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WANTED: A FEW GOOD CEOs
Why managing succession is such a problem--and what companies ought to do about it
If you are planning for one year, grow rice. If you are planning for 20 years, grow trees. If you are planning for centuries, grow men. -- A Chinese proverb
Well, it is only a proverb, and maybe one best suited to a fortune cookie. Don't expect to find it as a statement of purpose in many executive suites today. With the revolving door at the top of Corporate America spinning faster than ever, the days when corporations spend countless hours and millions of dollars cultivating legions of executives for the top job are fast disappearing. As Gilbert F. Amelio's abrupt exit at Apple Computer or John R. Walter's surprise resignation from AT&T make clear, CEO succession has become a messy melodrama. And few companies seem to have the time, the luxury, or the patience to grow CEOs anymore.
Yet there are few management issues of greater importance to companies, their investors, or their employees than who will lead a corporation in the future. The recent blowups underscore the imperative for CEOs and their boards to do a better job of preparing for succession. And as the generation of executives whose careers began in the postwar years hits retirement age, the issue will play out in record numbers: Of the 500 companies in the Standard & Poor's index, 17% have CEOs who are 63 or older. According to Bain & Co., that's up from only 10% in 1993.
Already, headhunters are scouring the landscape for new chiefs at AT&T, Apple, Delta Air Lines, Raytheon, Quaker Oats, and Unisys. Close behind are a host of other corporate powerhouses that will soon have to decide who is most qualified to fill the CEOS shoes. For such high-profile companies as Walt Disney, Ford Motor, IBM, Coca-Cola, Citicorp, and General Electric, the question of succession is imminent and ongoing.
But how best to choose a new CEO? In the wake of one succession shuffle after another, it is fast becoming a major focus in management circles. In September, the National Association of Corporate Directors will convene a blue-ribbon panel to explore how boards should approach the issue. McKinsey & Co., the tony consulting firm, has just embarked on a major research effort dubbed "The War for Talent" to study the best practices in the recruitment, development, and retention of a company's talent pool.
Much of the spotlight on CEO succession comes in the wake of the bloody dustups that have filled the business pages of late. But in recent years, there also have been major changes in the way succession is planned and executed. In part, that's due to pressure from institutional shareholders. The massive downsizings that have weakened the bench strength of many companies have also played a role. They've made companies far more willing than before to go outside their ranks for a new CEO. Back in the late 1960s, only 9% of new leaders came from outside. Now, nearly a third of CEOs at the top 1,000 public companies are outsiders--and that number is likely to grow.
But the biggest change may simply be the influence directors now wield in the process. Choosing a successor was once the near-exclusive province of the outgoing boss, who would present his pick to a generally compliant board. Now, outside directors at companies ranging from Campbell Soup to Merck and General Motors are taking a far bigger hand in selecting the new boss. In a few notable cases, boards are even taking charge. "In the past, there was a huge onus on the CEO to groom his own successor," says Susan Gretchko of Deloitte & Touche Consulting. "Today, the onus for developing and finding a successor has moved to the board."
Of course, boards are hardly fail-safe either. Apple's directors now have three failed CEOs to their credit. But with the shift, many boards are redefining their own roles, as well as rethinking how much involvement the CEO should have in naming his or her replacement. They are taking more responsibility for the timing of the boss's exit, making succession planning a component of the CEOS yearly performance review, and in many cases, debating what is the right division of labor between the board and the outgoing chief. "When a CEO and the company are doing very well, he tends to get the benefit of the nod," says Richard L. Thomas, former chairman of First Chicago NBD Corp. and a director on several boards. But if the CEO is on the rocks himself, "the board tends to be more assertive."
Ideally, say observers, outside directors should control the succession process, interviewing all internal candidates for the top job and hiring a search firm to benchmark insiders against the best outside talent. "The most important thing a board has to do is to decide who has to run the place," says John H. Bryan, CEO of Sara Lee Corp. and a director at Amoco, First Chicago, and GM. "I have been on boards for almost 20 years, and the attention given to this is vastly ahead of what it used to be."
