The old order changeth, yielding place to new – Alfred Tennyson.

One big challenge we face in a Business is how to best pass on the business to the next generation – a new CEO.

Succession planning is a process for identifying and developing the organizational members who have the potential to fill key organizational positions. For CEO and senior level positions their strategic as well as operational performance is evaluated. A recent Korn/Ferry Survey reveals some interesting findings. Nearly all large companies accord CEO succession planning as a critical activity. Yet, only 35 percent of them are prepared for either the unexpected or planned departure of their CEO. Another study by Vell Executive Search highlights Chief executive officers promoted from within a company do not perform nearly as well as ones recruited from outside.

A large number of global companies do not even have a CEO succession plan – so is it that succession planning is viewed as just a perfunctory exercise? The debate boils down to hiring internally or externally.

Selection from within – we cannot develop CEOs overnight it takes time – about 5 to 10 years to understand the culture and the external forces. The system identifies and tracks CEO material from middle levels then puts them through intensive training – goal setting, team-building and testing them under tough conditions. At top levels the incumbent CEO’s ability to groom the star employees may get compromised as they may perceive a competition from them.

Doug Ivester of Coca Cola was groomed personally by CEO Roberto Goizueta as his successor for almost 10 years. He took over as CEO in 1997 when the tenure of his predecessor Roberto Goizueta came to an abrupt end due to his sudden death. Yet Ivester had to resign as in less than two years. One reason quoted is that though Ivester impressed at operations but was never tested at the strategic level. The lesson here is what makes executives successful in the past may not necessarily work for them in a scenario of new challenges.

On the other hand Anne Mulcahy became the first woman CEO in Xerox’s history in 2001 who proved her leadership abilities in the turn-around of Xerox a deeply troubled copying and printing giant. Having served in Xerox from 1976 to 1991 her quality of honesty, communication, fearless in tough situations was well known to all in the company. And it is these very strengths of hers that the troubled Xerox needed badly for a turnaround. But Mulcahy’s statement which appeared in Fortune, June 9, 2003 is quite puzzling – “I never expected to be CEO of Xerox. I was never groomed to be CEO of Xerox. It was a total surprise to everyone, including myself…”

Selection externally – helps bring in new ideas & new perspectives. It’s like fishing in a much larger pool. The external candidates typically face less resistance to make changes in status quo.

Bill Ford in 2006 selected Alan Mulally a veteran of Boeing as CEO of Ford Motor Company. A question arises why choose someone who has no experience in automobiles and had twice been passed over as for CEO at Boeing. Mulally has to his credit an impressive performance record studded with aggressive cost cutting measures in tough circumstances. Then there is a commonality between Cars & Airplane industry in managing manufacturing assemblies. Ford Co. under Mulally has made some great strategic moves in new models and fuel efficiencies.

Another case in 2005 Sir Howard Stringer a westerner was brought-in to take charge of a Japanese company – Sony and turn it around. Despite Sony’s deep rooted oriental cultural and language barriers he succeeded.

Carly Fiorina was lured from Lucent Technologies Inc. to take the helm at HP in 1999. Fiorina’s nearly six-year reign at Hewlett-Packard Co. ended abruptly as board members forced her out, disappointed by her inability to transform a plodding technology giant dominated by printer sales into a more nimble innovator. Maybe she did not go far enough in understanding – The HP Way.

In the final analysis

The examples above highlight the unpredictability of outcomes in both systems – hiring internally or externally. Even with succession planning in place the ultimate decision is based on subjectivity. Yet the need to have a comprehensive succession planning system is vital – as it ties together many of the HR & leadership processes in an organization. It has a powerful motivational component and helps in retention. And if the system is structured, transparent and robust as in General Electric (GE) and IBM the subjective element reduces considerably.  There is also a need for the Board to play an active role rather than leave it to the outgoing CEO.

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About dilipnaidu

An open mind! Love to share my thoughts and a keenness to learn. An engineer and a MBA I had a wonderful innings in the Army and later moved to consultancy and teaching. My current interests are reading, music, growing culinary herbs, playing golf and yoga. I am serious on "Living life less seriously". A warm welcome to you be well and be cheerful always.

19 responses »

  1. Sachin Macwan says:

    Dear Sir,

    Have a glance on succession planning with my views. I have tried to focus on this marvelous topic with different facet.

