Executive Flaw : Succession: When Firms Often Falter

David G. Schmidt’s career at Ducommun Inc. came to an abrupt end Feb. 26, when he resigned the company presidency after just 363 days in the job.

The public explanation was that Schmidt left because of differences in business philosophy with his boss, Wallace W. Booth, Ducommun’s autocratic chairman and chief executive.

The dispute, however, was deeper and far more personal than that. The issue was who would succeed Booth as chairman--and when.

Schmidt was Ducommun’s crown prince, in line for the chairmanship upon Booth’s planned retirement next year at age 65. Schmidt, 46, had been Booth’s protege, almost a son to him, for more than a decade at three different firms.

But the plan for a smooth succession fell apart. Schmidt showed too much impatience for the top job; Booth decided that Schmidt was not the right man to replace him and reconsidered his retirement. Schmidt was given a severance payment and pushed out of the company.

Problem Spans World

And, like so many neatly laid plans for transferring power, the firm’s strategy collapsed in a clash of ambitions. In the story of Ducommun, a Los Angeles electronics and aerospace concern, can be seen the age-old themes of betrayal and estrangement, of frustrated princely ambition and regal refusal to yield power.

The question of succession bedevils every organization on Earth, from the American family to the Roman Catholic Church. It spawns bloodshed in organized crime, shatters families, sparks sectarian warfare and sets the future course of nations.

The study of succession is more an art than a science, a central concern of prophets, poets, playwrights and psychoanalysts. It is the motif of the game of chess, in which the move of every pawn affects the defense, and ultimately the demise, of a king.

No Proven Formula

In corporate America, the language of succession planning is borrowed from the Bible and medieval monarchies: dynasty, crown prince, heir apparent, kingmaker, the anointed. A multibillion-dollar industry of management consultants and executive recruiters has developed to counsel firms on how to handle the problem, yet there is no proven formula for successful transition.

American democracy and the Roman Catholic papacy have survived as long as they have, in part, because both have explicit and accepted rules of succession. But no 25th Amendment or College of Cardinals exists in the corporate sphere to ensure an orderly and peaceful transfer of power.

“Choosing the next CEO (chief executive officer) is the single most important decision any company makes,” said Alex Kyman, president of City National Bank in Beverly Hills. Kyman is the presumed heir to Bram Goldsmith, 63, the bank’s current chairman. As in many firms, however, the question has never been broached openly.

“We’ve never discussed it,” Kyman, 56, said. “It’s obviously a delicate matter, particularly when you have a dynamic chief executive who normally is not in the mood to talk about his human frailty.”

Grooming a new generation of leaders is at once the most critical and the most sensitive of tasks for business managers. Those who do it poorly--or fail to do it at all--risk the future of their enterprise.

According to one study, 70% of family firms collapse or are sold when their founders die, largely because of failure to prepare a successor. Examples abound of larger companies floundering after the unexpected death or removal of their chiefs.

Even the largest multinational corporations, which would be expected to groom a sizable pool of talented executives, can suffer for years after the departure of a charismatic chairman who neglected to provide for an orderly succession.

Reluctance at the Top

Booth of Ducommun spoke candidly about his clash with Schmidt and his desire to find a successor and step aside. Yet, at this point in the process, he has shown reluctance to give up authority, and company insiders are beginning to doubt his stated intention to retire next year.

Last month, Booth named W. Donald Bell, 48, to replace Schmidt as his No. 2 man, but he is withholding his endorsement of Bell as heir apparent.

“I think it’s generally known that he is the only logical candidate to succeed me, but others might come along who are younger,” Booth said. “If it doesn’t work out, I’ll probably be going outside” the company to find the next chairman.

Students of succession say that this is the classic behavior of a strong man nearing the end of his reign.

“CEOs, for the most part, are passionate, compulsive, driven people. They don’t want to give up their power, and there are lots of things they do to avoid the inevitable,” said Robert Paulson, managing director of the Los Angeles office of management consultants McKinsey & Co.

