potential inside candidates.
During difficult times, there is a tendency to want to put succession on the back burner.
Lines of Communication
When narrowing down the list of contenders, keep in mind that communication with internal candidates should be the first priority. Dana Mead, chairman of MIT Corp., the governing body of the Massachusetts Institute of Technology, and a director at Pfizer, said that when internal candidates realize that a board is also considering external options, it can lead to backlash or an exodus of top talent. Mead stressed that internal candidates might become restless, questioning why they aren’t being promoted or why the company is considering “an outsider” for the post. “It may be because the board has a dysfunctional succession plan,” he explained.
During difficult times, there is a tendency to want to put succession on the back burner. “The idea is, ‘we’re trying to survive—we aren’t thinking of succession,’ ” said Thomas L. Doorley, chairman and CEO of Sage Partners and lead director at Natrol. Doorley also pointed out that sometimes the CEO believes he or she is the only person who has the ability to guide the company through the rough patch. A challenging economy is exactly when CEO succession planning matters the most, advised Dysart, since volatile market conditions might force a change in the top post, either voluntarily or through termination. A CEO might be doing a good job with a flailing company in a turbulent economy, but if stocks are down 20 percent, investors are likely to cry foul and may call for new leadership.
Boards are increasingly devising formal processes for identifying capable individuals in the organization who are qualified for top posts or should be groomed for future consideration. “What are your tools for making that determination about who should be on the list?” asked Doorley.
“It’s important to know the top executives in the organization who should be managed, to make sure they are acquiring the right skills,” noted Miles. As a board looks deeper into the organization for potential candidates, directors need information about each individual to determine who is high on the list and what the next tier looks like. Since the board rarely sees employees below the C-suite, they are often unable to know each potential candidate well. When sizing up candidates, particularly in a larger company, Miles urges boards to have brief synopses written on each person since it would be difficult to remember details about 100 or more individuals who might be discussed.
When to Say Goodbye
“Changing the guard—terminating a CEO—is there a better way to do it than what we often see now?” asked Jeffrey M. Cunningham, chairman and CEO of NewsMarkets. The panel agreed that there is no easy way to remove a CEO once the board decides termination is the answer. When changing CEOs, boards must consider current business needs and future scenarios. While the decision should be carefully weighed, it should not be delayed and should follow a set process.
Engaging the whole board by tapping into members’ expertise is key. “While it’s unlikely that every member on the board will know the ins and outs of a company, a good board consists of a medley of experts: those who can lay out industry-specific information and others who have experience on how to run a business,” said Miles. “The compilation of talents is what truly makes for a well-rounded, well-informed board.”
MIT’s Mead agreed, emphasizing that succession should never be the responsibility of just one committee— the entire board needs to contribute. “Make it a regularly scheduled item, so you know every six months what is going on,” said Mead. When the compensation committee meets, either after or during the same meeting, Mead advises that succession candidates under consideration should go in and meet with the board.
Miles cautioned boards to be realistic about evaluating candidates, suggesting that sometimes it can be counterproductive for boards to be too focused on finding faults or shortcoming in the current or prospective CEO. “Pick one or two things to improve about someone—not 20 things,” he advised.
Role Migration
While the road to the top post must be mapped out carefully, panelists agreed that the path to other executive positions must also be re-examined. Doorley said the role of the COO is changing and is now often focused solely on operations, so many companies are uncoupling that role from the president’s title.
But the COO role differs in each company and industry, which makes it difficult to create a “one size fits all” scenario for succession planning. “There’s no ‘COO magic [formula]’ because they are unique to their company,” said Miles, who likened the roles of CEO and COO to a Venn diagram. “The COO is a customized role—if the CEO and COO roles overlap too much, it won’t work,” he concluded. He also noted that many CEOs have been reluctant to have a powerful COO, although that sentiment is changing.
Panelists pointed out that the role of the CFO depends on the industry. “In the biotech industry, the CFO is the second spokesperson after the CEO,” says James Frates, senior vice president, CFO, and treasurer of Alkermes. In some industries, the CFO is taking on responsibilities such as working more proactively when closing deals and communicating with clients and other partners. Board members should be familiar with a company’s specific requirements, so qualified internal candidates are on deck for consideration when necessary.
Engaging Your Board
Due to increased scrutiny from both shareholders and the public, many CEOs are now under intense pressure to demonstrate and sustain performance. Typically, however, they’re not focused on finding their own replacement. An effective board must take the reins and be proactive by putting a disciplined succession-planning process into place that emphasizes the recognition and cultivation of internal talent.