Succession Planning 101
The best laid succession plans often veer off course.
When PepsiCo elevated John Compton to the role of president in March, analysts speculated he was a likely successor to Chief Executive Indra Nooyi.
But the mid-September announcement that Compton is leaving the food and beverage giant where he has worked since he was 21 to take the helm of privately held restaurant operator and franchiser Pilot Flying J in Knoxville, Tenn., put in play a new series of executive promotions. PepsiCo announced Zein Abdalla, chief executive of PepsiCo's European business, will assume Compton's position, while Enderson Guimaraes, president of PepsiCo's global nutrition group, will take over for Abdalla.
PepsiCo clearly was more prepared to handle the departure of a key executive than many companies have been, but time will tell how the new PepsiCo team performs. The recession and slow economic recovery has spurred many companies to put off succession planning as they focus on what they consider more pressing matters, experts say. But that can leave them high and dry when a key executive departs suddenly.
Aubrey Daniels International
CEOs typically stay in their positions from one to six years, says Aubrey Daniels, founder of Aubrey Daniels International and author of the book, "Measure of a Leader "The average [CEO] tenure is not very long, which is kind of amazing," Daniels says. "They're doing something wrong in selecting them."
New research from executive search firm Crist|Kolder indicates the average CEO tenure at Fortune 500 and S&P 500 companies is currently 6.83 years and 8.26 years at major retailers, with Leslie Wexner of Limited Brands skewing the results at 49 years. Crist|Kolder's CEO volatility report suggests companies are less likely to boot out a CEO during a difficult economy, while CEOs also may be reluctant to jump ship because of the uncertainty of taking a new position elsewhere during a tough period.
Transitions don't always come off as planned, perhaps because so many companies have flawed succession plans, says Jim Duffy, a partner at Wiss & Co., an accounting and consulting firm in Livingston, N.J. "I've seen businesses that treat it kind of like a homework assignment. They put everything on paper, select the next leader and talk about how roles will be transitioned. They don't address the style differences in the leaders or how they're going to transition from this one philosophy of the current leader to the next."
Often a crisis prompts a CEO transition. Declining sales at Supervalu over several years spurred the board to name Wayne Sales CEO in July, replacing Craig Herkert. Sales, who has been a director at the company since 2006, is overseeing the company's strategic review and potential asset sale.
Companies that historically have made succession planning a priority can be caught off guard by an unexpected turn of events. "When someone resigns because they were recruited out to another organization or when a vacancy is created because someone has a heart attack, those are the ones you can't plan for," says David Nosal, chairman and CEO of Nosal Partners, a San Francisco-based executive search firm. "That's why boards have to be so thoughtful and somewhat aggressive in their thinking and planning. They need to plan for contingencies. They need to plan the what-if," he says.
Chief operating officers account for 52.6 percent of internal CEO successors, followed by division presidents, who represent about 26 percent of CEO successors promoted from within a company, according to research from Hinsdale, Ill.-based Crist|Kolder. When boards look outside the company for successors, they generally focus on CEOs or division presidents.
The Planning Process
The succession-planning process at a public company starts with the board of directors.
The board and CEO need to establish a process for assessing, evaluating and developing current leaders to determine who might be viewed as a successor to the CEO, David Nosal of Nosal Partners says.
The assessment should include 360-degree feedback from the CEO, the identified executive's peer group and subordinates and the financial community. The assessment often will point to areas of competence that need strengthening, such as communicating with financial analysts who cover the company, Nosal says.
When companies don't have several obvious candidates in house, they should consider recruiting an outsider for a newly created role, such as chief strategy officer, to expand their options. "You create a role that gives them the broadest lens to the ever-changing landscape in their industry," Nosal says.
Boards should document the succession planning process by creating objectives that can be measured at least twice a year, Nosal says.
"I think there should be a hard objective built in to the CEO's key performance indicators that measures him or her on whether or not they are meeting their deliverable in the area of succession," Nosal says. "A certain proportion of their compensation should be tied into that, and it should be meaningful enough that the CEO recognizes the board takes it seriously."