    “I will give you the keys of the kingdom of heaven; whatever you bind on earth will be bound in heaven, and whatever you loose on earth will be loosed in heaven.” (Matthew 16:19 NIV)

    The above statement was spoken by Jesus Christ to Peter; which transmits importance of succession planning to bring GOD’s kingdom on the earth through Peter (one of the apostles of Christ). I would like to give you recent example of India’s one of the largest conglomerates TATA Group. The TATA Sons anointed Cyrus Mistry(43) as Successor to lead the group since its iconic chairman Ratan Tata(73) is going to retire in December 2012. The group was seeking for young and dynamic blood and their discovery ended up in the image of Cyrus.

    If we check the history of traditional Indian companies, we find the eldest son is the successor of that group. Birlas and Ambanis are the best examples of that. But in recent years, traditional business houses have emphasized on “Succession Planning”; the large corporate houses like Godrej group, Mahindra & Mahindra and Dabur have suitable succession plan.

    Succession planning is explained as a systematic process of developing individuals to fill organizational key roles. Here, the point to be noted is; when an organization makes changes at the top, the organization’s strategy, vision, mission, market value and culture also may get changed. Succession planning also deals with company’s performance. So, a wrong decision about successor may ruin the brand image of the organization. Influential successor always think about knowledge transfer and core competencies of organization. e.g. Wal-Mart’s core competency is inventory control. FedEx is good at reliable delivery. Nokia is known for its aggressive marketing.

    Some basic steps for Succession Plan

    1) Anticipate Future Positions: One should think about future position needs and leadership gaps while deciding successor for the organization.

    2) Identify Potential: As Naidu Sir enlightened, it is not fortnight process. It takes time to get a right chap. The business group can identify potential candidate from within or outside organization as per need.

    3) Personal Development Plan: Personal development plan is an inevitable part of succession planning which deals with future leadership.

    4) Mentoring & Networking Period: This phase requires mentoring for the future leader and teaching networking with all departments.

    5) Update your plan regularly: The last step seems easy but it requires lots of efforts to update your ideas. Day-to-day changes may bring a new fragrance in the succession planning.

    Regards,

    Future Successor 🙂

    Like

    • Dilip says:

      Hi friend Sachin,

      Thank you for some excellent points on succession planning. You are right the large business houses do entirely dispense with the process of succession planning. Yet the change now is that the sons who inherit are exposed to the family business from their childhood and are also well groomed and educated in some of the best business schools in the world.

      Take the example of Kumar Mangalam Birla the Chairman of the Aditya Birla Group he is a chartered accountant and MBA from London Business School. Then you have Rajiv Bajaj graduated first in class, with distinction in Mechanical Engineering from the University of Pune in 1988, and then completed his masters in Manufacturing Systems Engineering, with distinction from the University of Warwick. And this is a healthy change for the better isn’t it?

      I’d like to hear your views on the next post on strategic HR.

      Cheers 🙂

      Like

  2. girish says:

    Respected sir,

    The successful succession planning is very important in the organization for its growth. moreover I found that most of the CEOs are not wanting to train their juniors as they feel uncomfortable and insecure . So the board members and the chairman of the company should plan for a succession planning.
    Regards,
    Girish Kohli

    Like

  3. Neeraj says:

    Very insightful! All comments are great and brings in various perspective that covers majority of the issues firms face at large.

    From Corporate Governance perspective, whom do you think should initiate and control such efforts – Board, CEO, HR, or proxy votes? Who should govern and assume the ownership of such initiatives? How could the adequacy of the plan be measure without any conflicts of interest? What would be the impact of succession planning disclosure, if any, to shareholders?

    I understand leadership’s involvement, Board’s vigilance, and HR support. Agree, all of this is necessary to have a sucessful planning in place. However, an effective implementation demands Level-5 leaderships command. How many such leaders are out there? and the number of organizations that need help? There’s quite an imbalance at this front. Any comments?

    Like

    • Dilip says:

      Hi Neeraj,

      Thanks for your insightful comments. I feel it is the Board Chairman who should take ownership for initiating a successor. We have an excellent example in Ratan Tata’s Tata group who formally set the ball rolling to find a successor by setting up a five member committee. To me Ratan Tata is a combination of humility and single-minded resolve is a good example of Level 5 leadership too. You are right such leadership class are far and few.

      All the best and regards.

