CEO Succession This page intentionally left blank CEO Succession Dennis C. Carey Dayton Ogden with Judith A. Roland OXFORD UNIVERSITY PRESS 2000 OXFORD UNIVERSITY PRESS Oxford New York Athens Auckland Bangkok Bogota Buenos Aires Calcutta Cape Town Chennai Dares Salaam Delhi Florence Hong Kong Istanbul Karachi Kuala Lumpur Madrid Melbourne Mexico City Mumbai Nairobi Paris Sao Paulo Singapore Taipei Tokyo Toronto Warsaw and associated companies in Berlin Ibadan Copyright © 2000 by Oxford University Press Published by Oxford University Press, Inc. 198 Madison Avenue, New York, New York 10016 Oxford is a registered trademark of Oxford University Press All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of Oxford University Press. Library of Congress Cataloging-in-Publication Data Carey, Dennis (Dennis C.) CEO Succession / Dennis Carey, Dayton Ogden; with Judith A. Roland p. cm. Includes bibliographical references and index. ISBN 0-19-512713-7 (alk. paper) 1. Executive succession—United States. 2. Directors of corporations—United States. 3, Industrial management—United States. I. Ogden, Dayton. II. Title. HD38.25.U6 C37 2000 658.4'07128—dc21 00-020412 135798642 Printed in the United States of America on acid-free paper Contents Foreword vii 1 Introduction 1 2 Covering All the Bases 15 3 Putting a Process in Place 37 4 Looking Deep Within the Organization 63 5 Striking the Right Balance Between the Board and the CEO 9 1 6 The Delicate Matter of the "Number Two" 1 1 5 7 Financial Tools That Promote Succession Planning 129 8 Global Intelligence®: A Window on the World 147 9 Flashing Yellow Light: Potential Problems Ahead 165 10 Conclusion: Core Principles Yield Best Practices 189 Appendix 193 Recommended Reading 197 Index 199 This page intentionally left blank Foreword John A. Byrne, Senior Writer, Business Week People are the lifeblood of every organization. In every corporate enterprise, in every nonprofit group, they form the communities that determine whether an organization succeeds or fails, whether they change the way we think and work or are merely superfluous to our economy and our society. That is why there are few management issues of greater importance to companies, their investors, or their employees than who will lead an organization in the future. The book you hold in your hands not only provides welcome insight into how the best companies prepare for smooth succession; more importantly, it tells all of us to take succession planning far more seriously. Doing so assures the continuity of organizations and the ideas that propel them. Mentoring people, nurturing them, care- fully planning for the time when you yourself will move on to anoth- er stage in your life is doing nothing more than sustaining the legacy of your life's work. In addition to this ongoing, long-term agenda, companies are increasingly recognizing the importance of planning for the un- expected. A CEO who is healthy and vital one day may become grave- ly ill or die the next. Just as suddenly, CEOs now often make surprise moves to other companies. Hence, more and more boards are insist- ing on "drop-in" candidates—who may or may not be permanent viii Foreword successors—ready to step in as a replacement CEO on a moment's notice. The critical importance of succession planning is understood by too few people. The truth is, many chief executives view succession as a threat to their own status or livelihood and spend very little time wondering who their successors will be. That's understandable: It's human nature to think that, if you're the top dog, no one else can do your job. Yet, nine years before his expected retirement as chief exec- utive of General Electric Company, Jack Welch was already saying that choosing his successor was "the most important decision I'll make. It occupies a considerable amount of thought almost every day." And well it should. Much of today's spotlight on CEO succession comes in the wake of a series of bloody dustups that have filled the business pages of late. For far too many companies, succession at the top has become a messy melodrama, the result of poor preparation, out-of-control egos, and bad choices. When succession becomes a struggle and a problem, it not only threatens the current and future success of an organization, it also threatens the legacy of those who worked so hard to create and build something that is enduring. Not surprisingly, then, much attention has been paid in recent years to how succession is planned and executed. Major changes have occurred in the field, many of them explored in this book. The changes are partly due to pressure from institutional shareholders and partly to the acknowledged importance of having the brightest, most creative people on board. The massive downsizings of the 1980s and 1990s that have weakened the bench strength of many compa- nies have also played a role. They've made companies far more will- ing than before to go outside their ranks for a new CEO. Back in the late 1960s, only 9 percent of new leaders came from outside. Now, nearly a third of the CEOs at America's top one thousand public cor- porations 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 Foreword ix ranging from Campbell Soup to Merck and General Motors are tak- ing a bigger hand in selecting the new boss. In the past, the onus to groom a successor was largely placed on the incumbent CEO. Today the onus for developing and finding a successor has moved to the board of directors. With the direct involvement of the chief executive, every board must work toward the inevitable transition that will lead to new lead- ership. A goal of every executive and every manager is to cultivate tal- ent. A goal of every CEO is to expose and test that talent before a board of directors and the outside world. If board members find the CEO is unwilling to face this part of his job, they need to forcefully remind the boss that it is within his best interests to worry not only about the company's strategy and focus but also about its leadership. In the landmark study on what accounted for the long-term suc- cess of the truly visionary corporations, James C. Collins and Jerry I. Pooras correctly noted in Built to Last that the best companies "pro- mote from within to preserve the core." They spend the money, the time, and the energy to develop, promote, and select talent from inside the company to a greater degree than their less successful rivals. Indeed, Collins and Pooras found that across seventeen hun- dred years of combined history in their eighteen visionary compa- nies, there were only four individual cases of an outsider coming directly into the role of chief executive. How to explain, then, the willingness of major companies to look outside their own ranks for a new CEO? While many organizations still devote significant effort to grooming up-and-coming executives, a decade or more of white-collar layoffs 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 now think that rapid changes in business and a more mobile job market have made much of the talk about manage- ment development meaningless for the run-of-the-mill company. "Unless you're GE or somebody like that, it may no longer make eco- nomic sense to make major investments in development and train- ing," says Robery Felton, a McKinsey & Co. partner. "Companies should think twice about spending a lot of time and money on some-