ROUGH Road To Succession

Leaders at one in five organizations are unprepared to deal with the sudden loss of their key executives, according to a 2010 online survey of 1,098 senior managers and executives by the American Management Association’s Corporate Learning Solutions. Only 14 percent were said to be well-prepared, while 61 percent were somewhat prepared. This sad state stems in part from layoffs and other cutbacks during the recession, when succession planning moved to the back burner.Now, boards of directors and chief executive officers are facing pressure to make succession planning and talent development a priority.

Government regulators began prodding them in 2002, when the Sarbanes-Oxley Act increased scrutiny on governance. And recently, the Securities and Exchange Commission upped the ante in an advisory telling corporate boards that it intends to take succession planning seriously.

“Look for more government oversight,” says Stephen A. Miles, vice chairman of consulting firm Heidrick & Struggles in Atlanta. “We’re heading toward a mandate.”

Meanwhile, shareholders have been responding to succession lapses they suspect threaten their investments. Shareholder resolutions calling for boards to disclose succession plans are popping up; the Laborers’ International Union of North America proposed one at Apple Inc.’s annual meeting last February.

Embarrassing News

Most glaring has been news featuring companies caught in situations where executives have been asked to step down prematurely or have left unexpectedly. This has happened even at companies you would expect to have invested in succession planning. For example, in the midst of a financial meltdown, General Motors Co.’s directors had to cobble together succession plans on the fly, naming three CEOs in 18 months. “You’d have thought they would have been better prepared,” observes Raoul J. Buron, vice president and chief learning officer at Prudential Financial in Newark, N.J.

Bill Conaty, former senior vice president of HR at General Electric (GE) Co., describes what happened at Hewlett-Packard (HP) as a worst-case scenario and a wake-up call for boards and executives.

Conaty, currently a board member at consulting firm Aon Hewitt, says HP had to replace its CEO three times and “the board was ill-equipped” each time. “You would think they would have had robust options—insiders who they thought wereready,” he says. Instead, even in the most recent incident, it took board members about four months from their discovery of allegations against former CEO Mark Hurd to hire outsider Léo Apotheker.

“It cost the company financially and tarnished its standing with analysts and the public,” says Conaty, co-author with Ram Charan of The Talent Masters: Why Smart Leaders Put People Before Numbers (Crown Publishing Group, 2010). During the months of uncertainty, HP’s market value fell 18 percent.

Going Through the Motions

Even when companies have succession plans, the plans often lack rigor. Succession planning has become “a paperwork drill” resulting in “a notebook that sits on the shelf,” Buron notes. “Leaders have no confidence in it.” He estimates that succession plans are not followed more than half the time.

Leaders need to create “plans that are viable in theory and practice,” Miles says. Of course, “to do so is a lot more work.”

Conaty contrasts the HP board’s lack of preparedness with the GE approach. Today, GE leaders continue to build on the framework developed under former CEO Jack Welch. “The ultimate goal is same-day succession,” Conaty says.

The departure of senior vice president Larry Johnston—who became the CEO at Albertsons, a supermarket corporation—is a classic GE example. “One morning, Johnston came into the office and told us he was leaving,” Conaty recalls. “After spending an hour or so trying to talk him out of it and realizing we couldn’t, we accepted his resignation.”

Welch, current CEO Jeffrey R. Immelt and Conaty met to discuss their next moves. “We had candidates with two or three backups for all key positions—including the C-suite and all business units. And the board already knew who was lined up” thanks to six-month reviews, Conaty says. “They knew the names, personalities and their status. We went to our books, pulled out the candidates and filled the slots.

“Later in the day, we called a press conference. Instead of a downer for GE, we announced Johnston’s departure at the same time we named an insider as his successor and about four players down the line who were moving up.”

