3.5.7 CEO succession

CEO succession has always been an important issue for the board in the US. Generally US companies are very good at career development, training those persons with the highest potential and grooming them for top positions. In the US it is often quite clear who is promising among their staff. The ladder practice, also called "auditioning", is being increasingly used.1 Who has the potential to be CEO is often quite clear in advance. In many cases "laddering" goes more or less as follows: a potential CEO is first appointed as COO, then as president and only afterwards, if he has fulfilled expectations, as CEO. The successor is never publicly announced, but often there is an awareness of who is being groomed.2 Often there are several persons to choose from, who have demonstrated their abilities as heads of divisions. The effectiveness of this longterm process has been mentioned to me by Dutch captains of industry as an example of good US practice. Indeed, Dutch directors who work in large US corporations have told me that even at lower levels two or three candidates are named and groomed for key positions.

In the past the CEO/chairman took the lead in the process of selecting his own successor and asked the board for agreement at the last moment. Ovitz's appointment as COO by the Disney board in 1995, which was planned by CEO/ chair Eisner, was an example that worked out badly, but has served as a warning for many companies and boards.3 At GE the appointment of Immelt to replace Welch, which was prepared 5 years in advance, was an example of how things should be done.

The framework within which US boards work on succession matters has changed radically in the past few years. Regulations and guidelines, especially concerning the nominations committee and disclosures, required by the Sarbanes-Oxley Act, NASDAQ and NYSE, have increased the pressure to ensure effective CEO succession. Shareholders, investors and employees are holding boards accountable for CEO performance. As a result, directors are getting more involved in succession planning.

It is crucial to assign the oversight of the CEO succession planning to the independent nominating committee and to have the lead director or independent non-CEO chairman chair that committee. It follows that control over this critical strategie factor has shifted from the CEO to the independent directors.4

Best practice advice to independent directors concerning CEO succession is to plan three to five years in advance and ensure that there is full board involvement. Succession planning should also integrate business strategy and risk management.5

Other measures generally promoted are to establish an open and ongoing dialogue and annual review and make the process transparent, to develop and agree on selection criteria, to use a forma! assessment process of all interaal (and, if any, external) candidates for their work in prior years, to interact with interaal candidates by having managers make presentations at board meetings, attend off-site meetings, retreats and social events and have managers meet individually with board members. The best way to test potential candidates is to have them discuss strategy in a board consisting of strong, opinionated people. An often heard warring stresses the need of not leaving career development to the Human Resource department, but having directors themselves meet the top 50 staff members of the company. This is one of the reasons for on-site visits. It is also advisable to stage the succession, but avoid horse races. The consensus among directors is that "having a clear front-ruimer is the right way to go". However, if a board is developing multiple prospects, it should never publicly announce who is being considered for the role and should develop interaal candidates rather than recruiting externally. Interaal candidates are familiar with the company's unique business and culture.6 Companies like General Electric, Lowe's, Microsoft and McDonalds have processes that strongly favour interaal candidates. These companies all have effective executive development programmes. Companies that have the best development programmes will have the best interaal candidates.7

The next best practice, at a change over, is to either have the outgoing CEO leave, or stay on as a chairman for a limited period of up to 6 months. Most directors are in favour of the CEO leaving immediately. "Wekh (at GE) isn't trying to teil Immelt what to do". If the outgoing CEO stays on briefly, this works best, when there is absolute clarity about the division of roles and the symbols of leadership. For example, the office of the outgoing CEO should be moved to another floor. It can be useful if the lead director is prepared to act as mediator and if the outgoing CEO gets coaching during the interim transition and the other directors help as well. This short period of 6-12 months, during which the outgoing CEO stays on as chairman, is called the "apprenticeship model". This "apprenticeship" system has become increasingly popular over the years in the US.8

It is certainly advisable to prepare a comprehensive emergency succession plan. McDonalds is often mentioned as the perfect example. When the company's 60-year old CEO suddenly died from a heart attack, the board had "a good plan" in place and acted immediately by naming a respected insider, thus reassuring franchises and investors that the same strategy would continue to be followed. Steps to be taken by directors in connection with the emergency plan are to ask the current CEO who the interaal candidates are, make a requirement of having an emergency plan and be prepared to replace the entire executive team when necessary, have a communication strategy and prepare for a search.