      Like

  4. Nice post. Succession planning lies at the core of any business today, esp. the ones which are there for several years. I would recommend reading “The Leadership Pipeline” by Ram Charan to get a further insight in to this. He talks wonderfully about this leadership succession.

    Like

    • Dilip says:

      Thank you for your visit and the comments. I always wanted to read Ram Charan’s ‘Leadership Pipeline’ but will do so soon. Thanks.

      I just visited your website on Insurance issues and found it to be brilliant. I am sure many of my readers too would like to visit and benefit.

      With kind regards.

      Like

  5. Dear Sir,

    I couldn’t agree more with you in this matter that the need to have a comprehensive succession planning system is vital for an organization. I recently came across the incident of McDonald’s Corporation, whose CEO, Jim Cantalupo, died unexpectedly in April 2004 and was replaced in an orderly manner six hours later. A few weeks later, the replacement CEO, Charlie Bell, was diagnosed with cancer, and the board again was able to make an orderly replacement within a very short span of time.

    This proves the efficiency of a strong succession plan in place, with a plan B handy in case of the unexpected. This not only helps build the faith of the shareholders, but also strengthens their trust in the overall management of the company.

    Warm regards,

    Dheeman

    Like

    • Dilip says:

      Dear Dheeman so nice to hear from you. Excellent examples given bu you to reinforce the importance of ‘succession planning’. Thanks.

      Trust you are doing well and would now be working on your dissertation. I wish you all the luck.

      I will be happy to be in touch with you.

      With warm regards!

      Like

  6. Gaurav R Arora says:

    A properly designed and executed Succession plan is vital for any successful transition. A good succession planning for CEO provides a framework that drives senior executive development. It helps to align leadership at the top with the strategic needs of the organization. It gives the CEO, a chance to adjust and learn his/her role according to the need of changing business conditions.

    Succession planning is also important from Investors point of view as they hold stock of the company for long term running. If we look at companies like Microsoft, the transition of Bill Gates was a planned affair that took more than eight years to complete. A long-term approach would give an opportunity to bring new executives and provide the kind of certainty that both customers and investors are looking for. Even India’s top business Giant Tata’s are in the search for successor to its chief Ratan Tata. The Succession issue of multi billion Tata group has been a matter of global attention, as about two-thirds of its revenue come from abroad.

    A Report in Financial Times revealed “In a country where corporate leaders and politicians enjoy extraordinary professional longevity, lack of succession planning is a key failure of boards at many family-owned businesses in India, leaving them highly vulnerable after the retirement or death of their leaders.”

    From my learning in Strategic Management class, I feel the most important attribute of CEO will be ability of planning and executing Vision and Strategy. He should be able to demonstrate his leadership skills during complex situation and should be able to integrate his thought from his learning for organization growth. The biggest challenge for HR will be to find a leader that works well within the existing corporate culture or has an ability to change the culture according to organization strategies. The main dilemma in succession planning is the focus on internal or external talent. Selecting a candidate from within the company may provide continuity; while selecting a candidate from the outside usually brings new ideas.

    The current CEO’s involvement is very important for development of internal candidates. I think it’s vital for any organization which is strong on HR, to have its own written Succession plan seriously practiced in their Organization. Main purpose of Succession plan is to ensure that right kinds of people are available to the Organization in right numbers at a given time. This helps to maintain continuity of strength in the Organization. Our HRD class got a case study on Succession planning. The case revealed that it is very important to have Emergency succession planning, in the event of sudden death or vacancy of CEO.

    HR Plays a very important role in developing a talent pipeline for Succession planning. Proper succession planning allow HR department for Perfect Recruitment, Training and Career Growth Plan. HR will help ensure that the company’s next leader will have the capabilities and experience necessary to respond to complex situation. I think beside HR, the entire Board or few members of board should be involved through Presentation and regular company visit. They should review leadership development plan and address any shortcomings. I am not sure whether having two or three potential candidate for CEO post will be good idea or it will increase complexity.

    Regards

    Gaurav R Arora

    Like

  7. supriya says:

    Dear Sir,
    According to me when we talk about CEO succession planning I feel Every CEO and HR professional in today’s competitive economy faces two harsh realities in securing a high performing workforce: “the retirement of the Baby Boomers” and “the tightening of the labor market”.The current economic crisis may be shrouded in uncertainty, but one outcome is already crystal clear: We are seeing a sharp increase in the rate of CEO turnover.Despite this discrepancy between what companies want to do and what they actually do, the future is not so bleak.The majority of companies, particularly forward-looking companies, are implementing or planning to implement a formalized succession planning process.