For many companies, it's a top-of-mind concern. GE Chairman and CEO John F. Welch, who plans to retire in 3 1/2 years when he turns 65, refuses to publicly discuss his much watched succession with U.S. reporters, but he recently told the French magazine L'Expansion that the issue has become "an obsession" for him. "It's on my mind constantly," said Welch. "Finding the right person is the most important thing I can do for the company."
TAILSPIN. At GE, there are roughly half a dozen serious candidates for Welch's job. But at the vast majority of corporations, there are far fewer, if any, logical internal successors. Most observers agree that if something happened to Microsoft Corp.'s William H. Gates III or Walt Disney Co.'s Michael D. Eisner, the stock of those companies would go into a tailspin. Yet Eisner--who has lost three potential successors, one to death and two to blustery public resignations--seems annoyed at the talk about who could assume his job. "I am 54 years old, and if it hadn't been for my bypass no one would be even talking about succession," says Eisner. While he says there are a handful of people "inside and outside" Disney who could take over, he concedes the company has no concrete succession plan.
Just what would happen at Disney and many other companies remains an enigma, in part because passing the baton to a new leader is fraught with risk and emotion. Most companies sidestep any talk of the boss's succession, partly to avoid the politics and drama that often engulf contenders for the top job. After all, public horse races can encourage ruthless elbowing among competitors, even as they advertise talent to prowling headhunters and rivals.
In testing his potential successors, GE's Welch has vowed not to repeat the very public process of elimination that he had to go through to become chairman and CEO in the late 1970s. Then, Welch was among seven top execs, a trio of whom were later named vice-chairmen and placed on the board until Welch was declared winner 14 months later at the end of 1980. "He felt it was divisive," says Noel M. Tichy, a University of Michigan professor who has worked with Welch. "People naturally took sides, and it created armed camps at the company." The scramble also cost GE precious talent: Immediately after being bypassed, four candidates left GE.
In that area now, GE is in a rare position. It boasts such bench strength that it has become a favorite poaching ground for headhunters. Indeed, GE dominates a BW survey ranking execs with CEO potential (page 69). Elsewhere, though, a paucity of executives with the right stuff has increasingly become the norm, putting pressure on boards to move quickly when they have a credible successor in-house. After all, in today's fluid market, the risks of having your top candidate plucked off are high. At H.J. Heinz Co., for example, Wall Street analysts publicly fret that the food company could lose President William R. Johnson to Quaker Oats Co. or another rival if longtime Chairman and CEO Anthony J.F. O'Reilly fails to retire in a timely fashion.
At other companies, the CEOs contract has been extended past original retirement dates because of uncertainty about succession. Sometimes, the CEO is unwilling to give up the corner office; elsewhere, boards feel no one is ready to step up. In the past year, boards at Avon, Coca-Cola, Gillette, and Ford have extended the contracts of CEOs past 65, their customary retirement dates.
Uneasy because some chieftains have paid scant attention to succession, some boards have now tied the process to CEO pay. At Ralston Purina Co., the board handed Chairman and CEO William P. Stiritz 600,000 stock options last year expressly linked to his developing a succession plan. The board "did not see an obvious successor in place," says Eric P. Marquardt, a senior vice-president at Compensation Resource Group Inc., which designed the plan. The result: Stiritz named two co-CEOs who will take over Sept. 30, when he will relinquish the job but stay on as chairman.
If Stiritz, 63, has dragged his feet, he's hardly alone. Confronting one's own succession can be daunting to the ego. "It's a little like writing a will," says Dennis C. Carey, vice-chairman of SpencerStuart, who has co-authored a forthcoming book on the subject. "Most CEOs don't want to think about it. They're consumed with the business and don't want to consider their own mortality."
Business history is littered with CEOs who don't know when it's time to call it quits. Today's Harold S. Geneen or Harry Gray--both corporate architects who had to be pushed out by their respective boards at ITT Corp. and United Technologies Corp. after they allegedly sabotaged several potential successors--may well be Steven P. Jobs at Apple or John S. Reed at Citicorp. Jobs is now playing an ever larger role at the troubled computer company he co-founded. Unwilling to step completely aside, his presence complicates Apple's already difficult search for a new CEO. Meanwhile, the 58-year-old Reed has pushed out some of Citicorp's most talented executives; critics believe he has done so to ensure that no strong second-in-command emerges. The void led to a shareholder resolution last April urging Reed to name a clear successor. Although the resolution failed, a Citicorp spokesman says that Reed has brought several overseas executives to New York headquarters to give "broader experience to a new generation of management."
