Strategic Issues in Succession Planning

By A V Vedpuriswar[1]

Introduction

At a strategic level, succession planning is probably the most important Human Resources (HR) risk. The consequences of appointing the wrong successor can be much worse than slow growth or decline in market capitalisation.  Take the case of Westinghouse. A series of wrong CEOs virtually drove this company, once rated on par with General Electric to bankruptcy.  Unfortunately, many companies do not take succession planning seriously.  The Boards due to friendship, politeness or inertia are reluctant to broach the subject.  Ad hoc succession plans lead to crises.  It is thus no coincidence that many CEOs in major US companies have failed to last even three years in recent times.  These include Douglas Ivester of Coke, Robert Annunziata of Global Crossing, Durk Jaeger of Procter & Gamble, Dale Morrison of Campbell Soup and Jill Barad of Mattel.  In India, companies like Thermax have faced crises because of poor succession planning. In this article, we attempt to outline the important issues involved in succession planning and how they need to be managed.

  What is succession planning?

Succession planning is identifying and preparing the right people for the right jobs.  Though applicable at all levels, it is at the highest level that the most formidable challenge exists. 

Succession planning is typically done in different  stages:

•   Identification of key positions and when vacancies might crop up

• Determining the skills and performance standards for these positions

• Identifying potential candidates for development

• Developing and coaching the identified candidates.

Succession planning if executed efficiently helps the organization in several ways:

•  It engages senior management in a disciplined review of the leadership talent available with the organization

• It guides the development activities of key executives

•   It ensures continuity of leadership and sends the right signals to employees as well as external stakeholders.

• It guides the promotion policies and helps to ensure that the right people are promoted at the right time.

• It facilitates a critical review of selection, appraisal and management development processes of the organisation.

This article focuses on succession planning at the CEO level.

The Coke example

Choosing a wrong successor, is a mistake all CEOs want to avoid.  Unfortunately, the track record in this regard of even the most successful CEOs is disappointing. Consider the legendary CEO, of Coke, Roberto Goizueta.  The aristocratic Cuban had trained his successor, Doug Ivester so well and made it clear to one and all long before his death who his successor was.  When Goizueta died of cancer, Ivester took charge in what the markets perceived to be one of the smoothest transitions ever in a Fortune 500 company. The Economist commented[2]: “Robert Goizueta will be severely mourned at Coca Cola, … but he might not be missed.  Strangely enough, that would be one of the greatest complements a departed chief executive could receive… Douglas Ivester, Coke’s 50 year old president and chief operating officer, is now expected to succeed Mr Goizueta and to carry out the same strategy that has served Coke so well.  Mr Goizueta deserves the credit for this smooth transition.  He was responsible for succession at Coke, and his plans had been laid well in advance.” Yet, a couple of years later, Ivester was found unfit for the task and had to resign. An accountant by training, Ivester had a flair for numbers and had the reputation of a street fighter, unlike Goizueta, who had been a strategic thinker and delegator.  When they were together, Ivester complemented Goizueta well.  But after becoming the CEO, Ivester found it difficult to manage some sensitive issues and by early 2000, had resigned.

Looking back, Ivester’s number crunching, financial engineering and technical skills were exceptional but his people orientation and leadership skills were lacking when they were needed most.  Take the scare in Belgium when hundreds of people became sick after drinking Coke.  Ivester did not go there for a week,  a reflection of his inability to appreciate the magnitude of the crisis.  Similarly, Coke’s failed merger deal with Orangina was mostly due to Ivester’s failure in dealing with anti Americanism in France.  Ivester also seemed somewhat out of place while handling a racial discrimination suit. Quite clearly, Goizueta had trained his successor well but had chosen the wrong successor in the first place.

The Indian scenario

The problems associated with succession planning are particularly acute in India, where family managed businesses proliferate. Such companies throw discretion to the winds and spend time on dividing the family silver among the next generation rather than in grooming the right person to take over the top job.   Family managed companies would do well to remember that  the chosen successor should have the necessary education and skills and be made to work his or her way up the management to gain the maturity needed to appreciate the privileges and responsibilities involved. Alternatively,  they should be bold enough   to appoint a professional manager, when there is no suitable candidate within the family.  Some of the more progressive Indian business houses like Ranbaxy, the Murugappa group and the Eicher group have demonstrated a high degree of professionalism in this regard. 