    “There is strong buy-in from the CEO, the Board and management
    team. These steps must come before the technology. The purchase
    of our solution was approved by the Board which required selling
    them on the idea first. “— Bob Proctor, HR Director Lacera

    The fundamentals of succession planning include:
    • Support from the CEO;
    • Build a development mindset in the organization;
    • Approach should not be just top-to-bottom but also bottom-to-top and cross-functional;
    • Align succession plan with the overall strategy of the company;
    • Ensure data-driven decision-making;
    • Develop a “learning organization”; and
    • Assess performance culture on a regular basis.

    Integrating succession planning with other processes is not the only challenge facing companies. While 74% of companies implement or plan to implement a succession planning program, these companies still confront several challenges to making it work..Succession planning needs to be aligned with the business objectives of the company. CEO and other senior management involvement is a critical step. Succession planning will not become a company wide initiative if the management is not involved and playing an active role in ensuring a more cohesive succession planning initiative.

    Managing the CEO succession process is a board’s ultimate responsibility. A regularly reviewed and closely followed succession plan is essential to successfully exercise that responsibility. The costs of shortchanging this process can be high if an organization is caught off-guard; but, conversely, the reward for planning also is high, resulting in continued momentum as it moves from one leader to the next. In addition, ongoing succession planning helps the board to be better informed and aligns the development of senior management with the strategic needs of the company. Beyond its keyhole in risk mitigation, CEO succession planning contributes to the successful governance and management of the firm long before and after a successor is needed and chosen.

    Regards,
    Supriya

    Like

    • Dilip says:

      Hi Supriya,

      Quite a stunning comment! It’s true ‘baby boomer retirements and a dearth of talent’ are global challenges for succession planning. The 7 Fundamentals listed by you cover are critical factors and can be as a good ready reckoner especially for our colleagues and readers.

      Boards do need to play a important role as leaving it to CEO alone can bring in a lot of subjectivity and personal likes and dislikes.

      Thank you so much for your time to share your thoughts at length.

      Kind regards and best of luck.

      Like

  8. Reshma Shah says:

    Dear Adripta,

    The example you gave is very informative…This type of CEO Succession planning is also known as emergency succession planning.

    An Emergency Succession Plan can help organizations manage the risk associated with leadership change. Change can be made more manageable by taking time in advance to think through different leadership change scenarios, developing competency among the staff and board to respond to change, and putting supportive practices in place.

    But at the same time when organizational change happens there is risk involved. This risk takes many forms, which may include uncertainty about what the change means, confusion about how to manage the change, loss of confidence and moral among staff and stakeholders, and other challenges.

    In today’s fast-paced global business environment, CEO succession planning is a must to ensure the continuous and smooth operation of a corporation during a CEO transition. Therefore, corporate boards must make it a priority to develop a CEO succession plan to take into account both planned and emergency scenarios.

    Regards,
    Reshma

    Like

  9. Adripta Bhadra says:

    Respected Sir,

    The whole article was very informative. Succession planning does play a vital role in finding the right person who will adhere to the organisation’s goals and objectives.
    There was an instance of Succession planning recently in ‘The Times of India’ dated 18/01/2011. It was about Apple Inc. CEO Steve Jobs, a cancer survivor, being granted medical leave of absence to focus on his health.
    In the meantime, COO of Apple Inc. Tim Cook was given the responsibility for the company’s day-to-day operations, with Jobs continuing as CEO.
    Even earlier in 2004, Cook had filled in for Jobs while the CEO was recovering from surgery for a tumor in his pancreas.
    While presently, Jobs will continue to be involved in major strategic decisions for the company.
    This shows that COO of Apple, Tim Cook would probably be the most sought after CEO for the company. This can be an apt example of Internal succession planning.

    Thanking you Sir, your comments would be valuable.

    Regards,
    Adripta

    Like

    • Dilip says:

      Hi Adripta,

      Its good to see you are up-to-date on the latest on Apple & Steve Jobs medical leave. People like Jobs who enjoy iconic status are one of a kind and it would be difficult to to find a replacement with identical characteristics. You never know Tim Cook in his own way may prove a great success one he steps in a as a successor.