Yet while many companies stall in the face of inevitable transition, others have begun to develop new ways of maintaining a steady supply of CEOs-in-waiting. The goal is to cultivate talent and expose it to the board and the outside world, leading to an array of "best practices" that are gaining increasing acceptance (table, page 66).
The recent passing of the torch at Campbell Soup Co. may well rewrite the book on CEO succession. It is an unusual example of a board that took full charge of the process. The company elevated Dale F. Morrison, head of its international and specialty food operations, to CEO and president on July 15. To assure a smooth transition from 64-year-old Chairman and CEO David W. Johnson, the board assembled a succession committee in November of four outside directors headed by Philip E. Lippincott, the former chairman of Scott Paper Co. The group quickly decided to evaluate not only the two best inside candidates--Morrison and U.S. grocery President Robert F. Bernstock--but also to hire Thomas J. Neff of search firm SpencerStuart to round up the best outsiders.
The committee narrowed its external search to three final candidates from Neff's initial list of 19 outsiders. After interviewing the three, directors sent two of them to CEO Johnson before deciding on a single outside finalist. Lippincott also insisted that Neff do an unusually large number of reference checks--28 altogether--on the two outside finalists. "When you have really good inside people, you want to be sure that if you pick an outsider, it's somebody highly respected," says Lippincott.
Meantime, the committee interviewed both Morrison and Bernstock on three occasions and arranged for small groups of other outside directors to question them as well. The committee also grilled the seven execs who report directly to Johnson to get their impressions of the two insiders, and it arranged for headhunter Neff to interview Morrison, 48, and Bernstock, 46, for Neff's assessment.
In mid-June, after a private session with Johnson to get his review of the year-to-date progress of the internal candidates, the committee weighed its two insiders against the outside candidate. Although Morrison has been with Campbell for only two years, directors were especially impressed by the former PepsiCo Inc. executive's turnaround of the company's Pepperidge Farm business. Morrison, moreover, had lived outside the U.S. for six years, a key advantage because international growth is central to Campbell's strategy. On June 26, the group unanimously recommended Morrison. Three days later, the full board approved the choice.
All told, the outside directors met 15 times from early December to June and communicated by phone more often. "I felt I was no longer retired," says Lippincott. "But it's the most important job a board has. You have to be sure you have the absolute best person to take the organization to the next level."
EMPTY TALK? There, as elsewhere, one huge change may be the willingness of major companies to look outside their own ranks. While many companies still devote significant effort to grooming up-and-coming execs, a decade of downsizing has drained a lot of talent from the pool. It has also cut layers of management where high-potential executives once gained additional seasoning.
Some observers, in fact, now say that rapid changes in business and a mobile job market have made much of the talk about management development superfluous for the run-of-the-mill company. "Unless you're GE or somebody like that, it may no longer make economic sense to make major investments in development and training," says Robert Felton, a McKinsey & Co. partner. "Companies should think twice about spending a lot of time and money on someone who may walk out of the door anyway. A healthier attitude today may be to consider the world as your bench."
That's still an unusual view, one prompted in part by the inability of IBM and AT&T--companies that have spent more money and time on management development than most--to cultivate internal CEOs. "They prepared a wonderful group of executives for yesterday's business," says Edward E. Lawler, director of the Center for Effective Organizations at the University of Southern California. "By being so good at narrowing the gene pool, they replicated people who would have been good leaders in the past but not the future."
It didn't help, of course, that both corporations had monopolistic mind-sets as well as more narrow product lines. In contrast, GE's portfolio of businesses, ranging from hard-core industrial manufacturing and consumer-goods marketing to finance and broadcasting, has long provided broader developmental experiences for its executives. The companies' depth of talent is evident in the number of GE-trained executives who are now CEOs at other companies, from AlliedSignal and Owens-Corning to McDonnell Douglas and Stanley Works.
