Why so many companies fail at succession
By Joseph L. Bower

Why so many fail at A focus on three circumstances that can cause self-destructive behavior in leader selection, even for the well-managed companies: the style ofthe incumbent CEO, rapid growth, and strategic inflection, Whafs a board to do? BY JOSEPH L. BOWER E VERY YEAR for the past five years, the consulting firm of Booz Allen Hamil- ton (BAH) has conducted a survey ofthe world's 2,500 largest public companies, at- tempting to develop a clear picture of the phenomenon of executive turnover. BAH's researchers have found an astounding de- gree of turnover at the most senior ranks of the corporate world. Much of that turnover isn't voluntary. If you assume, as I do, that the data contained in these re- ports are accurate, then you have to conclude that corporate succession as it is currently practiced is a disaster. Why are all these train wrecks happening? The obvious cul- prit is a shift of power away from the imperial CEO — although it's not always clear to whom that power is shifting. I don't personally believe that this power is shifting, or should shift, toward boards of directors. Boards are necessarily populated by part-time advisers. They can play a very constructive role in succession, but only as a special part ofthe set of processes by which the company is managed. The people best suited to manage the process are the individuals who, on a day-to-day basis, run the place and look out for the interests ofthe share- holders. Succession is one of their key responsibilities. But given all the downsizing and other self-inflicted wounds, a lot of institutional memory may have been lost and, along with it, internal ability. If this is the case, it's even more impor- tant for the board to step up. The board^s choices You already know the choices: the board can look outside, or they can look inside. Almost certainly, they hire a search firm. While search firms are used to provide reassurance to boards 3O DIRECTORS a BOARDS during internal succession processes, they are a necessity for a board looking outside. If boards do look outside, they are likely to be directed to one of the legendary people factories — GE and Procter & Gamble come to mind for generalists; Baxter, for technologists — where they will knock on the door with a large bag of money in hand and hope for the best. What's likely to happen next? Well, the incoming CEO with a modicum of experience will find ways to cut costs during the first two or three years, thereby fattening up the bottom line somewhat. (This is especially true if the incoming CEO is a so-called turnaround artist, who is practiced at the art of cor- porate surgery.) After that, performance deteriorates, and it's time, once again, to get a new CEO. Most likely, the turnaround artist didn't have the time, motivation, or skills to work much on succession, so the board must look outside — again. This time, though, the stakes are likely to be higher. The board now has at least one highly visible failure in its recent past. What follows, as a natural result, is a search for the "per- fect leader," who will swing his or her sword and cut through all the company's mounting problems. This phenomenon is well described by Rakesh Khurana (in his book. Searching for a Corporate Savior, Princeton University Press, 2004) as a very unhappy process for the board and the company. Why? Ac- cording to Khurana, the perfect outside leader turns out to be imperfect at best. After he or she washes up on the beach, the cycle starts all over again, drawing on the same small and largely inappropriate talent pool. Another consideration is how much time it takes for that outsider to wash up on the beach. The data show that success- ful companies — companies that did well in the two years that preceded the succession — are one-third more likely to fire a new outsider than unsuccessful companies are. In other words, poorly managed companies are far more likely to hang on to their outsider than are successful companies. Again, success- ful companies operate in particular ways and therefore think about themselves in certain ways. They want the best and in- vest in the best. But viewed from the perspective of succession, even well- managed companies get into trouble when the time comes for succession. Their problems fall into three categories: the style of the incumbent CEO, rapid growth, and strategic in- flection. companies succession COVER STORY 1. The Style of the incumbent CEO Anyone who has studied successful companies has had the experience of meeting individuals who were larger than life. Even if their inherent temperament was quiet and modest to begin with, success wreaks its changes — in how they think of themselves, in how others see them, and in the kinds of input they get. Success creates an aura of competence and, most likely, an increased level of self-confidence. The successful CEO's calen- dar gets increasingly crowded as individuals and groups try to tap into his or her magic. With the best of intentions, associ- ates start walling off the CEO, shielding him or her from "dis- tractions." Contemporary corporate architecture compounds the problem, sequestering the CEO in a large office, often on an executive floor. The carpet is thick. The view is magnificent. The gatekeepers guard the palace, barring the door to reality. Of course, CEOs can and do fight this tendency. But even those who don't become self-impressed and who are truly dedicated to protecting the flow of unvarnished information from the outside — which helped lead to their success in the first place — can be thwarted. A member of Jimmy Carter's White House staff told me a wonderful story. The U.S. Se- cret Service cared so much for the president that, on at least one occasion when he went fishing at Camp David, those on service that day arranged things so that as he began casting his line, hungry fish from a trout farm were released into the water upstream. Carter, no doubt, would have been appalled, but his guardians distorted reality just to make sure that their hardworking boss had some fun. This kind of assiduous care and feed- ing can cut the leader off from the rest of the organization — and from the rest of the world. Even when successful CEOs do get out in the world, it's a pretty rar- efied slice of life that they are exposed to. J. Irwin Miller, the legendary leader of Cummins, once noted that for both CEOs and the queen of England, all the world smells of fresh paint. And most CEOs aren't modest like Jimmy Carter or self-deprecating like Miller. They enjoy the many perks of office, as well as the ex- ercise of power. They argue, accurately, that one reinforces the other, making it easier to lead. If you look and act invincible, you're more likely to be invincible. If you have your own eleva- tor and your own plane, you save time. You don't get to talk to any but the chosen; you get digests of other views. But the aura of invincibility creates a whole set of other problems. It has been said that "Acorns don't grow well in the shadow of great oaks." When CEOs pull off the feat of ap- pearing to be great oaks — which, of course, is gratifying and makes day-to-day life easier — then others around them can feel thwarted, diminished, and overshadowed. There are CEOs who cow and break a whole generation of their most talented