The board also should determine whether the current CEO will transition to nonexecutive chairman or retire all together. "I'm a big believer that outgoing CEOs should have some transition period, up to two years," Nosal says.
If the former CEO stays on in some capacity, the board might need to devise yet another exit strategy for the executive.
With less internal grooming of CEO successors, more companies are hiring external candidates, Crist|Kolder reports. The company's annual volatility study indicates 11 of 42 new CEOs at Fortune 500 and S&P 500 companies during the first half of 2012 came from outside the companies. The search firm indicates external recruitment of CEOs is at an all-time high of 27.9 percent, compared with 21.4 percent in 2011 and an average rate of about 20 percent. Looking specifically at the retail industry, 22.6 percent of CEO successors came from outside the firms this year, the research indicates.
Best Buy in August named outsider Hubert Joly president and CEO, after forcing the resignation of previous CEO Brian Dunn in April due to allegations of an improper relationship with a female employee. The company had a seamless succession plan up until the last year, Nosal says. Its founder, Richard Schulze, was CEO from 1983 to 2002, when Brad Anderson became CEO, followed by Dunn.
"They didn't plan for Dunn to go. It was a chain of personal events that led to his departure. Up until that point, they did a brilliant job," Nosal says. "Even when an organization has a great track record of succession as Best Buy did for many years, the best laid plan can go awry."
A month after Dunn resigned, the Best Buy board pushed out chairman Schulze after it found he had knowledge of Dunn's alleged improper relationship but failed to report it. The company's succession plan took another twist when a week after Best Buy named Joly CEO in August, the board granted Schulze access to due diligence information and permission to form an investment group to bid for the company.
While Best Buy's situation is more tangled than most, often when a founder is still involved with a company, succession planning takes on an added dimension because of the founder's emotional attachment to the business, says Matthew Erskine, principal at the Erskine Co. and a partner at Erskine & Erskine in Worcester, Mass.
Some family-owned companies might stipulate control will pass to a relative who has never worked for the business, without fully thinking through who will manage the operations to keep the company afloat.
The 116-year-old family-operated Tootsie Roll Industries continues to be run by CEO Melvin Gordon, who is in his 90s, and his wife, Ellen Gordon, who at 80 is chief operating officer, The Wall Street Journal reported in August, noting that the company doesn't have a public succession plan.
Succession planning is often an afterthought at family-run companies, experts say. "To a certain degree, all founding families have a different sense of time. There's either now or the future. Now exists until the future suddenly appears," Erskine says. "On the succession plan...people put it off because they think the future will never come."
Internal vs. External
If no family member is ready or interested in taking over the management duties, a private company might hire a professional manager or agree to sell the firm, Erskine says.
Ideally, companies will have succession plans incorporating several different scenarios. When a private company hires an external candidate, the decision-makers need to be prepared to tell why they chose the person they did. "You have to have a good reason why you've chosen someone outside the family. It's complicated," says Gene Grabowski, executive vice president at Levick, a strategic communications firm in New York and Washington, D.C.
An important part of any CEO transition is delivering the story to employees, investors and other stakeholders, Grabowski says. "Today it's not enough to be a good leader. You have to have good P.R. You need everybody out there telling good stories about you," he says.
Because investors are constantly scrutinizing public companies, they need to appear organized about succession. While stakeholders are accepting of change, they've also been known to downgrade companies that don't have an obvious succession plan in place. "Shareholders look at succession as an indicator of whether [the company] has a good enough plan in place to weather future events," Grabowski says.
Some have questioned Best Buy's choice in outsider Joly, a former CEO of global hospitality and travel company Carlson, because he doesn't have executive retail expertise. But often industry experience is less important than finding a leader with a strategy for the future, Nosal says. The Best Buy board was interested in Joly's turnaround experience with the video game business at Vivendi and earlier at French computer firm EDS, according to media reports. "If done right, Best Buy will see extraordinary brand potential," Nosal says.