Succession planning - is it passe?

Over the last six months, a number of well-publicized chief executive failures have made CEO churning an issue.

Challenger, Gray and Christmas, a Chicago placement consulting firm, reports CEO turnover is at its highest level since the summer of 1999.

Given the number of disasters that have arisen in recent years when a corporate heir has been promoted to the top job after the CEO leaves, retires or drops dead from exhaustion, one has to ask the value of succession planning.

Since late 1999, the people promoted to the position of chief executive officer at a number of major companies such as Xerox, Mattel, Coca-Cola and Gillette have been pushed out or quit after short tenures.

This record turnover of senior executives at major companies coupled with the failure of many promoted executives to perform following their succession to top jobs leads to a reassessment of the practice of succession planning. With what appears to be an appalling failure rate in succession planning, one is led to question the validity of the concept in the first place.

Before one starts to question the concept, it would be worthwhile to examine how succession planning usually transpires. That in itself is a daunting task since succession-planning exercises are as varied as the companies that use them.

They range from intricate plans involving several levels of management and a multitude of meetings to the simple supposition that an entrepreneur has of who should or could succeed him if a calamitous event hit tomorrow.

Unfortunately, many plans that are called succession plans are not really succession plans at all but are at best, replacement plans. They are prepared within the organization with the objective of identifying the person or persons who could immediately be inserted into a vacancy if a catastrophe hit the incumbent. As it is often expressed, “What would we do if Lauren got run over by a bus tomorrow?”

Normally, succession planning, as the name implies, represents the development of a plan for the continuance of the incumbent group of employees.

This premise in itself might be one of the critical causes for the failure of many succession exercises. Inherent in this method is a retrospective approach to the task. It leads management to view the situation in light of what has gone on in the past. It tries to identify the reasons the departing individual has been successful during his tenure and sets those experiences, and characteristics as the model for the successor.

This approach fails to recognize that it may only be the departing executive’s lengthy tenure in the position which makes his performance appear to be satisfactory.

Another reason the incumbent’s performance may be viewed as a success is his fit with the corporate culture and that of the board of directors. A new appointee is not likely to have the advantage of a relationship with the board and must earn its trust and confidence. The prime way that trust is earned will be through the performance of the organization.

So it is quite conceivable that the successor’s performance is subject to more severe scrutiny than that of the departing executive who has been in the position for a period of time. It is also likely that the new internal appointee is expected to perform at a higher standard and at an earlier time than an external recruit who is often given a “honeymoon period” to get established.

Any plan to identify a successor based on the departing executive’s traits also runs the risk of missing changes to the business environment that may call for a different type of chief executive. The demands of the marketplace may have evolved and the characteristics necessary to fulfil the position in the future may be distinctly different from that of the past.

In his book Corporate Lifestyles, Ichak Adizes points out that organizations go through stages of growth. To ensure the organization continues to move forward, the tasks required of executives, at each stage are frequently substantially different from those required at the previous stage.

If one factors into the organizational scenario the changes that have occurred and are occurring around them, then it is relatively easy to accept the idea that what served a departing executive well, may not serve his successor.

In most cases the change in needs will be greater in the smaller, younger organization than in the well-established company.

The former is faced with the challenge of a developing organizational structure and must address this as well as the vagaries of the business environment. The latter has a mature organizational structure that it can adjust or manipulate to best meet changes in the marketplace. Radical change is less likely to be required.

If succession planning is to have a chance of being viable, it must not be a retrogressive vision of what the organization requires. It must be integrally tied to the organization’s strategic plan. It can not be a human resource strategy aligned to the organization’s strategic plan since that approach will have a tendency to view things in a regressive manner. It must be an integral part of the organization’s strategic planning process and be visionary in outlook. Only when it is, will successors be developed and groomed for the challenges of the future.

In the May/June 2000 issue of the Harvard Business Review, Warren Bennis and James O’Toole wrote an article titled “Don’t Hire the Wrong CEO.” This article seemed to be stimulated by the significant turnover of CEOs at the time. The authors call this activity “CEO churning.”

They concluded the prime reason for the failure of CEOs is that the boards of directors that appoint them fail to define what real leadership is in today’s business environment.

The authors seemingly take as a given that the most successful recruitment of a new CEO will be the hiring of an external candidate and not an internal successor. The authors make the observation, “In fact, as discouraging as it may be, history shows that few internal successors have made great CEOs.”

