CEO Succession Planning: How Prepared is Your Company?

Makovsky

A CEO has two major responsibilities; the first is to enhance shareholder value and the second is to groom his successor to ensure the continuity of the enterprise.

In terms of succession, some companies get it right while others struggle with the issue, creating a corporate version of “Game of Thrones” and, in the process, unnerving investors.

The lack of succession planning appears to be prevalent among “young” companies, most notably tech start-ups. In June, Dick Costolo stepped down as CEO of Twitter; founder and former CEO Jack Dorsey became interim CEO while the company’s board conducts a search for a successor. After the death of SurveyMonkey CEO David Goldberg in May, the board named director Zander Lurie as executive chairman for three months while the company searches for a new CEO.

Well-established companies also have had problems with succession and have turned to their former CEOs to resume their previous positions. Ron Johnson exited JC Penney after about 17 tumultuous months on the job following his recruitment from Apple and was replaced by former chief Mike Ullman. After four years of lackluster results under Bob McDonald, Procter & Gamble brought back A.G. Lafley as CEO in 2013 to restore investor confidence and reshape the company by pruning back its operations. His strong tenure at the helm of the company from 2000 to 2009 gave him the credibility to formulate a plan and execute it.

Of course, such moves provide investors with a certain degree of comfort, particularly if the previous CEO enjoyed success and growth; however, it does lead one to ponder how deep the bench strength is at some companies these days. While the move at P&G was somewhat surprising at the time as the company has long been considered one of the great management “finishing schools,” part of Lafley’s second tenure was used to evaluate internal candidates at the consumer products giant, culminating with the recent selection of David Taylor as its next CEO who served as group president of Global Beauty.

In an industry not noted for stability in the C-Suite, the Disney Company is being given high marks for the way it handled its succession question. Recently, the company announced that Thomas Staggs had been named chief operating officer, having won a long horserace with James Rasulo, his chief rival to succeed Bob Iger, who, it is believed, will step down when his contract expires in June 2018. Mr. Staggs was known to investors for having served as Disney’s chief financial officer before taking over as head of the company’s theme parks and resorts business, which gave him operational experience. It should be noted that succession was an issue for Disney during the reign of Iger’s predecessor Michael Eisner, who promoted and pushed out potential successors Jeffrey Katzenberg and Michael Ovitz before a shareholder revolt which led to his own demise.

A corporate succession plan is critical and should be revisited a number of times during the course of a year as business circumstances change. Some succession programs work smoothly; the CEO has done a good job, reaches the company’s mandatory retirement age and his successor has long been identified and groomed for his move up. Others are not as smooth as something goes awry – a social scandal, a downturn in results, attack by activist shareholders, illness and untimely death can wreak havoc on the best laid plans.

We offer some insights:

• Have a formal plan. Regardless of the size of the enterprise, all companies should have a plan in place which takes into account the need for contingencies. The planning process should include members of the company’s board of directors.
• Check your bench. The board should be kept apprised of the homegrown talent. Internal executives should be interviewed frequently to determine their strengths and weaknesses and their leadership abilities. Sometimes, there is a “hidden gem” within a company’s ranks. Developing a visibility campaign for these “next in line” executives is also important.
• Know what you need. Companies go through different phases of growth and, as such, their needs change. Do we need a legal mind? A financial expert? A marketing ace? The stage your industry is in will likely dictate the skills the prospective CEO should have.
• Introduce him / her to “the Street.” Once your candidates are identified, consider making them a part of important investor presentations as a means of “introducing” them to “the Street.” Investors will gain insights into your company’s bench strength and, perhaps, an appreciation for its management depth. Influential media introductions should also be arranged.
• Keep an eye on the competition. They are most likely facing similar issues and going through the same succession process. Someone else’s “in line executive” could be your shining star should internal candidates fail to measure up.

The task of succession planning is critical to an organization’s continuity. Handling such matters smoothly will go a long way to insuring the company’s reputation with all of its important constituencies.

-Scott Tangney