NACD New England Chapter Event Highlights
Breakfast Event – February 12, 2013
Succession Planning: How Prepared is Your Company, and What Role do the Directors Play?
Event Overview
The typical American company is not very good at CEO succession planning, according to a recent survey of top managers representing a cross-section of U.S. industries. Although board members and executives generally recognize that advance planning for CEO departures is a crucial part of corporate governance, the obstacles they encounter in preparing for CEO succession are formidable.
It is not unusual to see the efforts of a thoughtful and determined board derailed by internal politics, strategic ambiguity or the influence of an incumbent CEO. And even the most carefully crafted succession plan can disappoint shareholders if it falls short in taking their interests into account. Four panelists with deep experience in coping with these challenges shared their thoughts on successful succession planning at the NACD New England Chapter’s February 2013 Breakfast Event.
About the Panel:
George Davis is Egon Zehnder’s Boston Office Founder and Managing Partner. In addition to serving as the co-head of the firm’s U.S. business from his operations in Boston, Davis also co-leads the firm’s prominent Board Consulting Practice and personally participates in management appraisal studies, searches for board members, non-executive directors and a variety of C-level assignments.
Pamela Godwin is President of Change Partners, Inc., an executive coaching and strategic change management consulting firm.Previously she was president and COO of GMAC Insurance Personal Lines – Agency Division. Godwin is a director of Unum Group, where she serves on the Governance and Finance Committees, and is a member of the board of the Federal Home Loan Bank of Pittsburgh.
William G. Messenger is a director of ArQule, Inc., a Boston-area biotech company focused on cancer drug discovery and development. He chairs the Compensation, Nominating and Governance Committee and is a member of the Audit Committee. His professional field is business ethics. He serves primarily small-to-mid-sized businesses through his consultancy, the Lexington Sycamore Group.
Ellen Zane is a nationally renowned healthcare leader who recently retired as president & CEO of Tufts Medical Center and the Floating Hospital for Children. She remains involved at Tufts Medical Center as a vice chair of the Board of Trustees. Zane previously held the position of network president for Partners Healthcare System, Inc. She currently serves on the boards of directors of Brooks Automation, Haemonetics Corporation and Parexel International.
AboutThe Moderator
Deborah Buckley Hope, MBA is president, co-founder of the Charles Hope Companies, LLP and a leadership development coach. For over 25 years she held senior management positions in the financial services industry. Hope was a managing director and senior vice president of Capital Markets for Everen Securities and Gruntal and Co. Prior to that she was a senior vice president at PaineWebber. She currently serves as an overseer at the Brigham and Women’s Hospital.
Panel Discussion Highlights
Moderator Deborah Buckley Hope opened the panel discussion by reviewing the dynamics in today’s business environment that are making CEO succession planning a higher priority for boards of directors. CEO turnover is increasing, she said, and activist shareholders are stepping up their efforts to exert greater influence on CEO selection. In addition, “the future will not necessarily look like the past, so succession planning must go hand in hand with strategic planning.” As an enterprise evolves, the successor CEO may need different skills to successfully navigate the new competitive environment, as compared to the skills of the founding or entrepreneurial CEO, she said.
George Davis then discussed the current succession planning landscape, prefaced with the findings of a recent Egon Zehnder-sponsored survey of U.S. corporate leaders and highlighting the pitfalls most often encountered by companies involved in developing succession plans. Polling 836 executives and directors, Egon Zehnder found that only 33 percent of companies have a well-documented succession planning process in place.
The survey also found, however, a growing recognition of the importance of CEO succession and awareness that succession planning needs to be “a mandatory ongoing dialogue that is revisited annually no matter what life stage the current CEO is in,” Davis said. “It is never too early – or too late – to be prepared for a change in leadership.”
Davis pointed to four common obstacles to successful succession planning, chief among them an incumbent CEO who wields too much influence. “Allowing the current CEO to drive the process often results in a preference for the internal candidate he or she has spent so much time developing without any regard to other possibilities that may be a better fit for the company’s long-term future,” he said.
Another frequent challenge is the propensity of many boards to approach succession planning reactively – for example, by waiting until the incumbent CEO is about to retire before developing a succession plan. “Succession planning should be a continuous process that keeps internal and external candidates in view and reflects the evolving needs of the company,” he said. “This forethought can allow for recruitment of potential CEO successors into the top executive team two or three years in advance, providing more options for the board when the time comes to select the new CEO.”
A third obstacle to effective succession planning, Davis said, is “the wrong person driving the bus in the boardroom.” Even if solid protocols are in place, sometimes the process ends up being driven by the largest personality in the boardroom, he said. CEO selection should be based on a plan agreed-upon by the entire board that is executed by a succession committee with representatives from the board, he added. The fourth challenge cited by Davis is a failure to reflect the fundamental nature of the enterprise. Successful succession planning is different at founder-led companies versus private equity owned companies or companies with broadly held public equity.
Against this backdrop, moderator Hope asked the other three panelists to talk about their most challenging succession planning experiences. Pamela Godwin told the story of large nonprofit that did not have a formal succession plan when its CEO was stricken by a heart attack. Interpersonal issues on the board immediately surfaced that brought governance to a standstill. Fortunately, a sitting director was able to step in as interim CEO. The incumbent CEO eventually recovered, and the board was able to treat the event as a learning experience by adopting a set of thoughtful succession planning protocols.
