HR Magazine, May 2001: Turnover at the Top

By Bill Leonard May 1, 2001

HR Magazine, May 2001Vol. 46, No. 5

The CEO position has become a revolving door in U.S. corporations. How can HR help hire the right person for the top job?

A high turnover rate is always a cause for concern among organizations and their human resource professionals. Experience and research both show that high turnover reduces productivity and drains corporate profits.

But what happens when turnover spins out of control at the highest management level? What can HR do to help recruit and retain the most important and influential position at an organization—the chief executive officer?

The role of HR in hiring a new CEO—a decision that is a political powder keg—is usually limited because it is a function of the corporate board of directors. Generally, the board forms a selection committee, which hires a search firm to identify candidates who then are interviewed by the committee. Finalists meet with the whole board, which votes on whom to hire.

The board-driven system is used by businesses of all sizes. But does this system recruit the best candidates? A recent upswing in CEO turnover rates seems to imply that the answer might just be a resounding “no.”

Approximately 40 of the 200 largest corporations in the United States replaced their CEOs last year—compared to 23 during 1999. And this year, CEOs have been under more pressure to perform and keep profits up as the U.S. economy cooled down. Last year, a study released by the outplacement and career development consulting group Drake Beam Morin (DBM) examined CEO turnover at 450 of the world’s largest corporations. The DBM researchers found that roughly half of the CEOs had held their current jobs for less than three years, and that many of the CEOs who left their jobs were either dismissed or forced to resign.

“It’s a very tough bus.iness climate right now for CEOs to work in, and it will probably only get tougher,” says Jay Conger, a professor of organizational behavior at the London Business School. “Wall Street is much more punishing than it used to be. Stock prices will take a plunge if your company profits are off just a single percentage point from earnings projections. And when that happens, boards generally believe they have to take action.”

The Corporate Hot Seat

The sustained economic expansion throughout the 1980s and 1990s has been both a blessing and a curse to chief executives. The economic growth has provided companies with revenue and resources to expand but, at the same time, it has boosted expectations among investors and corporate boards.

“Overall expectations are extremely high, and stakeholders want results yesterday,” says Conger, who also is a senior research scientist with the Center for Effective Organizations at the University of Southern California. “This means many CEOs are expected to pull off a miracle, which in most cases just can’t be done.”

According to Conger, research shows that it takes between four to seven years for change to really take effect when operating a large company. Boards of directors and investors are very interested in protecting their investments and generally have a lot riding on the performance of the CEO. However, stakeholders want an immediate return on their investments and don’t want to wait four years to see if things turn around, says Conger.

“If the four- to seven-year figure is valid, which I believe it is, and an outsider is hired as CEO to make changes, then they face a tremendous challenge,” Conger says. “And it’s a challenge that very few people are capable of overcoming.”

Sink or Swim

So essentially it has become do or die for new CEOs, and established CEOs also feel the pressure to produce or face the wrath of an impatient board and investors. For example, John McCoy served as chairman and CEO for Banc One Corp. for 18 years until he was forced to resign in late 1999 after the company suffered several financial setbacks and struggled through a high-profile merger with First Chicago NBD Corp.

A more unsettling trend is the growing number of CEOs who are sent packing after less than two years on the job. And the CEOs with the short tenures aren’t heading up obscure companies. Most of these CEOs have held high-profile jobs, and the list reads like a “Who’s Who” of corporate America.

Last year, Durk Jager, chairman and CEO of Procter & Gamble Inc., left after only 17 months in the job; Jill Barad, chief executive of the toy manufacturer Mattel, was forced out after 18 months on the job; Michael Hawley was ousted from his job after serving only 18 months as the chief executive for Gillette; and Lloyd Ward, chairman and CEO of Maytag Inc., resigned in November after only 15 months.

While the external pressures to perform and provide immediate returns on investment have contributed to the ouster of many CEOs, internal pressures such as understanding and adapting to a new corporate culture also are key elements.

“Employers are generally much more cautious when hiring a supervisor or mid-level manager than when hiring a new CEO,” says William C. Byham, chairman and CEO of Development Dimension International, a Bridgeville, Pa.-based consulting group that focuses on helping employers identify and develop top-notch talent. “HR definitely has a role to play here by providing the support and resources necessary to make a good hiring decision.”

Resource for Hiring

While HR isn’t in the driver’s seat for hiring CEOs, it shouldn’t sit idly by, experts say.

“HR has done a poor job of positioning themselves and really isn’t seen as a resource to help an organization develop and select top management positions,” says Don Andersson, a former CEO of a large public sector organization and author of the book Hire for Fit: Select the Best Executive for Your Organization (Oakhill Press, 2001).

Both Byham and Conger emphasize that HR professionals should show the board of directors that they can be the best resource available when it comes to making hiring decisions—even at the CEO level.

“HR can’t take control of the process, because it has and always will be the board’s job to select a CEO,” says Byham. “But HR can show the board that they can be a valuable resource when it comes to selecting an executive search firm, performing background checks or providing data on compensation packages.”

Byham notes that when selecting an executive search firm, HR also should emphasize to the board that the search firm’s job is only to identify qualified candidates.

“All too often the board will accept a candidate recommended by a search firm as a finalist for the position without doing any adequate background or reference checks,” Byham says.

For an HR department to become a valuable and recognized resource by the board, it must seize possession of the organization’s succession plan, says Conger. He even goes as far as to say that HR needs to “own” the company’s senior talent.

That doesn’t mean that HR should completely control the career development of a company’s senior executives but rather develop a plan of action.

