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Irreplaceable You

July 31, 2003
Related Topics: Workforce Planning, Featured Article, HR & Business Administration

Don Hewitt, 80, who invented the revolutionary newsmagazine 60 Minutes in 1968, refused to heed the loudly ticking stopwatch that served as the leitmotif of his signature program. The CBS executive producer, who once announced his intention to "die at my desk," increasingly had to deflect the desperate attempts of company execs to secure his cooperation in a succession plan. Earlier this year, he grudgingly agreed to turn over the reins to Jeff Fager in 2004. In exchange for setting a departure date, Hewitt was given a deal. He’ll serve as executive producer of new projects and "advise" his heir from a different desk, presumably the place of his eventual demise.

Colgate-Palmolive CEO Reuben Mark won an award from the Corporate Library as the "director most committed to proper conduct" for doing his best to browbeat Citigroup’s mulish CEO, Sandy Weill, 70, into formulating a succession plan. While the rest of the Citigroup board of directors acquiesced to Weill’s obstinacy, Mark was so disgusted by his refusal to plan responsibly for contingencies that he tried to resign, then finally settled on refusing to run for re-election. (Citigroup announced in July that Charles Prince will become CEO January 1; Weill will remain chairman until 2006.) What is it that makes succession planning so difficult? Why on earth would a gifted, sophisticated leader be reluctant to strengthen his legacy by properly preparing strong, accomplished people to carry it on? And how can workforce management leaders--in roles akin to those of kids asking dad to announce who will inherit the house--increase the odds of seamless, easy transitions in their firm’s top slots?

In a 2000-2001 study by DBM,only 2 percent of 481 large companies surveyed internationally judged their succession-management programs as excellent. Two-thirds described their policies as fair or worse. A 2000 survey by the Society for Human Resource Management found that only 32 percent of 473 organizations surveyed had any sort of formal succession plans at all.

At worst, failing to have a competent commander in chief in the wings can result in a company’s imploding. More frequently, the leader chosen in a desperate circumstance turns out not to be the right one, and a firm begins a downward spiral into organizational chaos. As employees become demoralized by a firm’s inconsistent direction and their perception that promotions are arbitrary, turnover escalates, defections to competitors skyrocket and retention costs balloon. Because the new boss is likely to be bounced within a couple of years, the company’s mission and strategy become increasingly erratic, and competitiveness declines. And then there’s all the bad press.

Companies lacking succession plans are "fragile enterprises. They lose intellectual capital. It goes with the people who have left. The company loses traction, momentum, productivity, morale and customer service."

Putting "a dollar or euro number on not having a succession plan in place is frankly impossible because each enterprise is different," notes Chris Pierce-Cooke, executive vice president and a worldwide managing director of Right Management Consultants, an international firm headquartered in Philadelphia. But the departure of a capable leader can instantly downshift a company’s stock by as much as 10 percent, and if a prepared and capable candidate is not put in place, it may never bob back up. A search fee--traditionally one-third of an executive’s total annual compensation--can easily range into the hundreds of thousands of dollars, he adds. Companies lacking succession plans are "fragile enterprises," Pierce-Cooke says. "They lose intellectual capital. It goes with the people who have left. The company loses traction, momentum, productivity, morale and customer service."

The reasons behind the tenacious hold of some top execs at the head of the table are legion. But the consequences of their refusal to say good night gracefully can prompt situations out of Greek tragedy. Who hasn’t read the story of the ruler who destroys the kingdom he loves in a desperate attempt to keep it as his own?

"Some people are so wrapped up in their role in the company that it’s their only source of identity, friends and family," says Elaine Sloan, senior vice president of Personnel Decisions International and general manager of PDI’s Twin Cities office. Execs who haven’t diversified their lives to include roles outside work cling the hardest to their saddles, she notes. "They’re addicted to the perks, the adulation and all the attention." The same attributes that help an executive battle his way to the top--a titanium-tough ego, the confidence of a rock star and a voracious need for control--suddenly become drawbacks when the career curtain descends.