subordinates. When that happens, the board may decide that it's necessary to skip over that entire generation as potential successors. Alternatively, the board may decide to elevate a member of that oppressed cohort for a short tenure as CEO, with an eye toward finding a younger acorn that has developed away from the great oak's dense shade. This oak-acorn phenomenon is one reason that many suc- cessful inside successions involve the appointment of leaders who have recently spent several years outside headquarters — for example, on overseas assignments. They've worked in the sunlight, where their full range of talents was visible and tested. They were aware of the imposing figure at the center of the oak universe, but they were not unduly im- pressed by him or her. They are, in other words, quintessential "inside outsiders." Joseph L Bower is the Donald Kirk David Professor of Business Administration at Harvard Business School. He has 44 years of research and expertise in strategy and organization and the changing role of the leader. He founded The General Manager program and chaired The Corporate Leader program at HBS. He serves on the boards of several corporations, including Loews Corp., Sonesta International Hotels Corp., and Anika Therapeutics Inc. This articie is adapted with permission from his new book, The CEO Within, copyright 2007 by Harvard Business School Publishing Corp. (www.hbsp. harvard.edu). All rights reserved. FIRST QUARTER 2008 31 SUCCESSION 2. Rapid growth A second success-related problem tends to challenge the com- panies that have experienced rapid growth. Here, the problem as succession approaches is that the insiders who have worked tirelessly to achieve the present scale may be at the very edge of their capabilities. Look at the underlying math. An executive who joins a company that then grows at 40 percent a year will be trying, within five years, to manage a business four times as large. Look ahead another five years, and the company is four times bigger still. When I discussed succession with Bill George, the retired CEO of Medtronic, he expressed the strong view that an insider was always a preferable choice. But then he explained how he and his board brought in an outsider to serve as chief operating officer for several years while groom- ing him to be George's successor. Why didn't they groom an insider? Medtronic's revenue had grown sevenfold under George's leadership. As George explains: "When we looked at the people who worked for me, we didn't see the range of capabilities that would be required to take the company to a whole new level. If the company continued to grow at 20 percent a year, they would be managing a $15 billion enter- prise in three or four years. They were good but didn't have what Medtronic would need. Some were unhappy when we brought Art Collins in, but after working with him for a year or two, they acknowledged to me that they understood why we had brought him in." Scale makes a difference in terms of organization, systems, the nature of competition, and the relations with financial markets and other external constituencies. Untested talent can sometimes make the jump, but that is a risk the board may not want to take. It is always easy to attribute success to the talents of the de- parting CEO and underestimate the contribution and skills of the potential successor. This is especially true in the context of a functional organization, where none ofthe inside successors has had a chance to run a whole business with a profit and loss. The absence of general management experience, coupled with the scale issue, really drives the search process toward an outsider. 3. Strategic inflection Andy Grove defined a "strategic inflection" point as "a time in the life ofa business when its fundamentals are about to change." By definition, this is a time when the skill set of in- siders may turn out to be ill suited to the challenges ahead. The value of an "inside outsider" is that she or he may have the skills required in new circumstances. That, in fact. Is how Reg Jones described Jack Welch. Jones saw a totally new set of circumstances ahead in the 1980s and thought Welch's tech- nical training and tough personality would be well suited to the task. But it is understandable if those who have grown up inside an organization and have been crafted for one set of circumstances lack the mindset appropriate for something really different. It is also understandable when a board that has concluded that it faces a strategic infiection point decides that the in- siders lack the skills to take the company to the next stage of development. They are implicitly discounting the value of the team they have been developing, but it is a common conclusion. Tom Neff of Spencer Stuart and Gerry Roche of Heidrick & Struggles, both CEO search gurus, spoke to the greater tendency of boards to discount the abilities of insiders when they believe the circumstances ahead will be substan- tially different. Early recognition of the probiem But all this can be managed. Great oaks, rapid growth, and strategic inflection are not new phenomena. They are as old as the history of organization. And they can be recognized, and managed, as forces that simply make succession a bit harder. Great oaks need to give potential successors some room. Overseas assignments make sense. Organization can be changed to create more general management roles. In the interests of efficiency, companies may retain the functional structure they used to grow big. But managing new business with distinct business units pays a big long-term dividend in the form of general managers who can grow business and potentially lead the company. Rapid growth needs to trigger even more attention to recruiting and developing talent. If the problem is recognized early enough, the pool can be enriched by lateral hires so that several years later, succession can be managed in a normal fashion. Strategic inflection is harder to manage than incremental growth, since the ability to recognize big movements early is a scarce talent in and of itself. But that makes it even more im- portant for strategy to be on the board agenda annually. The best stimulus for developing talent is the recognition that the strategy under development will require a raft of great people who are not now in the company. These are exactly the kinds of issues that boards should be discussing with their CEO. They are part and parcel of the resource allocation process. Dealt with successfully, they cre- ate ail kinds of associated benefits — including, for example, protecting the corporation against marauding speculator owners. The cold logic To recap the cold but inescapable logic: Outsiders have a hard time succeeding. Insiders may have problems, too — especially if their rise reflected their ability to serve their boss's vision rather than developing their own. Those insiders' wings have been allowed to atrophy at exactly the career junction when they should have been exercised and strengthened. A company has to recruit, organize, plan, and invest in ways that teach its most talented people how to fly. If you skip that investment, you ultimately pay the price: You get to recruit an outsider and pray hard. • The author can be contacted st jbower^bs.edu. 32 DIRECTORS & BOARDS
 


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