Stock markets rise and fall, recessions come 
and go. CEOs, other C-suite executives, and boards struggle to create long-term value while fretting over short-term performance. Markets change, evolve, and disappear. Competitors emerge, fade, get bought out, and sometimes buy others out.
In this daily thrum and chaos of the business world, a very important task often gets forgotten: choosing a successor. The old saying about forgetting that you were hired to drain the swamp is doubly resonant when it comes to succession planning: you also forget that someday, you’ll need to hire someone else to drain the swamp.
FUNDAMENTAL PRINCIPLES
Succession-planning discussions are often focused on the CEO, particularly in the case of a charismatic company founder (like Steve Jobs, Fred Smith, or Herb Kelleher) or iconic miracle worker (like Lee Iacocca, Jack Welch, or Lou Gerstner). But the importance of succession planning also extends all the way down an organization. Companies that
require all managers to have a plan for a successor are also the ones that will have less trouble replacing key people at the top of the organization chart.
There are some fundamental steps to the succession-planning process in every organization: defining what experience (and possibly education) will be required to fill a role, what internal performance factors are important, where the talent might be located internally (a big challenge in a multinational company), and what training and development programs might be needed for managers on the way up.
This type of process can serve as a sifting mechanism over time, creating a smallish pool of strong candidates for the top jobs. It can be effective, even at the top levels of the organization, for most jobs:
- Consider that all Chief Counsels will be lawyers.
- All CFOs seem, to the untrained eye, to be the same.
- The CTO will, no doubt, be a highly educated engineer.
- The CIO may have more of a business orientation, but will be very well-versed in leading and emerging technologies.
- Although it can be a challenge for a top salesperson to become a top sales manager, the head of sales in an organization will be, in fact, a salesperson.
- Even the COO (whether specifically titled as such or not) will typically be an operations-oriented executive who has risen through the ranks as a floor manager, facility boss, and/or division leader.
A METHOD TO THE MADNESS
A number of competing books, theories, methodologies, and consultants are available, yet no single approach to succession planning has been proven superior to the others over time.
This platitude might be true as far as finding the right CEO is concerned, but is perhaps less true across an organization. Successful CEO succession planning might be likened to the entertainment business, in which a few big hits compensate for a number of less-successful efforts.
The charismatic leader is a staple personality in the business world, and defines most of the superstar CEOs who emerge over time. But this staple can also be a stereotype. A succession of CEOs at Intel over the years have been uncharismatic, yet persuasive, public speakers. Who remembers the great performances of Ray Kroc, or going back further, of Alfred Sloan or Tom Watson Sr. or Jr.? Today, it’s tough to imagine a more diffident speaker than Google CEO Larry Page—but who’s to say he won’t keep the company on its highly successful path?
THE NEED FOR LEADERS
Below the pinnacle, decisions about who should be promoted through the managerial ranks can be systematically driven and codified based on past success. As in the military, most businesses have a very good idea of which lieutenants will make good captains and which captains will make good majors.
One of the most sought-after skills for an executive is the ability to make decisions in the face of contradictory input from equally influential sources. This can be a particular challenge in organizations with any sort of matrix management in place, in which a manager might be taking specific direction from more than one boss or more than one
committee of bosses.
Managers must become leaders if they are to be considered for the C-suite and other top jobs. Leadership can be difficult to define, but it’s easy to identify. A good corporate manager will successfully negotiate a “trial by fi re” (or several), eventually proving themselves capable of effectively leading teams through difficult challenges.
THEN THERE’S THE CEO
But when it comes to the CEO, the ideal choice can be anyone’s guess. No process can be automated to the degree of picking the right candidate from among many, especially for the CEO job. There is simply a screaming uniqueness about that top spot.
Business is not war—even for modern executives who are regularly seen toting copies of Sun Tzu. But a business does have a strong command-and-control aspect to its management structure, along the lines of a military organization. Succession planning is inherent to the military’s “up or out” leadership culture, in which only two percent of its
top officers are nominated to be generals and admirals.
Even in the tightly controlled environment of the military, however, choosing a top leader is as much art as science. Specific personalities can be the perfect fi t one year, and the wrong fit the next. One day, a highly technical background is preferred. The next, sharp political instincts and elbows. The next, a classic warrior.
The same holds true for business. It’s easy enough to mock the huge mistakes certain companies have made over the years in choosing their CEOs. It’s tougher to be in the position of making this sort of decision. Savvier boards of directors act quickly when it becomes apparent they’ve put the wrong person in place, even if it’s usually because the market is loudly telling them they’ve made a mistake.
In the wake of the disastrous market crash that brought on the Great Recession, the federal government decided to poke its nose into the issue—or rather, allow shareholders to poke their noses in, in the form of SEC Bulletin 14E (see the related story on page 21). Some of the wording in this regulation opens the door for shareholders, even very small shareholders, to place CEO candidates into consideration.
This sounds like vocal sports fans having a real say in picking the quarterback of the local NFL franchise—a policy of which many sports fans would, no doubt, approve. Just as sports fans provide the revenues for NFL teams, shareholders
provide the equity for public corporations to function. Furthermore, picking a winning quarterback can be as perilous and uncertain a task as picking a winning CEO. So why not?
IT’S THE MORALITY, STUPID
Though picking and retaining the optimal CEO attracts the most scrutiny, the most important aspect of choosing a top executive should be ethics and morality, not performance. A bad fit or a surprisingly lackluster performance from a new CEO is one thing. Criminality is another. It is the stuff of nightmares.
Public companies have been rocked by several large scandals involving criminal behavior during the course of the first decade of the 21st century. Such behavior will no doubt rear its ugly head again somewhere, and sooner rather than later.
To combat this, the federal government instituted two major (and controversial) pieces of legislation over the past decade: Sarbanes-Oxley (SOX), and more recently, the Dodd-Frank Act. C-Suite Insight readers are as well-steeped in this legislation as any group of people. It’s not a secret that they often fi nd the legislation to be burdensome.
But just as SOX has encouraged board members to play closer attention to major decisions, Dodd-Frank is encouraging board members to pay closer attention to their CEOs.
A recent Equilar survey, for example, found that 84% of companies in the Fortune 100 now have clawback provisions in place. We can imagine that these policies will be enacted among public companies of all sizes in the near to moderate term. An ugly word for an unpleasant process, clawbacks are intended to reimburse companies and their shareholders
for financial restatements, ethical misconduct, and even criminal activity—not simply incompetence or bad luck.
BOTTOM LINE: DOES IT WORK?
There are very few other criteria that board members can apply to their CEOs. One immutable business reality is that a CEO and compliant management team can run a company right off a metaphorical cliff. That’s the essence of the risk investors take when they buy stock.
But looking at the very long haul shows that the system works. The United States and other Western nations have built tremendous wealth since the end of World War II. Today, emerging nations from every region of the globe are getting into the game, through the time-tested combination of stable government and capitalism. There are fits and starts and terrifying moments, of course. One recent example is Thailand, where a period of political upheaval was followed just a few months later by a World Bank upgrade of the country’s economy to the middle-income tier.
Meanwhile, the Great Recession and its aftermath seem to have shaken the U.S. to the core. Criticism of what goes on in Washington and on Wall Street is in a steep crescendo at the present moment. The U.S. appears headed for an historic election next year, one in which the issues are clearly defined and in which truly different visions of the future are being presented.
“Succession planning” in the world of politics is a top-of-mind issue for many American voters heading into 2012. As in the military and corporate worlds, this process has a methodology in its early stages, but the final selection is typically more imprecise art than rigorous science.