One wonders why this might be true. Is it because there is not as much analysis done of an internal successor as there would be if the person were hired from outside? Shortfalls are often overlooked in high performers but not so much so with outsiders. Outside hires often have to face elimination based on their overall competencies, while incumbents are more likely to be appraised based upon their most recent performance in a single functional area.

The notion that internal candidates do not excel as successors to CEOs seems to fly in the face of the almost universally accepted belief that one of a CEO’s prime responsibilities is to develop talent. If this is true, it would infer that many CEOs are not doing a good job developing talent to the organization’s highest level. Does this mean that the development of talent should cease at the level below that of CEO?

Why does this dichotomy of opinions exist?
Perhaps it is due to the way the succession planning process takes place. In some organizations it falls almost exclusively within the domain of the human resource function with only indifferent input from other functional departments. The CEO depending on his interest will provide input that will vary from giving the HR-developed succession plan a rubber stamp to providing in-depth domination of the process.

The development of the succession plan is frequently seen as an annual ritual that must be carried out prior to being filed away pending next year’s plan.

Many organizations avoid putting to paper a plan that identifies who the successor will be for the CEO, fearful of losing good people who aren’t identified as the next in line for the top position. The CEO may have discussions with his board about the matter but this does not always accomplish anything more than identifying whom the incumbent CEO believes should be his successor.

Depending on the board, this may or may not be a pivotal piece of input.

In the Bennis and O’Toole article, the authors take the stance that “developing talent is one of the CEO’s key responsibilities, but choosing the next CEO is nobody’s job but the board’s.”

However, compare this assessment of the board’s role with the situation disclosed in a survey on corporate governance conducted by Spencer Stuart Canada. That survey revealed that “A number of companies report(ed) that their board is not formally involved in the strategic planning process or succession planning.”

If one places Bennis and O’Tooles’ claim that it is the sole job of the board to choose a new CEO opposite the observation that a number of boards are not involved in the succession planning process, then it is not surprising that the process lacks credibility and success.

In those cases where boards do not participate in the development of the succession plan, it is not surprising that they frequently go outside the organization for the CEO’s successor. This is a high-risk approach which, based on recent results, has been very costly for many companies.

If succession planning is to be a viable activity there needs to be major changes in the process.

To be successful and meaningful the development of the succession plan can only be led by board members. These board members must be intimately knowledgeable about the organization’s strategy and its personnel needs. They must understand and accept the organization’s current culture or establish their vision for cultural change.

However, if there is to be a succession plan then the board members entrusted to develop the plan must become intimately knowledgeable about the talent within the organization. This will require directors to be more aware of performance ratings as well as become involved with senior level hires.

Carrying out these responsibilities will require significant time requirements. Many external board members do not have such time available. If they are to perform such duties they will need meaningful input from the organization’s personnel.

Based on the poor record of appointing CEOs, as cited above, it would seem that for many board members to successfully execute these responsibilities it will require the acquisition of new skill sets.

The organization’s strategic planning guru needs to identify what will be the human resource needs of the organization to achieve its strategic thrust. This will require identifying trends toward new skills and competencies emerging in the marketplace.

The human resource function can no longer be seen as having responsibility for leading the activity. This means HR will be giving up their traditional position. Some people will be upset with that but at the same time, succession has become a very critical issue. It may be counter to what has been going on but it has also become too important an issue not to be taken up at the very highest levels and in many cases HR is not in a senior enough position to have that impact.

Human resources should provide input and co-ordination of the activity but not lead it. They must prepare a plan that will identify the time required to develop the skill levels that will be required to achieve the strategic demands of the business.

The incumbent CEO must review those issues that provide the greatest challenge. She must analyze the competencies that are required to successfully address them and provide that input to the succession process.

For organizations to achieve a greater degree of success in the succession planning process, it may be necessary to recruit some directors that have a good track record identifying and developing talent. If this route is not taken, the most feasible action would be that a board recruit for its own use a senior level consultant experienced in organization development and senior level recruiting. This person would be part of the team involved with the development of the succession plan.

The concept of succession planning should not be allowed to die because it’s usually executed poorly. However it requires major surgery and subsequent attention to be effective in modern day commerce. If it is abandoned, boards of directors will be forced to continue to play the game of “CEO Roulette.”

Fred Pamenter is managing partner with Pamenter, Pamenter, Brezer and Deganis Limited, a Toronto-based HR consulting and executive search firm. He may be contacted at (416) 620-5980 or [email protected].

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