      @ Reshma fantastic inputs especially the ’emergency succession planning’ issue linked with effective management of leadership change. I must confess this point never came to my mind. Thanks.

      Yes succession planning must be linked closely with (1)Leadership development(2)Performance appraisal(3)Job movement and rotation(4) Talent management(5)Recruitment and selection. Along with this certain for certain high profile and critical appointments it is a must to keep track of outside talent and people with ‘hot skills’.

      Thank you Adripta and Reshma for an excellent contribution – our readers as well as students from future courses will benefit from your inputs.

      Cheers & best regards!

      Like

  10. Reshma Shah says:

    Dear Sir,

    I definitely agree that CEO Succession planning is important after all stepping down of one top most person in the organization brings about an opportunity for the other on to showcase his/her talents in taking the firm to heights by using different perspectives.

    As per the human brain “If he steps down, I will take his place”. Yes, everyone wants to be in that position…But there are some issues considered by organizations in Succession planning. These are:

    1. Political Issues:
    • Dealing with factions within the board
    • Avoiding destructive internal politics
    • Balancing needs of external constituencies

    2. Emotional Issues:
    • Coping with personal emotions
    • Helping those not selected adjust
    • Creating support for the new CEO
    • Moving on

    3. Rational Issues:
    • Identifying job requirements based on company strategy
    • Searching diligently for the best candidate
    • Assessing candidates using multiple methods and raters
    • Selecting the best candidate for the job, regardless of
    personal loyalties

    KEY TAKEAWAYS
    1. CEO succession planning represents one of the
    most important and challenging obligations of the
    corporate board of directors.

    2. Research indicates that a strong majority of corporate
    boards of companies in North America do not
    devote sufficient time and effort to CEO succession
    planning.

    3. CEO succession planning commonly falls short in
    two areas: the need to balance internal evaluations
    of potential CEO candidates with comprehensive
    external market scans of potential CEO candidates;
    and the need to balance subjective judgments of the
    talent pool’s merit with objective evaluation tools.

    4. Corporate boards of directors that integrate
    greater objectivity into succession planning and evaluate
    both internal and external candidates strengthen
    their CEO selection process, put their companies
    in a better position to achieve future success and, by
    doing so, fulfill their primary obligation to shareholders,
    employees and other stakeholders.

    Like

    • Dilip says:

      Wow Reshma,

      You have dealt with the Succession Planning issue comprehensively. The Board aspects and the political, emotional and rational issues are well discussed.

      This is really a very good contribution from you. Such writings surely help develop a broad vision.

      Many thanks and wish you all the best!

      Like

  11. Dipak Gadekar says:

    Couldn’t agree more. I have seen this process of succession planning at CEO Level practiced at my current organisation. The succesor was identified a few years earlier, groomed for the post and moved in to it to work parallely for over a quarter before taking independent charge.
    Yes, the Board has to play active role and not leave it to the incumbent.
    This also needs to be cascaded down to atleast Key senior positions, i.e. the direct reports of the CEO.

    A question always comes as to whether to let the person know if s/he is identified as THE SUCCESOR? It has its own advantages and disadvantages, but I would tilt towards informing.
    I have also seen unwillingness on part of some identified successors to move locations and / or functions as a part of getting ready for the key post. How do we deal with such talent and who should they blame if they are passed over?

    As mentioned by you, there is usually a resistance to accept someone who was shoulder to shoulder with us till yesterday as our Leader today. This happens most when the distinction is not very sharp or people perceive the choice as undeserving.

    Lastly, I believe only those CEO, who are ready to move on will do a good job at it !!

    Like

    • Dilip says:

      Excellent points. Views coming from you mean a lot as they are based on your rich experience at the organizational top levels.

      The question “whether to let the person know if s/he is identified as THE SUCCESSOR”? I tend to agree with you that successor must be informed. The general opinion is that if the successor is announced well ahead of time it may lead to other top talent leaving. But that may still happen when the new person actually takes over.

      The point on dealing with identified a person unwilling to move locations and to other positions – my view is that such people despite having talent lack – leadership qualities. The chances of their success as CEOs to my mind are bleak.

      In the army our succession planning system is pretty good and when successors are tipped for the top echelon positions the colleagues after some initial disappointment accept the new leadership in good spirit.

      Thanks for making time from you busy schedule and giving this enriching comment.

      Regards!

      Like

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