Many Indian companies are now beginning to appreciate the importance of planning successions carefully.  At L&T, one of India’s leading engineering companies, many of the company’s senior managers are expected to retire in the first few years of the new millennium.  CEO A M Naik has been attempting to deal with the situation, naming the top 10% of his executives as stars and chalking out a fast track career path for them.  Naik hopes that by 2005[4], “L&T will be in strong hands”.  Before initiating the program, L&T employed  the services of an HR consulting firm to list the positions falling vacant and the required competencies.  L&T now fills vacant posts with internal candidates wherever possible.  In some cases, however,  it compares the internal candidate with an external candidate to judge his or  her readiness to move into the new job.

The problems which Indian companies face while managing succession planning are well illustrated by one of India’s most people oriented employers, Thermax.  The Pune based company has been known to take good care of its employees, making it a favourite employer among many of India’s premier technical institutions.  Yet, the company was facing a major crisis at the beginning of the new millennium.  Roughly five years after founder Rohinton Agha  passed away, the entire board of governors had to resign en masse as the company struggled to compete in a changing business environment.  Thermax’s  market capitalisation declined sharply from Rs. 990 crores (on 22^nd July 1996) to Rs. 186 crores (on April 4, 2000).  Agha had nurtured and grown Thermax over a long period of time but had not paid enough attention to succession planning.  His wife, Anu Agha[5] recalled: “My husband was like an ostrich.  He never liked to discuss anything.  Once, he vaguely talked about taking over as non executive chairperson.  He didn’t discuss a succession plan definitively.  But since Abhay Nalwade was the only designated executive director, he appeared to be his obvious choice”. Nalwade who was appointed as Managing Director after Agha’s death recalled: “It was so sudden that I didn’t have the time to think.  I feel if succession had occurred systematically, it would have been better.  Rohinton never discussed that I would be the successor he had in mind.  It’s one thing to be a peer and another to be a boss.” Now a new Thermax  board with company veteran, Prakash Kulkarni as managing director faces the challenge of giving the company a new direction.

What the CEO needs to do

Many CEOs fail to handle succession planning effectively for a variety of reasons:

• They forget the big picture and stay focussed on day to day operations.

• They have an exaggerated sense of self importance and begin to think they are indispensable.

• They are poor in building a second layer of management because of an unwillingness to tolerate good people or to delegate.

• They try to avoid conflict and hesitate to send a clear message who the successor is going to be.

• They continue to play a role in the company even after the new CEO has been put in place.

To avoid these pitfalls, CEOs must periodically ask themselves the following questions:

• Is leadership growth keeping pace with business growth?

• Is leadership development keeping pace with the strategic needs of the organization?

• Are vacancies in senior management positions being filled up smoothly through internal promotions?

•  Are objective plans in place to identify and develop future leaders?

CEOs would do well to be proactive and take care of  the following:

• Identify the key leadership criteria and provide support to potential leaders to meet these criteria.

• Select a few high potential leaders and concentrate  the resources available on their development.

• Monitor the results of the succession planning process at all levels of the organisation regularly.

What the Board needs to do

The Board has a very important role to play in selecting the next CEO. Indeed, choosing the CEO is probably the most important decision the Board makes.   The board should convey to the incumbent CEO in clear terms that his success will also be measured by his ability to handle succession.  Also, the board should play an active role in the succession planning exercise and not just leave it to the CEO.

Specifying the criteria, the next CEO should meet, is a challenging task.  Many boards confine themselves to generalities such as ability to build a team or ability to manage change. Others concentrate on technical skills to the point of completely overlooking leadership skills.  In many cases, future CEOs are judged by their past track record in delivering measurable performance like increase in market capitalisation. Quite clearly, a balanced approach which takes into account the  requirements of the job in a holistic manner is necessary.