That's one reason the most closely followed succession in American business will be at GE. Insiders say that Welch has been testing more than a dozen CEO aspirants by rotating them through numerous assignments and giving them frequent board exposure. The leading contender--according to outside handicappers--is W. James McNerney Jr., one of several fortysomething stars in the company's stable. A Harvard MBA and former McKinsey consultant, McNerney, 47, came up through GE Capital, did three years in Asia, and became president of GE Lighting in late 1995.
CRASH COURSE. Welch has not put candidates through the now-infamous "airplane interviews" that his predecessor, Reginald H. Jones, used to sort out candidates. In those sessions, Jones abruptly called each contender into his office and asked who should be the next chairman if both were on the company plane and it crashed. "It's so much a part of the company's folklore that it wouldn't get the same spontaneity," says a GE executive.
While GE may remain in the forefront of management development, many other companies are investing big bucks and lots of time systematically grooming successors. Whirlpool Corp. has created what insiders there call "the bunker," a 15-by-25-foot room dedicated to tracking the progress of its top 500 managers. The four walls of the locked room are divided by regions of the world and contain the names, titles, and photos of the company's key talent. Whenever executives enter the room, any topic other than management development stays outside. "It's really made us much more focused during succession discussions," says Ed R. Dunn, corporate vice-president for human resources.
At Corning Inc., the CEO and the board meet every February for a discussion devoted entirely to officer-level succession issues. A week before the session, directors are given books that detail top candidates for key jobs: those ready now, good possibilities for three to five years out, and the long shots who may need up to a decade of seasoning. "The more time you spend on succession planning and having the board involved, the better," insists Chairman and CEO Roger G. Ackerman.
Years ago, companies pushed promising candidates up every 16 to 20 months, often through a single function. Today, there's greater emphasis on broader experiences over longer periods of time. "We ideally follow a two-plus-two-plus-two formula in developing people for top management positions," says Dan Phelan, senior vice-president and director of human resources at SmithKline Beecham Corp. Translation: The company wants its best people to gain experience in two business units, two functional areas such as finance and marketing, and two countries. Every time a vacancy opens among the top 300 jobs, it will consider the possibility of looking outside for talent. "A little new blood doesn't hurt," says CEO Jan Leschly. "If you're not the best person for the job, we'll show no hesitancy to go outside."
And what if disaster strikes? Planning for the unplannable is part of the process. Every year, Leschly meets with the board's remuneration and nominations committee to detail long-term succession plans, including who would follow if he were "hit by a truck."
Sometimes it takes a debacle for a company to become more systematic about choosing a new leader. After a contentious succession struggle at United Technologies in the mid-1980s over Harry Gray's refusal to leave, newcomer Robert F. Daniell pledged to ensure an orderly succession process the next time. He developed several internal candidates, giving them broad exposure to the board. "Daniell created a group of a half-dozen of us who went to every board meeting beginning in 1987," says current CEO George David.
After winning a three-year horse race between two executive vice-presidents, David was named president in early 1992, CEO in 1994, and chairman in April after Daniell's retirement. "From the time I was named president, Bob never allowed any ambiguity about succession whatsoever," says David. "Politics in organizations occur when there is ambiguity and uncertainty."
Still, for every board trying to tackle CEO succession in a head-on fashion, there remain many who leave it until too late or in the wrong hands. "The biggest single problem of boards of directors is that they are terrible at noticing when the CEO has stopped doing well," says Nell Minow, principal of Lens Inc., the activist investment fund. AT&T is an obvious example, with the company and its shareholders now paying the price. By allowing Robert E. Allen to control the outside search for his successor--even as his refusal to gracefully exit the CEO job prevented the company from attracting a top-drawer candidate--AT&T may have doomed the process from the start. Its board, sources say, met no other candidate for the job except Walter, the head of R.R. Donnelley & Sons Co. Embarrassed by Walter's resignation after only nine months, directors say they are now conducting the search for a new CEO.
Truth is, you don't have to plan for centuries to groom a successor. But shareholders need active and involved boards attuned to the leadership needs of their companies. The sudden demise or departure of a CEO shouldn't confound an enlightened and prepared board.By John A. Byrne and Jennifer Reingold in New York, with Richard A. Melcher in Chicago and bureau reportsReturn to top