Smoothing Out Succession

In the wake of CEO ousting at Citi and Merrill, a BusinessWeek.com columnist talks with Theodore Dysart about lining up the right successor

by William J. Holstein

Boards of directors are realizing they have to become more active in planning for the succession of outgoing chief executive officers, but they have much distance to travel before managing such transitions as smoothly as they should be handled, says Chicago-based Theodore Dysart, managing partner for the Americas for the board of directors practice of Heidrick & Struggles.

Here are excerpts from a recent conversation I had with Dysart:

Holstein: Are boards changing the way they think about succession planning?

Dysart: Yes, absolutely. In the past, they were a little bit more removed and trusted the management team. Now they recognize the most important thing they can do is select the leader and make sure they have leadership planning in place. They're spending a lot more time on it and trying to make sure there are procedures in place to evaluate the talent throughout the organization. Boards are recognizing that there are a lot of risks associated with going outside to find a CEO. There may be circumstances when that's required, but having at least a couple of internal choices is clearly the better option.

Judging from what happened at both Citi and Merrill Lynch, where CEOs were forced out but no successors were ready, the financial firms are way behind manufacturing companies like Procter & Gamble, right?

I can't comment on those two specifically. But it depends on each individual. In the industrial space, you can point to companies that have been very good at it and you can point to some that have been bad at it. In the financial sector, at Goldman Sachs and others, they've done a very good job of assessing, developing, managing, and motivating talented executives. Other companies have gravitated more toward the star system and when that star leaves or that star falls, you've got to scramble pretty quickly to figure out who you're going to put in.

But it doesn't imply that those boards were asleep at the switch?

The board has a responsibility to its shareholders to hopefully having a successor in line. But in most organizations, if you name someone CEO, the likelihood in the next year or two that you're going to have another successor lined up beneath him or her is pretty slim. The plan may include asking someone to take the job on an interim basis while the company does an outside search. That's one approach to succession planning. Directors I've spoken with say that no matter how hard you plan, in reality, it very rarely unfolds according to the playbook you've laid out.

But aren't Citi and Merrill essentially leaderless and won't that hurt their businesses?

Leadership transitions are always traumatic in an organization. Whether you have some period of time when a leader is in place just keeping everything together while you figure out your next step, or whether you move very quickly to name a successor, there is always a transition that occurs. It's much the same way if you declared whom your next leader is going to be, at the end of the period of time, because that means the incumbent can become a lame duck. People start transferring power and allegiances to the next person.

What went wrong at Sprint Nextel, where word of the board's search for a successor to CEO Gary Forsee forced him to resign and there was nobody lined up to take his job?

The management was really trying to move along in a particular direction and the board did not see eye-to-eye with them. It's the board's responsibility to make sure you are developing talent internally. But if you can't say, à la Jack Welch, that you've got three or four options under the CEO level, then you've got to ask whether the CEO is running the enterprise for the long-term benefit of the shareholders.

Isn't part of the problem that CEOs don't really want to promote people who might eventually succeed them because boards might pull the trigger early and force out the CEO?

I think that's part of it. But if you look around today, there are instances in which more enlightened CEOs are saying, "Hey, I have developed the talent underneath me. Do I really want to risk losing that talent or do I want to move on and find out what I'm going to do next in my life?"