7 Ways to Improve Succession Plans Focus on strategy and future business needs. Succession planning starts with careful examination of business needs now and in the future. Have “the strategy discussion with the whole board, and develop a set of scenarios of what the world would be like five years out,” advises Michael Critelli, CEO of Dossia, a nonprofit consortium of large companies dedicated to improving individuals’ health and health care, and a former executive chairman of Pitney Bowes Inc. At Discover Financial Services in Riverwoods, Ill., Jill Zimmerman, vice president of talent acquisition and development, facilitates strategy sessions with the executive team. Projections revolve around questions like: Where do we want to be in three to five years? Will the skills and competencies that we need then be different? Her process also involves easy-to-visualize color-coded ratings of red, yellow and green for questions such as: Is the company structured from a human capital perspective to meet current needs? Do we have sufficient resources? Do we have the right people to achieve our strategies? William Byham of Development Dimensions International describes strategies developed from discussions like these as business drivers. A driver might be to expand into overseas markets. Then, “ask if we’re getting people with the capabilities we need to drive the organization in the specified ways,” says the chairman and CEO of the talent management company in Bridgeville, Pa. Identify pivotal jobs. Zone in on pivotal jobs that align with your business drivers. Keep in mind that what’s pivotal may not be obvious. At Southwest Airlines, for instance, “Everyone says that pilots are a key position, but they are not,” says Raoul J. Buron, vice president and chief learning officer at Prudential Financial. “Pilots are a dime a dozen; they know their job and don’t need development.” People buying futures contracts for fuel are pivotal, he explains. Establish a process to determine criteria for each key job. The best practice for finding a future CEO is illustrative: Engage board members in a discussion of CEO qualifications, says Beverly Behan, consultant and founder of Board Adviser LLC. Push them to “come up with an extensive list of criteria that only a ‘water-walker’ could fulfill,” she says. “Eventually, they’ll have to prioritize and cut, aiming to come out with about 10 criteria.” Implement objective assessments and flexible development processes. Look at the talent and the gaps you have. “Look at each person individually and identify development needs,” Zimmerman says. “Fit them into jobs or assign experiences that will help them grow.” Adds Buron: “Run your business and develop people. That’s where the bulk of the learning occurs. Classroom stuff opens the window shade, but the experience is where the critical learning and seasoning takes place.” Some executives choose to place high-potential employees in acceleration pools rather than target them for one job. Talent in the pool is viewed as a companywide resource and can be moved wherever and whenever necessary as people move along the pipeline. At USEC Inc., the acceleration pool starts with a review of front-line managers. “If you’re tapped, you can expect to go through a process characterized by increasing scrutiny,” explains W. Lance Wright, senior vice president of human resources and administration. In some companies, managers may take a proprietary interest in their high-potential employees, narrowing the possibilities for growth and opportunity. At other companies, such as Nestle USA Inc., with its many divisions worldwide, talented people move where the best development opportunities may be. “The company owns the talent,” says Jeffrey Ertel, vice president of human resources. Encourage buy-in from top executive mentors. Faced with pressure to deliver business results, executives may give development duties less attention than is needed to benefit a succession candidate assigned to them. This can be addressed in various ways. At Prudential Financial, executive compensation is linked to contributions to the succession process. “Annually, our top 17 business leaders have to sit in front of the CEO, John Strangfeld, and go through their succession plans,” Buron says. “They have to show their strategy and how they’re executing it. Included is information on their bench, their replacement, their diversity efforts and more. The CEO has his HR executive with him, and you have your HR manager with you. Your incentive bonus is based both on how you’ve run your business and how effective you’re being in developing people.” Byham says peer pressure can be a motivator. He recommends having senior executives report on the people they mentor at meetings attended by fellow executive mentors. Make the business case. HR leaders’ responsibilities include putting together the business case for why succession management is important and showcasing best practices in other companies, contends Ursula Fairbairn, president and CEO of the Fairbairn Group LLC. HR chiefs must convince executives in each business unit that those executives can deliver desired results with the right people. “You say, ‘You’re telling me you have to deliver; let’s look at your talent pool and assess who has the skill sets you need,’ ” says Diana Newmier, executive vice president of human resources at Transfield Services/Americas. “If you can show them the impact of talent through their own metrics, you’ve made the case.” Minimize risk. “Risk is minimized when you have a pipeline of talent,” Wright says. “Absent a performance problem or a huge change in strategic direction, insiders are the choice. Today, external candidates have to be head and shoulders above the insider to bring them in." No doubt, fresh talent should be added to invigorate a company’s talent mix, but experts agree that recruiting outsiders at lower levels and then developing them incurs less risk than bringing them in at or near the top. “People have demonstrated greater success in high-level positions when they have time in the HCA way than when they come in ‘cold turkey,’ ” says John Gering, group director of organizational effectiveness for HCA Inc. in Nashville, Tenn., a for-profit hospital system. Keep an eye on the external environment. Still, Buron says many executives are not as externally focused as they need to be. “They get lulled into believing they have the best talent available,” he explains. So, in tandem with internal development and monitoring, troll the marketplace constantly. Are you sure you have the best people in pivotal positions? “Do an external market scan to identify the top talent among competitors, in related industries and to identify best athletes—fungible CEOs or other leaders who can go anywhere,” advises Heidrick & Struggles Vice Chairman Stephen A. Miles. —Robert J. Grossman

Succession Management, the Definition

A lack of clarity exists around what succession management encompasses and who is responsible for it. Some see it as a limited function to develop and replace executives at the very top. Leaders that use best practices, such as Buron, see it as integral to comprehensive talent management. “It’s a discipline, not a process—a mind-set that has to be embedded in your culture,” he says.

It’s not something you can finish and be done with, adds Ursula Fairbairn, president and CEO of the Fairbairn Group LLC in New York City, an HR and executive management consulting firm. She calls it a “holistic circle” that includes:

• Identifying and assessing talent.
• Developing individual career plans.
• Conducting annual reviews.
• Moving key people to other roles with new responsibilities.
• Recruiting new talent.

