Companies & Industries

The Recession Is Gone, and the CEO Could Be Next


During a series of meetings of directors of Minneapolis-based Medtronic (MDT) in recent weeks, board members have mulled potential successors to outgoing Chief Executive Officer William A. Hawkins. Although the 56-year-old Hawkins had been in charge for just three and a half years, he announced in late December that he would retire in April. During his tenure, the medical equipment maker's stock has dropped 30 percent amid waning growth for core products such as pacemakers. Medtronic now says it's looking outside its ranks for a new leader—a big change for a company that usually fills the top spot from within, but one that may be needed in its fast-changing industry.

"It requires that you keep taking a good look," says Medtronic director Robert C. Pozen, who lectures on corporate governance at Harvard Business School and is chairman emeritus of MFS Investment Management. Pozen declined to talk about Medtronic's CEO search but acknowledges that boards are under increasing pressure to maintain management performance. "You can make the right choice for CEO, [and] then if the regulatory environment or the business has shifted, he may no longer be the right person."

After three years of declining turnover among CEOs, churn at the top is back. As the economy improves, the rate of corner-office shakeups has picked up as more boards replace veteran CEOs with younger leaders with very different résumés. Many new CEOs have international experience and a track record in marketing or sales rather than finance or manufacturing, the specialties of CEOs two or three decades ago. They also haven't necessarily spent their careers at one company or in a single industry.

A case in point is Campbell Soup (CPB) Chief Operating Officer Denise Morrison. She will become Campbell's CEO in August, after zigzagging from Procter & Gamble (PG) and PepsiCo (PEP) to Nestlé, Nabisco, and Kraft Foods (KFT) before joining the soupmaker eight years ago.

Among other changes: new Pfizer (PFE) CEO Ian Read, who formerly was group president of its global biopharmaceutical business and earlier worked in Europe and Latin America, replaced Jeffrey B. Kindler, a lawyer with no operations or overseas experience; Google (GOOG) co-founder Larry Page, a software developer who is 38, replaced veteran executive Eric Schmidt, with the mandate to restore innovation to the Internet giant; and Advanced Micro Devices (AMD) CEO Dirk Meyer resigned after splitting with directors over the No. 2 chipmaker's strategy.

More reshuffling is imminent. Newell Rubbermaid (NWL) CEO Mark D. Ketchum, 61, plans to retire as soon as a successor is found. Ketchum sold off and restructured businesses during his five years at the helm of the Atlanta-based consumer-products maker. Now directors are seeking a CEO to expand the company, especially overseas. 3M (MMM) is evaluating several managers at the company to succeed CEO George Buckley, who plans to retire next year at 65.

Meanwhile, Sony (SNE) is conducting a search for a president who would be a successor to CEO Howard Stringer, who turns 69 in February. And a succession horse race among several IBM (IBM) executives is under way at that company. In July, CEO Samuel J. Palmisano will turn 60, the age at which IBM CEOs have typically retired.

The rush to change corporate leadership is a turnabout from the management standstill that set in during the financial crisis. CEO turnover declined from 12.7 percent in 2007 to 9.4 percent last year, according to a study of Standard & Poor's 500-stock index and Fortune 500 companies by executive search firm Crist/Kolder Associates in Chicago. One likely reason: Boards were reluctant to change leadership during the recession, concerned that if a CEO left, investors might think the company was coming unglued.

With the economy recovering, Crist/Kolder is predicting a return to double-digit corner-office turnover at big companies in 2011 and 2012, says Chairman Peter Crist. "We're going into a 24-month cycle of CEO volatility," he says. "Since companies are now compared to competitors on proxy statements, there's heat on boards to change leaders who aren't getting results."

New CEOs have fewer gray hairs; recruiters say executives approaching 60 are today often bypassed in favor of younger candidates. And they expect to serve shorter tenures: six to eight years, vs. 10 to 15 years a generation ago, according to a Booz & Co. study of CEO succession from 2000 to 2009.

Boards today also want CEOs who have run an international business, traveled extensively overseas, and have connections with executives and government leaders around the world—experiences they need to oversee big companies that often can derive up to half, or even more, of their revenues from foreign markets. Being a director of a public company also counts in an era of heightened corporate governance when CEOs must work more closely with their boards—and often report to a nonexecutive chairman.

"CEOs of big global companies today understand that they need to respond to consumer groups and [nongovernmental organizations] and work closely with governments around the world," says Rakesh Khurana, a Harvard Business School professor who studies leadership. "They aren't going to do what former General Electric (GE) CEO Jack Welch did a decade ago when he tried [unsuccessfully] to gain approval to acquire Honeywell International (HON) and lectured the EU about economic policy. There's more modesty now."

Boards itching to change leaders often are starting from scratch. Only 35 percent of 1,318 executives surveyed by Korn/Ferry International (KFY) in December said their companies had a succession plan. A 2010 survey of 140 North American CEOs and directors found the respondents' boards averaged only two hours a year on CEO succession. Some 39 percent of respondents to the survey, conducted by executive search firm Heidrick & Struggles (HSII) and Stanford University's Rock Center for Corporate Governance, said their companies had no viable internal CE0 candidates.

A smooth corner-office transition often depends on a CEO who has groomed subordinates to replace him or her. Four years before he turned 65, Richard T. Clark, Merck's (MRK) chairman and former CEO, began grooming Kenneth C. Frazier for the corner office. Frazier, a lawyer by training who was named Merck's new president and CEO in January, made his reputation defending Merck against Vioxx lawsuits. In the last three years, Clark made Frazier the company's global sales and marketing chief and then president, to build his leadership experience. Frazier also is a director of ExxonMobil (XOM).

Some recruiters see a limited pool of CEO candidates, especially since private equity firms have siphoned off talent from public companies' management. Tom Tiller, for one, left snowmobile maker Polaris Industries (PII) in December 2009 to become CEO of Abound Solar, a solar module manufacturer that's raised more than $250 million from several private equity investors. Ari Bousbib, formerly president of United Technologies' (UTX) commercial businesses and an executive considered a likely UT chief, left in September to become CEO of IMS Health, which provides research to pharmaceutical companies and is owned by TPG Capital and other investment firms.

"Ari was being chased by numerous public companies," says search executive Crist. "Every time we're doing a CEO search now, the candidate is also talking with TPG, Blackstone (BX), or another private equity firm," he says. It's difficult to lure executives back to public companies, since those who head private equity-owned firms typically must spend two to five years restructuring or building a business before "it's taken public and they get a big return," says Crist.

The bottom line: Now that the recession is over, turnover in CEO suites is picking up. Boards today are often seeking leaders with new skills.

Helyar is an editor-at-large for Bloomberg News in Atlanta.

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