Keys to getting succession planning right

Business, Editor's Choice | Tue 22 Nov | Author – Business & Finance
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Management expert Andrew Hill shares the keys to getting succession planning right.

The chief executive of a multinational company told me recently about the first board meeting after his appointment to the top job.

He looked forward to the congratulations of directors, perhaps some warm words of support from the chairman – in other words, recognition that his arrival would mark a fresh start and a new golden era for the company. But when he opened the board agenda, he got a shock: item one was a discussion of who should succeed him.

What may look like extreme prudence is in fact sensible succession planning. Plenty of new chief executives think about their departure before they arrive. But usually because they are planning their own escape route and framing the contractual terms of their exit.

It is one reason why so many boards are left red-faced when their chosen leaders fail to live up to expectations and the lavish severance packages they signed during the honeymoon period come to light.

Instead, boards should be following the lead of the multinational I mentioned. Yet a surprising number have only scant succession plans in place – and this is a lapse to which every organisation, from fast-growing technology champions to blue-chip bellwethers, can fall prone.

In the first category, think of the trouble potentially in store for Alibaba, the Chinese ecommerce group, which enshrined founder Jack Ma’s rights in a dual-class share structure when it went public.

What may look like extreme prudence is in fact sensible succession planning

Mr Ma is gradually distancing himself from the group, and the structure – common also at some US technology groups – does provide some guarantee that founders will continue to impart their wisdom, to the benefit of all shareholders. But what if founders cling on? Then, attempts by investors impose their own chosen successors are likely to get bloody.

In the blue-chip camp you find Marks and Spencer – a company with a long pedigree that you would expect to have honed succession planning to a fine art. Yet in 2008, in part for want of an adequate internal successor as chief executive, it flouted governance orthodoxy by appointing Stuart Rose as executive chairman, a move that somewhat tainted his reputation and the retailer’s. (Since then, M&S – like the prudent multinational I mentioned above – has had succession as a standing agenda item at board meetings, which helped it achieve a relatively smooth transition to a new CEO earlier this year.)

KNOW WHEN TO GO

Knowing how and when to leave is an important part of leadership, but one that is often overlooked. In fact, I would go so far as to say that final judgement on the success of leaders should be reserved until it is possible to see how well their successor performed.

With this in mind, here are six keys to better succession planning:

First,  chief executives – monitored by boards – need to be constantly vigilant that they do not overstay their welcome at the top. That raises the obvious question: How long is too long?

The average tenure of CEOs dropped from nearly nine years to less than seven between 2000 and 2010, according to one survey. When I talked to some current and former chief executives, they suggested a seven-year itch to move on probably should be heeded.

Five years is too short and ten years too long, I was told by one US boss (then approaching the six year mark in office). The much shorter tenure of many chief executives barely gives them a chance to enact the plans they launch in their first year. It also makes it hard to judge the quality of their leadership.

ATTITUDE NOT AGE

Yet succession planning is not a mathematical exercise – which brings me to the second key point. Boards should be keeping an eye on attitude rather than age or tenure when they judge if their chief executive is past his or her sell-by date. It is a standing question whether and when Sir Martin Sorrell, now 71, should quit as chief executive of WPP, the advertising business he successfully built up.

The standard answer from the company is the right one: as long as he can devote the energy to the group, and its shareholders reap the rewards, his age should be irrelevant. (How much he gets paid is a different question altogether).  When I interviewed Sir Martin in 2015, I pointed out that he seems if anything to get more active as he gets older.

THE LONG VIEW

A third lesson is to take the long view and not assume that succession needs to be synonymous with complete reinvention.

Successful companies, according to a study conducted by academics for the book Strategic Transformation (Palgrave Macmillan, 2013), cultivate a combination of continuity and challenge. One way they do this is by spotting and nurturing radicals inside the group – potential successors who know the culture but are also prepared to adapt it to changing conditions.

Tesco was one such company and Sir Terry Leahy – at least initially – an example of a successful internal successor. Yet even he stayed too long (see my first key), helping to doom his successor Philip Clarke to a short tenure and leading ultimately to the appointment of Dave Lewis in 2014.

The fact that Mr Lewis was the first outsider to be named chief executive in the supermarket chain’s long history was a real sign of the succession crisis that had been building for years.

HEIR TODAY, GONE TOMORROW

Fourth, pay particular attention to succession if you head a family-owned company. Here rational succession planning can be complicated – occasionally fatally – by the emotion of family inheritance. Some dynasties (think of the Rothschilds or Wallenbergs in Europe) do thrive down the generations.

But most research suggests blood is not thicker than governance. As family companies grow, professional managers will usually need to be appointed over family members. A partial solution is for the principal family representative to move into a non-executive chairman role.

Boards should be keeping an eye on attitude rather than age or tenure

The academic euphemism for what generally happens if families stay involved in day-to-day management is “heir underperformance”. More colourfully, the late Tony Benn, the MP who renounced his hereditary title, once said it would terrify him, “if I went to the dentist and as he began drilling my teeth he said, ‘I’m not a dentist myself, but my father was a very good [one].’”

DON’T DIVIDE

A fifth point: except in rare circumstances, try to avoid dividing the main executive role. Of course, leadership is largely a shared responsibility but too often the appointment of co-CEOs is a sign of indecision and messy compromise rather than a way of recognising complementary skills.

Deutsche Bank’s experiment with having Anshu Jain and Jürgen Fitschen run the group ended messily in 2015, in what the Financial Times described as “the deepest crisis of confidence in a generation”. The duo was replaced by a single chief executive.

Likewise, while Research in Motion’s twin CEO structure at first married the different talents of Jim Balsillie and Mike Lazaridis to create and market the BlackBerry, it made them hard to oust when things started to go wrong earlier
in 2011.

andrew hill

Andrew Hill, Financial Times

THE ART OF THE MATTER

Finally, while cognitive computing and neuroscience may help transform the field of recruitment, it is worth bearing in mind that succession planning is often as much art as science, particularly at the top.

You can search diligently for a perfect match, apply all your surgical skills to the operation, and still run the risk of rejection

Studies disagree, for example, on whether and in what circumstances to go for an outsider over an insider. There are almost as many exceptions to the rules of succession planning as there are rules in the first place.

This should come as no surprise. Recruitment at the highest level is still largely about people picking people, with all the unpredictability that process involves.

Even the best preparations – based on the database searches of the world’s finest headhunters and the wisdom of the most experienced nominations committees – can come to nothing if, at the point of need, the chosen successor is either not yet ready, or simply not available.

So if there is an element of science involved, then it comes from medicine rather than data analytics. Picking a new chief executive – particularly one from outside the organisation – is like transplanting a new heart. You can search diligently for a perfect match, apply all your surgical skills to the operation, and still run the risk of rejection. 


About the author: Andrew Hill is management editor of the Financial Times and author of the recently published book, Leadership in the Headlines: Insider Insights into How Leaders Lead.