Print

Email story

Comment

Email editor

How to succeed at CEO succession

Companies can run into serious trouble if they do not have a continuing plan in place to replace the top person.

By SCOTT BARANCIK
Published March 6, 2005

When a U.S. president resigns or dies, Americans don't have to worry about a bloody power struggle.

The country's business plan, better known as the Constitution, is clear on the topic of succession: the vice president must be sworn in. If the vice president is unable, we turn to the speaker of the House of Representatives, and so on.

The line of succession for corporate CEOs is rarely so straight. Take Tampa's Walter Industries, which disclosed last month that it was losing its chief executive, Don DeFosset, and had no staff able to succeed him. Or Hewlett-Packard, Fannie Mae, Clearwater's Digital Lightwave or a host of other companies struggling to fill their top slot after an abrupt ouster or resignation.

More CEOs announced plans to leave their publicly traded employers in January than in any month since February 2001, according to Chicago outplacement firm Challenger Gray & Christmas. Other studies show CEOS are lasting fewer years on the job.

Board members are feeling the heat. A National Association of Corporate Directors survey of public-company directors in late 2003 found that 28 percent considered CEO succession-planning their top concern, more than any other issue. The Florida Directors' Institute will devote a session to the topic March 18 at its one-day seminar at the University of Tampa.

CEOs are under the gun, too. Many have begun to believe their legacy as a CEO depends in part on how well their successor performs, said Mindy Millward, lead partner for Mercer Delta Consulting's southeast region.

It's no idle concern: A rocky transition between CEOs can demoralize staff, generate internal power struggles, divide board members, derail business plans and scare the pants off investors.

"Investors hate uncertainty, and there's nothing more uncertain than an open CEO seat," said Steve Raymund, chairman and CEO of Clearwater computer distributor Tech Data Corp.

Raymund, who said CEOs should begin planning for succession their first day, said Tech Data has succession plans for 15 to 20 of its top executives, a relatively small group given the company's 8,500-head payroll. Nestor Cano, president of worldwide operations, is his "leading inside candidate" for CEO.

Yet the typical Tampa Bay area company is doing little succession planning, said Marty Traber, a partner at the Foley & Lardner law firm in Tampa. Foley assisted client Sykes Enterprises with its 2004 replacement of founder John Sykes.

Step 1, consultants said, is to groom internal staff. A CEO and the board - or increasingly, the board's corporate governance and nominating committee - should work together to identify promising executives, give them ever-tougher developmental challenges, and routinely evaluate their growth and readiness for the job according to a clear set of criteria.

Directors should resist the temptation to view external candidates as perfect and internal ones as flawed. Though external CEO searches may be called for, especially if the CEO's team is underperforming, "anybody can look good if you bring them in for a day," said Mercer Delta's Millward.

Ken Lewis needs no convincing. Lewis, CEO of Bank of America, said the bank keeps close track of its most promising executives and gives them growth opportunities. Under its color-coding system, for example, an executive with leadership potential who nonetheless has "issues" may be coded yellow.

Given the bank's well-defined corporate culture and its vast array of business lines, Lewis said, "Going outside (for a successor) isn't the way to go."

GEICO Insurance CEO Tony Nicely said he has "identified four (internal) people of various ages that could probably run GEICO someday better than me."

Step 2 is to try to time things so the CEO's departure and the name of a successor are announced simultaneously, or even before the transition is to occur.

Hewlett-Packard failed at Step 2 in February, when its board of directors demanded the resignation of chairwoman and CEO Carly Fiorina but was not ready to name a permanent successor. Interim replacements were named as a search for Fiorina's successor was started, with directors leaning toward external applicants.

Dave Felman, a shareholder at the Hill Ward & Henderson law firm in Tampa and a founder of the Florida Directors' Institute, called General Electric Corp.'s replacement of former chairman and CEO Jack Welch "the ideal transition." GE gave investors plenty of time to get used to successor Jeffrey Immelt, announcing his pending promotion a year in advance of Welch's 2001 retirement.

Welch had groomed not one but three potential heirs. In 1997, he told Immelt, James McNerney and Robert Nardelli they were finalists. When Immelt was selected, Nardelli left to become CEO of Home Depot and McNerney became CEO of 3M.

Thomas Snow, president and CEO of the Carlton Fields law firm in Tampa, took a similar tack last week. He informed the firm's board of directors that he plans to retire in one year and that the firm should begin looking for a successor.

Of course, even well-planned successions can be foiled by the unexpected. An internal candidate might stop growing, take another job, disappoint the board or be too green when the CEO slot comes open. Identifying a specific successor ahead of time could create internal jealousies and a political nightmare, Masonite CEO Phil Orsino said.

Similarly, a CEO might quit without warning or do something unacceptable that requires his or her immediate ouster.

Or the CEO might die. Fast-food chain McDonald's Corp., for example, recently suffered the death of two CEOs within a seven-month period, a development that deeply altered its succession plans.

In such cases, experts say, it is appropriate to appoint an interim CEO, often a board member with chief executive experience. The appearance of continuity is nearly as critical as the substance behind it.

How do local companies with recent CEO-switcheroos measure up against these standards? Here is a snapshot of three, based on multiple interviews:

SYKES ENTERPRISES: The Tampa customer-service company received good marks for giving investors more than a year's advance notice that founder, CEO and top shareholder John Sykes was planning to retire. It also received kudos for subsequently announcing his retirement and naming his successor simultaneously. Its choice of son Chuck Sykes as CEO drew praise (for continuity) and carping (for raising doubts about the board's independence).

That's a far better score than the company received regarding John Sykes' first retirement. In 2000, Sykes retired as CEO to make way for David Grimes, but returned when Grimes left four months later.

TECO ENERGY: The Tampa company floundered under CEO Robert Fagan, but it handled his replacement deftly. It announced Fagan's resignation and his replacement by board chairman Sherrill Hudson on the same day, a good sign.

By simultaneously disclosing the promotions of up-and-comers John Ramil (to president and chief operating officer) and Gordon Gillette (to executive vice president and chief financial officer), it telegraphed that TECO was preparing for Hudson's eventual successor.

WALTER INDUSTRIES: Response was mixed to the Tampa homebuilder and coal producer's announcement late last month of its CEO's pending retirement.

It lost points for failing to have a pool of internal candidates groomed and ready to replace CEO DeFosset. It displayed a lack of control over DeFosset's resignation by clarifying that it would be beginning an external candidate search, something that ideally would have been completed by announcement time. By leaving DeFosset in power through the search, the board may have left the company with a lame-duck CEO.

On the other hand, having DeFosset stay on insured some level of continuity, which investors like.

The company may have bought some internal goodwill when it gave significant raises and bonuses to three top executives just five days before Walter disclosed DeFosset's pending retirement.

DeFosset said he's staying out of the process. "Fundamentally, the hiring of my successor is a board-level responsibility," he said the day his pending retirement was announced. "I will not name my successor. I will not recruit my successor."

Times staff writer Jeff Harrington contributed to this report. Scott Barancik can be reached at 727 893-8751 or barancik@sptimes.com

[Last modified March 6, 2005, 00:13:18]