The Indispensable Succession Plan

Boards shouldn't wait until they have a crisis to deal with who's up next. The issue must always be top of mind—and top of agenda

by Ram Charan

Now that the dust has settled on the recent tumult in the C-suites of Merrill Lynch and Citigroup (BusinessWeek.com, 11/27/07), one thing is clear: Boards need to have a credible, specific, and actionable chief executive officer succession plan in place at all times.

The lack of such a plan—which appears to have been the case at two of the world's highest-profile financial services firms—destroys credibility in the capital markets and erodes shareholder value. It also stirs anxiety inside the companies involved, making it difficult for people to stay focused and maintain momentum. Boards that fail to have a decisive succession plan at all times, whether it's for an emergency or planned retirement, run the serious risk of being judged negligent in the court of public opinion.

The problems at Merrill Lynch (MER), which had to scramble to find a successor to Stanley O'Neal, and at Citi (C), which is still searching for a new chief executive, make the point. But you can easily find other examples. Kmart (SHLD) and Apple (AAPL) (before Steve Jobs returned) each had four consecutive CEOs who failed. Harder, but not impossible, to find are examples of boards being prepared. (When health tragedies struck two consecutive CEOs of McDonald's (MCD) in 2004, the board's robust succession plan came through.)

Behind the Board's Behavior

Why are so many boards so bad at what, by definition, is one of their most important jobs? As someone who has spent his entire professional life studying corporate leadership in all forms, it seems to me there are two fundamental reasons:

1. Boards don't take succession seriously enough. They assume that if the CEO is new, is performing well, or is several years from retirement, succession can wait. Urgent and routine matters eat up time, and succession slides to the bottom of the agenda. Or else the boards rely on the CEO to carry the weight. So, for example, when the CEO says the potential successor won't be ready for four or five years, the board is too polite to push the issue. Regardless of the current CEO's age or status, succession should be a constant and urgent concern.

2. Boards don't think through the constantly changing criteria for the CEO job. The world is in continuous flux, and so are the challenges a chief executive faces. The board must periodically revisit and perhaps change the mix of criteria by which leaders are put on—and stay on—the short list of potential CEO successors.

Succession is a hands-on activity. Boards have to own it, not just by saying that they do, but by digging in and getting engaged in the details. It cannot be delegated. Delegation is abdication when it comes to succession planning.

Board Members Should Be Hands-On

Boards should discuss succession in depth at least two times a year. Board members should know who the potential candidates are—not only who might be the next CEO but also who could be the CEO after that. (What happened at McDonald's shows the importance of such in-depth planning). They need to know how each candidate is progressing. They should get to know the candidates formally, through boardroom presentations, and informally, at the dinner table or on the golf course. That way, directors can form their own opinions of the candidates rather than rely solely on the CEO's.

Directors should also be prepared to suggest ways to help the candidates grow. Say those one-on-one meetings reveal that a candidate is weak in operating experience. The board might suggest a move to test (and preferably improve) that area.