Typical Defensive Ploys

The defenses of a chief executive officer include assuring himself of a friendly board of directors, stirring up the business so that only the top man understands the strategy and foisting off high-risk decisions to subordinates who must take the fall if they fail.

Another ploy is to set up a destructive competition among potential successors that yields one bruised victor and several bitter losers. The eventual winner assumes the chairmanship but is surrounded by enemies or preoccupied with filling top posts vacated by dispirited losers. In contrast to his unchallenged predecessor, the new boss looks weak. In some cases, the company recalls the former chief to straighten things out.

One time-honored tactic, practiced by industry giants such as Armand Hammer at Occidental Petroleum Corp., Harold Geneen at International Telephone & Telegraph Corp., William Paley at CBS, Henry Ford II at Ford Motor Co. and Donald T. Regan at Merrill Lynch Pierce Fenner & Smith Inc., is to run several candidates through the No. 2 job and replace them after brief tenures because of age or some unspecified shortcoming.

French History Example

One former Merrill Lynch executive compared Regan, who ran the firm from 1971 to 1981, with Louis XIV, who structured his kingdom so as to eliminate potential rivals:

“It’s a fascinating study. Louis XIV centralized France by bringing in all the nobles from around the country to a glittering court at Versailles. They all left their drafty castles and boring night life--but they also left their private armies and independent power bases.

“Regan brought the managers of major Merrill Lynch offices around the country to New York. He took away their real power bases and gave them staff jobs with no authority.”

Regan then placed a series of managers in the No. 2 slot, but never allowed any of them real power or a realistic chance to succeed him. Three highly qualified Merrill Lynch managers, stifled under Regan’s autocratic system, departed to become chief executives at other major financial institutions: George Shinn at First Boston Corp., John Orb at Smith Barney Harris Upham & Co. and Ross Kenzie at Goldome.

Regan’s ultimate successor, Roger Birk, took over the chairmanship when Regan left to become President Reagan’s first secretary of the Treasury. Without Regan’s grasp of the brokerage house’s levers of power, Birk lasted only two years in the job.

IBM Plan Works

The companies that have the least difficulty with succession generally are those that have carefully charted a route to the top, spelled out the rules of succession and created a corps of executives with broad backgrounds of experience and strong constituencies in various parts of the firm.

International Business Machines Corp. is the classic case. The face at the top of the giant bureaucracy changes predictably, each chief executive stepping aside at age 60 after a comparatively short stint during which he shares power with his successor.

The naming of a new IBM chairman last month was played on Page 36 of the Wall Street Journal in the paper’s Who’s News column. When most companies the size of IBM choose a new chief executive, it is a major news story.

“From the management-succession point of view, IBM is a well-oiled machine,” said a computer industry analyst. “IBM is organized like an efficient army. Substitution of one generalissimo for another doesn’t make much difference.”

At many other firms, however, it makes a critical difference. The most dramatic examples are to be found in cases of the sudden death of a founder or central figure in a business.

Sudden Death Leaves Void

In June, 1983, Eagle Computer Inc. was a high flier in the booming computer business. The Los Gatos, Calif., firm (since moved to Garden Grove) had grown from $8 million in annual sales to $80 million in a little over a year. It had just announced its first public offering of stock, which made its president, Dennis Barnhart, an instant millionaire.

The day the stock was issued, Barnhart accidentally drove his new Ferrari over a cliff and was killed. The firm has suffered several other setbacks since then, including a legal fight with IBM and two consecutive years of multimillion-dollar losses. Barnhart’s replacement, Ron Mickwee, lasted barely a year in the job.

Eagle Computer’s current chief, co-founder Gary Kappenman, said that the company would have had difficulties even if Barnhart had lived. His sudden death compounded the problems, however.

“I was 38 at the time and Barney was 40. We certainly weren’t thinking about drastic things like that happening. . . . It hurt, on a personal level and on a production level.”