A leader’s insistence on impersonating Cal Ripken can erode a company’s stock price and result in a mortifyingly public struggle for power, such as the long-running Viacom soap opera that has seen patriarch Sumner Redstone torpedo one heir after another. In 2002, the carrot-topped Redstone, 79, unsuccessfully tried to oust his most logical heir, Mel Karmazin, in what Michael Wolff of New York magazine described as "an extreme and comical instance of not going gently into that good night." In March, a Solomonic détente was finally reached that allowed Redstone to keep his hand on Viacom’s controls. But the deal permits Karmazin to stalk off with stuffed pockets should Redstone overrule him. After the agreement was announced on March 20, Viacom’s stock shot up 5 percent in a single day. "The reason this got played out in public is the employee was holding something over the boss," says George Mannes, a columnist at Had Redstone not made nice with Karmazin, "Wall Street would have pounced on Redstone for eating his young," Mannes says, no doubt by devaluing the stock by an equivalent percentage.

Succession planning for companies, Mannes says, is not unlike retirement planning for individuals. Everyone says they do it, but when the time comes, most find their plans woefully inadequate. And in a busy world overflowing with compliance mandates, quarterly targets and ASAP directives, there are rarely penalties or incentives levied on boards or CEOs who fail to deal with the question of "Who’s on third?" much less whether anyone is warming the bench.

To envision the leader you’ll need even one year from now "is like hitting a moving target," observes Brian Schwartz, owner of the Talent Management Team in Westport, Connecticut. While a CEO’s impulse is often to clone himself, companies "need different leaders at different times. At one point you might need a consolidator and a stabilizer. At another you might need a visionary." But the marketplace is moving at hyperspeed, and it’s often difficult to foresee specific needs. The rotten economy also works against all kinds of long-term planning. Even well-intentioned companies that take pains to develop their employees "are not using metrics to measure the success of their leadership programs," notes Pamela Stepp, managing director for the Center for Advanced Human Resource Studies at Cornell University.

And while CEOs increasingly have reigns the length of spin cycles, many are loath to give up their jobs because they can’t afford to retire in the comfort they had imagined. Plummeting stock prices have meant that many people--including the CEOs who may have presided over company crashes--are unwilling to leave, Stepp says.

Inattention to turnover at the top is especially surprising, given that it’s so common. The DBM study determined that the average tenure of a CEO is now 2.75 years, down from three to four years in 1999. This dizzyingly rapid turnover, the report concludes, is not solely reflective of shareholder impatience. It also indicates that CEOs "are not ready for the job when they get it." CEO departures are often the result of a merger or acquisition (25 percent) or retirement (28 percent), but a full 24 percent resign or are dismissed. Another 6 percent leave because they are appointed chairman. And 2 percent manage to realize Hewitt’s dream. They die in office.

Waiting until the corporate jet crashes to discover that there is no good internal candidate intimately acquainted with a company’s culture, and prepared to meet its goals and needs, can cost a bundle--and make a human resources executive’s life a nightmare. "We have very good research that shows that 50 percent of the people you hire from the outside for senior management positions don’t work out," whereas 65 percent of those internally promoted are successful, says William C. Byham, co-author of Grow Your Own Leaders and chairman and CEO of Development Dimensions International, a Pittsburgh consultancy and career coaching firm.

According to DBM, a full 86 percent of companies appoint a CEO from within. When organizations go outside for a leader--which is becoming increasingly common--it’s usually because the board wants to take the firm in a new direction, hopes that a magic-making exec from outside can weave yet another turnaround miracle, or finds the devils they don’t know more alluring than those they raised themselves.

Casting a national net for new talent is expensive but sometimes required. Be happy if the money you spend proves to be a waste, says Roger Conway, program manager for the Center for Creative Leadership’s "Leadership at the Peak" course. After a national search, "you compare your best available candidate to what’s available in the marketplace," Conway says. If succession planning has been comprehensive and your candidates properly developed and groomed, "yours should be much better."

Sloan notes that poor succession management can wreak havoc on retention efforts throughout a company. When the promotion process is fair, and employee development is sensible and generous, "people will stay on." When it’s not, employees become what Sloan calls "POPOS--passed over and pissed off." One large organization where Byham worked boasted a succession-planning process, but discovered that the number of senior managers who came out of it "was about zero. They were obviously using some other subjective criteria." Not using the data collected to determine promotions is guaranteed to demoralize and embitter good employees, and result in a talent exodus.