According to Bennis and O’Toole[6], the Board should assess the soft qualities of leadership by asking the candidate’s peers, subordinates and superiors a series of questions to get an idea of the :

• Consistency in the way the candidate inspires trust in others

• Ability to introduce a high degree of accountability

• Ability to delegate

• Amount of time the candidate spends in developing others

• Time spent by the candidate in communicating the company’s purpose and values down the line

• Comfort level in sharing information, resource, praise and credit

• Ability to energise others

• Demonstration of respect for followers

• Listening skills

One crucial decision boards face is whether to choose an insider or an outsider.  Firms in trouble often look for fresh flood.  On the other hand, when things are going smoothly, the board may decide to appoint an experienced insider.  According to a study by Nitin Nohria and Rakesh Khurana[7],  outsiders replacing a CEO who had been fired tended to do well.  Those who took over from CEOs retiring in the normal course failed miserably.  In the absence of a crisis,  an outsider often finds it difficult to carry the insiders along.   So, in the case of an outsider, it helps if the board sends clear signals that the earlier CEO has been asked to leave and the new CEO has been brought in to rectify matters.

Being the designated successor of a powerful incumbent CEO is very often not a happy experience.  The power and influence of the CEO tends to upset the succession planning exercise.  The incumbent CEO is aware that allowing the process to go ahead smoothly gives him a chance to perpetuate his legacy, but still hesitates and fails to come to grips with his own mortality. So, when the CEO is powerful and has been around for a long time, the Board should get very deeply involved in the succession planning exercise.

The successor’s dilemma

Some CEOs appoint successors well in advance of their retirement but only to see them leaving prematurely.  John Walter, who became the president of AT&T in October 1996 left in just nine months.  Disney’s Michael Ovitz lasted just over a year as president when a souring relationship with CEO Michael Eisner forced him to leave.  In Citigroup, heir apparent Jamie Dimon quit in 1998.  The same fate met Merrill Lynch C O O  Herb Allison who was strongly tipped to become the next CEO.

So, a successor needs to be coached well on how to handle the transition.  He should be encouraged to stay in constant touch with the CEO and remain focused on the post that is going to be his instead of falling into emotional traps.  The successor must be made to understand that his stakes are much higher than those of anyone else including the incumbent CEO. He must be motivated to seize the initiative and rise to the occasion, displaying the highest possible level of emotional maturity.  He should also be made to realise in a subtle way that if he quits, he would harm his own chances of becoming a  CEO elsewhere. 

The successor should be counselled to put himself into the  shoes of the CEO and understand what is going on in his mind.  Typically, the CEO goes through three phases after the successor has been appointed.  In the first phase, he feels good that he has initiated the process and maintains a good relationship with the successor. Then, the CEO starts feeling uneasy as the successor takes charge and begins to shake things up.  The CEO finds he is having to give up control and  share his power and authority with the heir apparent.  The issue of facing the post retirement phase also causes anxiety.  Finally, the CEO unless he is a  person of extraordinary mettle, develops friction with the heir apparent due to a threatened sense of identity and control.  At this juncture, an open conflict may develop and the CEO might marshal support from his trusted lieutenants and encourage people to directly come to him, by passing the heir apparent.  The successor often responds by being even more aggressive and result oriented.  If he succeeds, the CEO feels even more threatened.  Ironically enough, when the successor is just ready to move into the corner office, he becomes frustrated by the confusing signals sent by the CEO and decides to quit.

Conclusion

Succession planning is a key strategic issue that needs the time and attention of top management on an ongoing basis.  A pro active approach is far more desirable than an ad hoc knee jerk approach. It is heartening to note that some Indian companies are taking succession planning more seriously than others. Hindustan Lever (Lever) spends quite a bit of time and effort on succession planning.  Transition from one CEO to another has generally been smooth and there has been no case of any CEO failing badly in the top job.   Succession planning at ITC has also been generally smooth, though one CEO,
K L Chugh was probably a wrong choice.  A fixed five year term for the CEO has lent an air of credibility to the whole process at ITC.  Another Indian company which has got praise for succession planning is Ranbaxy.  When Parvender Singh died, his successor,
D S Brar, a professional manager took over the reins without much loss of continuity.  However, in general, Indian companies have a long way to go in the area of succession planning.  Especially in public sector organisations, succession planning has been a disaster.  CEOs have changed frequently and not been allowed to settle down into their jobs.  Many of the appointments have been guided by political considerations.  The fact that quite a few of the top jobs at PSUs are either unfilled or manned by acting CEOs is a clear indication of the lack of importance attached to succession planning.  The crisis at Unit Trust of India (UTI) in recent times has much to do with a totally ad hoc approach towards CEO succession planning.  In many Indian companies, CEOs spend more time protecting their turfs than in developing the next line of leadership.  Unless this attitude changes, many Indian companies may see themselves facing crises from time to time.

Back