Multitiered Approach

Succession planning and administration can be segmented. Visualize a pyramid with the CEO at the top, key managers in the middle and lower-level high-potential employees at the bottom.

Top tier. Owned by the board, working closely with the CEO and chief human resource officer, top-tier plans focus on executive continuity. They include an emergency “what if the CEO gets hit by a bus” component. “Typically, the emergency appointee is a different person than in your long-term plan,” says Beverly Behan,consultant and founder ofBoard Adviser LLC in New York City and author of Great Companies Deserve Great Boards: A CEO’s Guide to the Boardroom (Palgrave Macmillan, anticipated June 2011). “It could be a board member, a retired executive or the CFO. In a crisis, if the board can name someone within 24 to 48 hours, it is a confidence-builder.”

Emergencies seem to occur more frequently than one might think. In the first two months of 2011, four U.S. CEOs departed because of scandal, two left for health reasons and three died, according to consulting firm Challenger, Gray & Christmas Inc.

The firm also reported that 1,234 CEOs from U.S.-based corporations vacated their positions in nonemergency situations in 2010. For long-term CEO succession planning, board members target, develop and monitor internal candidates who are ready now, will be ready in a year or two, or will be ready in perhaps three to five years.

Middle tier. Owned by the CEO and run by the head of HR, middle-tier plans focus on the top 10, 20 or even 300 positions. Ideally, they include emergency and long-term plans to monitor and develop select individuals. Hence, when vacancies occur, the pipeline is filled with ready-now candidates. The CEO and HR head keep directors informed, seek suggestions and arrange opportunities for them to get to know top players.

In a former job as an HR executive at American Express Co., Fairbairn spent about half her time managing the top 300 people for succession. “My CEO and I would have reviews with the board multiple times throughout the year, and we would be very specific about talent,” she recalls. “We talked about our top 50 people once a year.”

Lower tier. High-potential employees at lower levels are targeted and groomed with oversight from the head of HR, reporting to the CEO.

Commitment at the Top

Succession management only works in a culture that values developing people—and when directors are willing to invest in the initiative. Leaders have to be committed to people, talent development and succession planning, Conaty says. At GE, Welch was legendary: Some estimates had him dedicating as much as three-quarters of his time to talent management. Welch was an outlier, however; Fairbairn estimates that effective CEOs spend 25 percent to 30 percent of their time on talent topics.

You know that managers buy into succession planning when you have “the event,” the annual meeting where the CEO and business leaders meet with the head of HR to discuss talent, says Diana Newmier, executive vice president of human resources at Transfield Services/Americas inPhiladelphia. At Transfield, “The CEO and I run it. We have all the plans prepared in a binder.” Newmier spends 20 percent of her time on succession planning and 80 percent on talent management.

According to the Society for Human Resource Management’s The Post-Recession Workplace: Competitive Business Strategies for Recovery and Beyond survey report, two-thirds of 346 HR professionals said that their organizations’ post-recession business strategies will focus on succession planning “to a large degree” or “to some degree.” This suggests that CEOs and boards are ready to commit. But saying and doing are not the same.

Wanted: Board Focus and Expertise

A board’s duties cover governance, strategy and succession planning, Conaty says. However, in a 2010 survey of 140 CEOs and board directors of North American companies conducted by Stanford University’s Rock Center for Corporate Governance and Heidrick & Struggles, board members said they spend only two hours a year on CEO succession planning.

Prudential Financial makes it a priority. “We seek board members who are skilled in talent management,” Buron says.

But Prudential Financial is an exception: “Too many boards lack expertise,” Miles says. “Board members who take the lead need to have at least three succession events as an executive or board member. One of the talent pools that continue to be passed over is former and sitting heads of HR. They know how the process works.”

HR’s Roles

HR chiefs must support a process that enables the company to tap into an ongoing pool of talent at all levels. They also must make sure employees embrace the culture and execute strategic and operational plans. “As the HR leader, you need to be the facilitator and to look for every angle, every edge, to support your business leaders,” says W. Lance Wright, senior vice president of human resources and administration at USEC Inc. in Bethesda, Md., a global energy company with 3,000 employees. In a May SHRM poll, 40 percent of the 209 HR professionals responding said they were responsible for leading succession planning efforts.

Regardless of the size of your organization, succession planning and succession management must command your attention. If you have the resources, you can get a boost from consultants and purchase state-of-the-art software. But limited resources shouldn’t hold you back: “It’s whether you have the conversations about key people and whether you keep track of what you’ve decided,” Wright says.

Mostly, succession management is just “elbow grease” practiced daily instead of once a year, Buron says. “There is no magic machine that spits out the information and analysis.”

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The author, a contributing editor of HR Magazine, is a lawyer and a professor of management studies at Marist College in Poughkeepsie, N.Y.