Analysis: Stepping Up to a Succession Problem

Amid a battle for control of privately held Carlson, the board hired a consultant to help find the company's first nonfamily CEO. Most companies would have panicked, says the Hay Group's Beverly Behan

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The Carlson board deserves a lot of credit for the way it handled an extremely difficult situation. It takes courage for a board to admit that the leading CEO succession candidate doesn't have the right stuff. Many boards won't make that tough choice. They're reluctant to start over and argue that the candidate they've devoted time and attention to grooming should at least be given a chance as CEO. But there are few things more destructive to a company, its employees, and its shareholders than a big mistake in CEO selection. Among other things, the wrong CEO can prompt defections among key talent, lower company morale, drive strategic missteps, and significantly erode shareholder value.

Pulling the plug on the top candidate when it becomes apparent he/she isn't going to make it as CEO is always tough, and those challenges were even more pronounced in the Carlson situation. The top candidate, Curtis Nelson, was the son of Chairman Marilyn Carlson and the grandson of the company's founder. The company also remains in family control. Not only do thorny family dynamics come into play in such a scenario, but appointing a nonfamily CEO represents a fundamental change in the way a family relates to the business.

No longer would a family member be a hands-on operator, representing a fundamental shift for the family from management to governance. Yet in spite of these challenges, the board took the courageous step of throwing their bodies on the tracks rather than endorsing a CEO candidate whom they clearly had reservations about.

Picking Up the Pieces of a Failed CEO Succession Plan

In classic succession situations, such as the well-known General Electric (GE) example, there is often more than one horse in the CEO succession race. Even companies that try to avoid the often brutal dynamics of a horse race among top executives typically have a Plan B if the front-runner runs into trouble before the baton is passed. As Marilyn explains, however, because the board anticipated being able to pass the torch within the family, there was only one candidate at Carlson. As such, the board found itself back at square one when the succession plan fell apart.

The typical reaction among boards with failed CEO succession plans is to panic and start throwing around names of other executives or speed-dialing a search firm so as to quickly feel better about having some kind of candidate pool to fill the breach. Instead, the Carlson board took the right step. They stood back and carefully considered—with the help of an experienced third party who was not a search consultant—what capabilities they really needed in their future CEO. Most important, they had the third party interview the board members, the family, and the executive team so as to get all of these key stakeholders engaged in objectively considering the future CEO criteria before surfacing potential candidates. In this way, they created an objective yardstick against which to measure the "fit" of candidates against the key criteria they had developed for the next CEO.

The value of the third-party interviews Carlson undertook goes beyond engagement and alignment of key stakeholders. It also serves to tailor the criteria for the next CEO to take into account the history, strategy, and business model of the organization. Nothing is more common—or more useless—than an "off the shelf" list of future CEO criteria that looks like it was downloaded from another company's Web site. In the Carlson situation, for example, the interviews undoubtedly fleshed out in some detail the criteria and capabilities that would be required for someone to successfully take on the role of becoming the first nonfamily CEO of this company.

This is apparent in the way Marilyn is able to clearly articulate the factors that made Hubert Joly the ultimate choice as CEO: The directors chose someone who came from within the company and therefore understood and respected the family's role and interests in the business and had also earned the respect of the family and the Carlson organization. They clearly recognized the importance of international experience and perspective in light of their corporate strategy—they chose someone who was a French national but had worked inside and outside of the U.S. for other global companies. Finally, they recognized the importance of a strong strategic perspective inherent in Joly's McKinsey background as well as his understanding of a virtual marketplace, a critical aspect of Carlson's business model.

Beverly Behan is the managing director of the Board Effectiveness Practice of the Hay Group and co-author of Building Better Boards: A Blueprint for Effective Governance. .