It has now been a few weeks since David Sokol, Warren Buffett’s assumed successor, announced his resignation from Berkshire Hathaway. Since his announcement, Berkshire’s stock has fallen more than four percent while the Dow and S&P indices have remained essentially flat. Sokol’s resignation and the apparent gap in CEO succession that it created at Berkshire appear to have had a negative impact on Berkshire investors.
Gary Hourihan
Berkshire is far from an isolated case. In the month following Mark Hurd’s resignation from Hewlett-Packard, again without a clearly designated successor, HP stock fell about 11 percent relative to the Dow and S&P and has yet to regain the loss. In fact, it currently stands at a relative loss of close to 30 percent since Hurd’s departure. Similarly, Apple’s stock price has lagged the S&P ever since Steve Jobs announced his intention to play a less prominent role due to health issues. And, in the aftermath of AIG CEO Robert Benmosche’s cancer diagnosis and lack of an obvious successor, the price of AIG stock has declined close to 40 percent despite a rise in the Dow of nearly eight percent. Benmosche had doubled AIG’s shareholder value in his first 17 months on the job. Are these cases all coincidences? Maybe, but doubtful.
While the adverse market reactions of Berkshire Hathaway, HP, Apple and AIG may be extreme examples due to the high-profile nature of their CEOs, they provide evidence that succession planning does matter in the eyes of investors. What is particularly disturbing about these situations is that the vast majority of companies do not appear to take succession planning seriously. As evidence, the National Association of Corporate Directors recently cited a study by David Larcker and Stanford’s Rock Center for Corporate Governance indicating that 46 percent of executives say their companies are not actively grooming CEO successors.
This being said, all isn’t gloom and doom. According to Wards Auto Week, Ford CEO Alan Mulally claims that Ford is devoting considerable attention to succession planning (arguably a very good idea since Mulally is widely credited with Ford’s recent success). To quote Mulally, “In every position, we didn’t try to have one plan, but to identify all the talent so we could go in multiple ways.” In January, The Men’s Wearhouse announced a succession plan for the orderly transition of executive leadership in fiscal 2011, including founder, Chairman and CEO George Zimmer.
Other examples that provide hope include CVS Caremark, which in January announced the next stage of its transition plan for CEO Thomas Ryan; eBay, whose proxy discloses that “the company conducts an annual review process that includes succession plans for our senior leadership positions”; and U.S. Bancorp, whose proxy reports “a defined board process for succession with respect to the chairman and CEO roles as well as other senior positions.”
Interestingly, in direct contrast to the negative market reaction to CEO succession issues, the stocks of both Men’s Wearhouse and CVS Caremark have performed well since their CEO succession plans were announced. The prices of both stocks have slightly outperformed the Dow since the announcements, giving additional credence to a recent comment by Stephen Mills, vice chairman of the executive search firm Heidrick & Struggles. In reference to AIG’s succession issues, Mills said, “The company needs to demonstrate to investors that it has the processes in place to find the next CEO when the time comes.”
So where are we heading? Are the surveys that find effective succession planning sorely lacking a cause for concern, or is the tide turning in the right direction? An important question is whether compensation committees can structure executive compensation packages that encourage and support proactive succession planning practices for the company. As the Dodd-Frank Act focuses investor attention on pay and performance alignment, executive reward design has an important role to play in succession planning. In this regard, the following example is illuminating. It demonstrates both what I believe to be trends in succession planning as well as best practices.
The board of a Fortune 500 firm not typically associated with progressive leadership planning undertook a process to assess its entire senior management team in response to the CEO’s expected transition in two to three years. The process encompassed the development of a “success profile” that incorporated the behaviors, values and skills considered by management and the board to be essential to the company’s strategy, culture and the demands of the role. In turn, the success profile was to serve as the basis for candidate evaluation. Once this profile was in place, an assessment of each executive’s behavioral characteristics, values, background and experience was conducted through interviews and a 360-degree assessment completed by the executive’s boss, peers and subordinates. The work resulted in the identification of internal and external candidates. The company decided that the two internal candidates should be mentored by the current CEO and “groomed” through assignments to address gaps in their experience. The company also identified candidates who would be able to fill the current roles of the two potential CEO successors.
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Gary Hourihan is right on every point. He is spot-on to bring special attention to the development of the ‘success profile’. This principle is critical to ALL companies, whether Fortune 500 or disruptive start-up. Every company MUST align their practices to link strategy, execution and individual performance management. Unfortunately, we are still finding companies that consider skill and past track record of success, instead of the ‘whole’. Those organizations are missing opportunities to link ROI, behavior, values and skills. Thereby, shortcutting long-term success.