Hit by a Bus

by Beverly A. Behan

The annals of corporate America have seldom, if ever, recounted a single tale of a public-company CEO being hit by a bus.

 

Yet the types of incidents that can “take out” a CEO are varied and increasingly frequent. In the past few years, they have ranged from a heart attack at McDonald’s to sex scandals at Boeing and British Petroleum. CEOs can be recruited away by competitors (TRW), dragged away in handcuffs (Enron, WorldCom, Adelphia, HealthSouth), or forced out by the board (Home Depot, Bristol-Myers Squibb) or by a zealous attorney general (Marsh & McLennan, AIG). No matter what the crisis, the speed and manner in which the board responds to the displacement of the CEO can make a tremendous difference in protecting shareholder value.

 

Leading companies the world over have recognized the importance of emergency succession planning. A study of governance practices at 150 of the world’s largest companies, conducted earlier this year by the Hay Group, found that of those on Fortune’s World’s Most Admired Companies list, 90 percent had an emergency CEO succession plan in place that was reviewed by the board at least annually. Only 66 percent of the boards of the other companies (not on the World’s Most Admired list) had such a plan.

 

Boards that, until now, have never discussed the sometimes thorny issue of emergency succession planning are increasingly recognizing the importance of having a dialogue on the topic. Many have concluded that it is far more valuable to consider emergency CEO succession in the cool light of day than in the heat of a crisis.

 

The exercise also typically brings to the surface some critical issues that the CEO and the board may find extremely illuminating. Often the CEO finds the board’s perception of members of the executive team to be radically different from what he or she anticipated: One CEO was astonished to find that the board considered the general counsel the first choice to replace him in a crisis. Another, who prided herself on the high-performing executive team she had assembled, was shocked to learn that the board considered none of them able to run the company in her absence. If she were “hit by a bus,” the board planned to install the chair of the audit committee as interim CEO while it conducted an outside search.

 

In other instances, the exercise yielded valuable insights about the board’s ability to respond to a crisis. One board we worked with recently recognized that the only directors who could make the time commitment to step in during a crisis didn’t have the optimal backgrounds to serve in this capacity. While there were former CEOs and directors with strong industry backgrounds serving on the board, these directors still had day jobs and would not be able to devote the time required to do the job.

Sally or Jim?
What, then, should be considered when the board turns its attention to the critical discussion of emergency CEO succession and how it should be handled? The most typical reaction to an emergency succession exercise is to begin by considering which members of the senior executive team or board of directors could potentially step into the CEO role. “Sally could do it!” or “I couldn’t see Jim stepping up to this,” for example. However, before turning to the question of who could best fill the interim CEO role, it can be extremely helpful to first define the requirements of the interim CEO role.

 

In our work with boards on the topic of emergency succession planning, we typically conduct interviews with both directors and members of the senior team prior to the board’s discussion of this topic. Among other things, we ask a series of questions: Who do you see as the key stakeholders whose interests need to be considered in emergency CEO succession planning? What will be important to each stakeholder in terms of interim leadership for the company? What do you see as the most important attributes or requirements for someone to step in as interim CEO if something were to happen unexpectedly to the current CEO?

 

The goal of this exercise is to distill the three to five top requirements needed for someone to be successful in providing interim leadership for the company. Avoid at all costs a list of 20 attributes. Zoom in on what is truly critical, and drive for as much specificity as possible. Once established, the requirements form a framework for
considering the candidates who might be best able to fill them.

 

In many instances, this framework serves to affirm why Sally could do it and Jim could not, and provides an objective basis for this conclusion. In other instances, it may be that Sally actually lacks some of the key requirements for the role and prompts a rethinking of who might be the best choice. After completing this process, other candidates that didn’t come immediately to mind might now reveal themselves as the most suitable successor.

What About the CFO?
The best emergency succession plans don’t stop with the CEO. They explore what might happen if two or three other top executives, such as the CFO, the COO, or general counsel, stepped in front of the proverbial bus. Going this extra step can yield important insights, particularly about the board’s level of exposure
to key members of the management bench.