Kappenman added that, even today, Eagle does not have a formal plan for replacing the chief executive. “It hasn’t really been discussed. It’s something you don’t want to face unless you have to.”

One company that has an explicit plan for dealing with the potential loss of its top officers is Arrow Electronics, based in Greenwich, Conn. Arrow lost 13 of its ranking executives, including two of its three founders, in a hotel fire in suburban New York in December, 1980.

‘Clear, Formal Plan’

“We have a clear and formal succession plan,” said John C. Waddell, the current chief executive and the surviving co-founder. “I have a president and chief operating officer, and he would be the clear successor.

“I’m perfectly willing to say it out loud, because that’s why the plan is there. It’s obviously important, given our experience, that there be a clear line of succession.”

Arrow has trod a rocky path since the 1980 catastrophe. Earnings plummeted in 1981 and 1982, rebounded in 1983-84, then fell again last year. Waddell blamed many of the problems on an industry-wide slump, but said that rebuilding the devastated executive corps consumed much of the time and energy he otherwise might have devoted to corporate strategy.

Turning over the corporate reins probably is most difficult in family-controlled businesses. Families have been shattered and empires diminished by disagreements over who would assume control of the enterprise.

The Bingham family of Louisville, owners of the Louisville Courier-Journal and other media properties, was driven to put its holdings up for sale earlier this year after an emotional family feud erupted over who would operate the family business. The fight pitted father against son, brother against sister. Although father and son have reached a limited reconciliation, the tragedy tore apart a proud, patrician clan and caused dissolution of a 70-year-old company.

Much the same outcome befell the Uihlein family, which owned the Schlitz brewery in Milwaukee. The large family, which controlled nearly three-fourths of the brewery’s stock, had a history of family brawls that exploded in tempestuous corporate annual meetings. When Schlitz President Robert Uihlein Jr. died in 1975, family members could not agree on an acceptable successor. The brewery’s fortunes deteriorated and the company was sold to Detroit’s Stroh Brewery Co. in 1982.

Most Successors Hand-Picked

Publicly held companies are not scorched by the emotional heat that family succession fights engender, but the process is touchy nonetheless and leaves many--such as Ducommun’s Schmidt--feeling betrayed and personally hurt.

It is a common misconception, encouraged by corporate public-relations officers, that chief executives of major companies are “elected” by the board of directors in a rational, democratic way. In fact, most American CEOs are hand-picked by their predecessors.

A 1982 study by the Conference Board, a business research organization in New York, found that two of three current CEOs expect to name their successor with little or no involvement of others. Only about one in five chief executives is chosen by a corporate board of directors.

“As long as the corporation is doing well, the CEO is able to name his successor from within the corporation with little interference from the board,” said Michael P. Allen, a sociologist at Washington State University who has written extensively about the subject.

“However, ‘crisis’ succession, precipitated by some form of failure, often weakens the hand of the CEO in naming his successor and is more likely to involve other board members.”

Attributes of an Heir

What do CEOs look for in a successor? Another Conference Board survey found that by far the most desired trait is “personal leadership style,” followed closely by an “aggressive, competitive outlook.”

These are qualities most chief executives ascribe to themselves. In other words, CEOs seek their successors in a mirror--and often are disappointed.

“They tend to look upon themselves as almost superhuman beings. An individual like that is unlikely to tolerate or develop someone like that under him,” said management consultant Robert Waterman, author of the best-seller “In Search of Excellence.”

Creative leaders tend to surround themselves with technicians or administrators, Waterman said, while strong potential successors grow impatient for power and leave. The ultimate effect, he said, is “a natural process of decay in companies.”

William Ouchi, professor of management at UCLA, said the issue of succession strikes at the heart of every chief executive and every parent. Their actions and motivations cannot be studied scientifically, he said, because “fundamentally, it’s not a rational, orderly process.

“It’s the first time they are confronted directly with the reality of their own mortality. And mortality is not something that’s dealt with rationally by most people.”