William Messenger described a scenario in which he had only recently taken on the chairmanship of the Compensation, Nominating and Governance Committee at a biotech company when he learned the CEO was thinking of leaving. The company was in the midst of a strategic transition from lab-based to human clinical trials, but had not updated its CEO succession criteria to reflect this transition. Messenger outlined the steps he took as committee chair to align the succession planning process with the company’s future strategy and prepare for the CEO’s imminent departure.
Ellen Zane recounted lessons she learned upon leaving her position as president & CEO of Tufts Medical Center and the Floating Hospital for Children. “Understand that there are different leaders for different times,” she said, commenting that the sills of the current CEO may have been paramount at one point in the organization’s evolution but may be very different from the skills needed for a new era. “The best gift an outgoing CEO can leave an organization is the gift of a prepared, mentored and trained successor CEO,” she said. Zane added that an outgoing CEO has a responsibility to prepare the organization for the change of leadership by explicitly and proactively supporting then new leadership and reinforcing the proposition that “organizational change is a good thing . . . not a bad thing.”
Q&A Session Highlights
Moderator Hope opened the Q&A session by asking the panelists to outline what they consider to be best practices for boards engaged in CEO succession planning and then invited the meeting participants to weigh in with their questions. Questions from the floor included:
Q: “First, am I correct in assuming that internal CEO succession is generally the preferred course, and second, how can the board ensure that leadership development is actually taking place not only for the CEO but also for the next level or two of management?”
A: George Davis responded to the first part of the question by commenting that studies show that internal CEO candidates tend to have somewhat longer tenures than external candidates. However, the rate of failure experienced by internal and external candidates is about equal, unless the internal candidates were benchmarked against external talent during the selection process. Pamela Godwin opined that internal candidates may be more appropriate for companies that are in a healthy condition, while troubled companies may find external candidates more appropriate. Both panelists responded to the second part of the question by sharing insights on effectively implementing leadership development programs, including making success in this area part of the incumbent CEO’s personal performance plan.
Q: “A board may recognize that strategic change is imperative, but that may not be the popular view inside the company. How can a board provide air cover for the new CEO coming in as a change agent when the organization may be on the verge of tissue rejection?”
A: Ellen Zane, George Davis and William Messenger each weighed in by saying the best way to provide air cover for a new CEO is to relentlessly communicate the need for corporate change before the new CEO arrives. The consensus was that waiting to address the fundamental need for change until after the arrival of a new CEO is a recipe for failure.
Q: “Succession planning for the chairman of the board is a sensitive topic. Can you point to any best practices in this area?”
A: Pamela Godwin responded by describing a succession planning process for board and committee chairs in which these individuals were designated as “heir apparent” well before they stepped into their chairmanship roles. She commented that Unum maintains a matrix of skills required on the board, reinforced by personal development plans for every director.
Q: “In circumstances where a company is not planning a near-term CEO transition, how can the board begin looking at external candidates?”
A: George Davis discussed the use of market maps in scanning for external talent. He advised populating such market maps by canvassing internal executives and asking, “who is out there among our competitors that we fear the most?”
Q: “What steps can be taken to ensure that, after a board has been deeply involved in selecting a new CEO, directors do not get overly involved in ongoing operations?”
A: The panel’s consensus was that boards should always be free to ask detailed operational questions as a means of exercising their governance responsibilities, but not to be actively engaged in operational activity.
Q: “What are the succession planning best practices when companies are involved in a merger of equals?”
A: George Davis and William Messenger responded to this question in detail, each emphasizing the value of continuing to look externally for talent. “Never just measure the tallest of the pygmies,” Davis said. It may be that neither of the merged companies’ CEOs have experience leading post-merger integration. Both may be lacking sufficient public company experience. Davis and Messenger both highlighted the importance of avoiding “brokered deals” under such circumstances and allowing the incoming CEO to select his or her own team.
Q: “What are the best practices when an entrenched CEO is not planning to leave, but the board determines that someone new is needed to lead the company into the next phase of its growth? How can this process be initiated without provoking internal battles that destabilize the company?”
A: William Messenger responded by saying, “Companies that remove a CEO will typically tell you they should have done it a couple of years earlier.” He went on to describe steps that can be taken to continually measure CEO performance, thus creating a foundation for action sooner rather than later. George Davis talked about alternative strategies, such as creating a chairman emeritus position.
Q: “As directors we get to see the C-suite and mid-level executives regularly. But how as directors do we get to better understand where the high-potential women and minorities are located at lower levels within our organizations and actually start to play a role in developing them as leaders?”
A: Ellen Zane responded by suggesting the creation of a board level human resources committee charged with identifying future leaders. William Messenger advised spending time with the senior human resources officer, who may be familiar with potential talent deeper within the organization. George Davis advocated looking at least two levels down into the organization and described methods for conducting an inquiry of this type.
Q: “I’m wondering about the use of assessments to determine whether external C-suite and board candidates are a good cultural fit for the company. Do you recommend using them?”
A: George Davis pointed to a set of established “markers for cultural fit” and described a structured methodology available for assessing candidates, based on these markers.
Meeting Wrap-Up
NACD New England Chapter Chairman R. Robert Popeo closed the February 12th session by thanking everyone for their participation and reminding them about the chapter’s next breakfast event: “Crisis Management – War Stories and Best Practices” scheduled for March 12, 2013 at the Langham Hotel, Boston.
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