Experts unanimously declare that effective succession planning is based on good, thorough employee evaluations (many favor the 360-degree approach), leadership development achieved via education, stretch assignments (testing an executive’s performance in a variety of jobs) and thoughtfully designed mentoring and coaching programs. The process also should be fair and transparent, and promulgated through all levels of the company.

But few companies seem to be able to put all the pieces together in a comprehensive, visionary way that is backed by the top management. Some executives recoil from the task in the superstitious belief that grooming successors may hasten their own departure. Astonishingly, even when management does have people in mind for top slots, the objects of their fond regard are often clueless that they’re in a pool of people tagged as having top leadership potential. In a 2000 survey of 150 companies around the world, Byham found that "50 percent don’t tell the people who are in it that they’re in it! I think it’s stupid."

Outgoing CEOs occasionally sabotage the process in service to their own self-interest, forging Faustian bargains to more richly gild their retirement years. Schwartz once worked with a CEO who turned the company over to a man Schwartz deeply distrusted. "I was the lead HR consultant and I advised him to rescind his decision," he recounts, but the outgoing CEO, eager to receive the huge windfall he had arranged for himself, refused. His heir, Schwartz says, vandalized the company for three years until "he was fired for cooking the books."

Having to choose between children competing for a top slot can re-ignite all kinds of sibling resentments over who loved whom best, resulting in estrangements and lawsuits.

Family companies have a particularly complicated set of succession issues. The pater--or mater--familias must be confident that the person designated to carry on is prepared, but also needs assurance of his own financial security. "We had a situation where the son was in his late 40s, running the business and responsible for all its recent success," recalls Jeff Galant, the tax and estate-planning partner for Goodkind Labaton Rudoff & Sucharow, a New York law firm that specializes in family businesses. The father owned most of the stock, but refused to bow out unless he received "fair value" for it. Establishing what constitutes "fair value" requires not just creative tax planning but an outside mediator, Galant says, because the son felt that the father had already received considerable recompense by withdrawing large sums from the company to support his posh lifestyle.

Having to choose between children competing for a top slot can re-ignite all kinds of sibling resentments over who loved whom best, resulting in estrangements and lawsuits. "They’re afraid to deal with these issues," Galant says. "They don’t want to bring out old problems. More and more, we partner up with family business consultants who have degrees in organizational behavior, and investment banking firms, to go in as a multidisciplinary team to help them through such restructuring."

What often works for a leader who is emotionally attached to running things and reluctant to leave is to put him in charge of a foundation or philanthropic arm of the family business, Galant says.

A good succession plan isn’t just about designating a prince to be crowned king, attorneys and consultants say. It’s also about developing a roster of candidates to cover all key positions, not unlike the military. Developing a surfeit of top prospects is advantageous for everyone. The company is guaranteed to have any talent called for available in-house, and the employees are happy because they’re growing, expanding their skills and rounding out their résumés.

"You hold on to them by their hearts," says Scott Behson, assistant professor of management at the Silberman College of Business Administration at Fairleigh Dickinson University in Teaneck, New Jersey. A firm can insure its investment by crafting policies such as offering to pay for an MBA degree if an employee agrees to stay with the company for at least three years after earning one, Behson says.

Galant says that crafting a fair, transparent process isn’t all that difficult if those in executive suites create and follow the plan. He counsels family companies to "build the criteria in early." Expectations about degrees and job experience that is required of future leaders should be made explicit. When there are multiple qualified contenders for the throne, an impartial expert panel can be appointed. "You try not to load the deck," Galant says. "We try as lawyers to make it as fair as we can."

That model is not impossible for other businesses to follow because while all employees want to work at a place that is fair, not everyone wants to occupy the top slot. "Kodak is doing some very interesting things" to open up the process and allay the concerns of women and people of color who often feel shut out of promotion opportunities, Stepp says. In 2000, the company’s Leadership Assessment and Development Center began a four-tier, open-door program to groom anyone who wanted to be considered for supervisory positions. The program attracted more than 1,000 potential leaders. After attending the introductory course, "So You Want to Be a Leader?" about 25 percent of the participants "deselect" themselves. Another 25 percent drop out after the second course, which gives instruction on how to handle supervisory duties such as budgeting, staffing and production.

At a time when the economy is uncertain, it’s not only lonely at the top. It’s also a precarious perch.

Workforce Management, August 2003, pp. 36-40 -- Subscribe Now!

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