“HR needs to understand how that senior talent is used, and know their strengths and potential weaknesses,” Conger says. “Then it can develop a succession plan and make suggestions to the CEO and the board on how they can best use and further develop that talent.”

Developing a Talent Pool

Lou Font, president of Strategic Talent Group Inc. in Chantilly, Va., agrees with Conger and says that companies should take a “portfolio approach” when assessing the top people within the organization. The organization needs to fully understand the capabilities and assets that its top managers provide and that HR can help develop this “talent portfolio.”

“An organization can truly gain competitive advantage through its top talent,” Font says. “But it does take a tremendous investment and patience to develop this talent for the long term.”

While a strong internal talent pool may provide a competitive advantage, it should be the duty of HR professionals to promote the talent development process and make the CEO and board understand that a strong succession plan is in the best interest of the organization.

“HR needs to be the conscience of the business,” says Chris Horn, director of talent assessment and development for Spherion Human Capital in Chapel Hill, N.C. “HR must be the champion of process and be prepared to make the argument that a succession plan will only make the organization stronger and more profitable in the long run.”

But when making suggestions on career development and succession planning to the highest levels of management, HR professionals must be consummate diplomats, according to both Byham and Andersson. A hard sell approach will quickly turn off top managers if they feel someone is lecturing them or trying to tell them what to do.

“It’s a delicate balancing act and definitely an exercise in diplomacy,” Byham says. “But if you can provide good solid assessments of the corporate talent pool and show how it will benefit the organization to further develop this pool, you will get the attention of the CEO and board.”

A Talent for Developing Talent

Particularly adept at grooming top talent internally is General Electric—one of the largest and most-admired companies in the world.

In late November, GE officials announced that Jeffrey Immelt, who headed the GE medical-systems division, would succeed Jack Welch as chief executive officer. However just one month before naming his successor, Welch announced that he would remain CEO through the end of this year, rather than begin his retirement in April as originally planned. Welch says that he decided to stay on the job to help GE work through its $45 billion acquisition of the Honeywell Corp.

Welch’s decision to push back his retirement date seemed to be the only surprise in a well-thought-out and orchestrated process to choose his successor. Immelt and three other GE executives had long been considered the finalists for the job. Welch made it widely known that Immelt was his personal favorite, and most industry observers believed he had always been the front-runner.

“What other corporation can name a replacement for its CEO and not have the stock price drop?” asks Spherion’s Horn, who also worked for several years as an HR executive for GE. “And we’re talking about Jack Welch, who is considered to be the best of the best. GE is really one of the few corporations in the world that can pull that off, because investors have such confidence in the company’s management and succession planning processes.”

GE executives often are hired away to head other corporations, and have a history of succeeding. Within one week of GE’s announcement, James McNerney, head of the GE aircraft engine division, was named CEO and chairman of Minnesota Mining and Manufacturing Co.—better known as 3M. He is also the first outside candidate to ever become CEO of the 98-year-old corporation. Less than a month later, Robert Nardelli, head of the GE power systems division, became president and CEO of Home Depot Inc.

But developing executives the caliber of Immelt, Nardelli, McNerney and even Welch just doesn’t happen overnight. It is a process that is an integral part of GE’s corporate culture.

The GE succession plan is a fairly simple model. GE managers and executives are moved from job to job every two to three years, and each job change or promotion is a well-thought out process that provides GE managers with much-needed experience and exposure to certain elements of the business. The end result is that GE is able to build a management core that is very knowledgeable and experienced in the operations of the giant corporation.

“GE executives put a lot of thought and effort into where a certain manager should go next, and what skills and experience that manager needs to succeed,” says Horn. “With each new job, managers have a set of goals and expectations that they must meet or exceed to move on to the next opportunity.”

“The GE model for developing talent isn’t a very complicated one,” says Strategic Talent Group’s Font, another former HR executive for GE. “But it is a process that is well-ingrained into the corporate culture. GE executives also are disciplined in their approach and are dogged about identifying talent and thinking where an individual needs to be within the organization.”

Welch always has been a strong proponent of GE’s succession process, which has been far-reaching and focused on the long term. For example, Welch has stated that the process to find his replacement began more than six years ago. Some people familiar with GE say that it actually began earlier than that.

“There is not another company in the world that begins serious consideration for finding a successor to their CEO six years out,” says Byham. “Usually organizations won’t even start thinking about replacing their CEOs until they announce their retirement or resignation. Welch was once quoted as saying that he spent about 50 percent of his time thinking about how to develop talent and groom possible successors. And I was quoted in the L.A. Times as saying that’s about 49 percent more time than other CEOs spend thinking about the same thing.”

Both Font and Horn say it would be easy for other corporations to replicate the GE model. However, most corporations are not willing to make the huge investment of time and effort it would take for the model to truly succeed.

“It’s a process that is focused on the long-term, and it takes a very disciplined effort to make it work well. Most organizations simply are not willing to make that kind of investment,” says Horn.

The succession process at GE is also very tough on executives—some people have dubbed it a Darwinian approach. And executives at GE will be the first to admit that it’s not a perfect system, but it does, however, work and develops some of the most talented executives in the world.

“Years ago, I heard Frank Doyle (former executive vice president of HR for GE) speak at Wharton Business School in Philadelphia,” recalls Font. “He was talking about the process of selecting potential candidates for CEO. He said it really was simple, that every year GE went to the top schools in the country and recruited the best talent they could find. From those top recruits, GE would typically hire 1,000 every year, and among the new hires there were usually just a handful who had the potential to become CEO. Doyle finished by saying, ‘If GE’s system was perfect, then we wouldn’t have to hire 1,000 of the top recruits every year.’”

Bill Leonard is senior writer for HR Magazine.

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