For New CEOs, Ability to Deliver Really Counts : Management: Ponderous succession planning is becoming a thing of the past. Companies now look for leaders who can turn things around--and fast.
The glacial pace at which companies have groomed successors to their chief executives is fast becoming antiquated.
With corporations slimmed down, management hierarchies collapsed, a host of middle managers replaced by computers and international competition forcing new and improved products to be cranked out at breakneck speed, the quaint notion that the top job should be a reward for long and loyal service is going the way of the gooney bird.
The revolt of General Motors’ board demonstrates that what counts most in today’s competitive world is the ability to deliver results: higher productivity, growth rates, market share or profit, for example, or downsizing, restructuring and refocusing strategy.
An ad hoc collection of business analysts, consultants, professors, shareholder activists and executives suggests that, over the last 40 years, big American companies developed ponderous succession planning. The result: leaders more bureaucratic than dynamic, which was fine when markets were predictable and American business ruled the world.
Today, however, says Harvard Business School Prof. John Kotter, “the world simply moves too fast.”
The old model, he says, was based on the assumption that as long as a company trained a great CEO, everything else was taken care of. Now business is so complex that “companies don’t need just one grand leader, they need dozens and hundreds at various levels.”
Kotter’s solution: Give people responsibility at age 30, not 50, and create a pool of talent from which to draw when a new CEO must be selected.
Deciding who should run a company used to be a closely held decision by the incumbent CEO, and it was considered rather impolite for board members to question his judgment. All that is changing now as big institutional shareholders pressure directors to play a stronger role, especially at troubled companies.
Says Scott H. Schlecter, president of U.S. operations of the London-headquartered consulting firm L/E/K Partnership, “Boards are more and more involved in succession planning. The groomed successor bureaucrat doesn’t have a hope. Companies need a manager who adds value, and he or she can only come from the front line. A CEO can no longer run a company based on the way things were done when he was down the ranks 20 years ago.”
The chairman of the public relations firm Burson-Marsteller thinks the changing relationship between CEOs and directors will lead to fairer succession choices. “Instead of having the ‘yes man’ get to the top, now there will be more competition.”
The 46-year-old chief executive of Gerber Products, Alfred A. Piergallini, says the changes result from pressure on directors from big shareholders. Directors are passing that burden directly to the CEO. As a result, he says, “boards are less beholden to CEOs than they were in the old days, and more accountable to shareholders.”
Unlike many of his peers, Piergallini welcomes shareholder participation. He shocked the business community last summer by issuing proxy materials that clearly estimated the dollar value of Gerber executives’ stock options--a reform the SEC now requires but which was hotly contested by most CEOs.
A foremost critic of high executive pay, UC Berkeley business professor Graef Crystal, wrote in his newsletter that it stressed his 58-year-old-heart and put him into a “dead faint” to read that a CEO “not only agrees that it is possible to place a value on an option but has gone and done so in a most public way.”
Piergallini also revamped the baby food makers’ executive pay to ensure that big rewards will come only with big prosperity.
This maverick baby boom CEO recently instituted at Gerber a succession-planning process that focuses on developing managers at lower levels.
“The program rapidly develops high-potential candidates,” he says. “People who can seize opportunity are easily recognized.”
Piergallini believes that top candidates for succession should come from divisions most responsible for a company’s value. For example, at high-tech companies, successors should have a technical background. At Gerber, sales and marketing are more critical.
For companies run by executives unhappy with the twin dynamics of institutional investors’ burgeoning power and boards’ heightened accountability, today’s changes in corporate governance represent a sea change.
Nell Minow, president of the shareholder-activist group LENS Inc., recalls that two years ago, when General Motors selected Robert C. Stempel to replace retiring CEO Roger Smith, two institutional investors--pension funds run by the state of California and New York City--wrote letters asking the board what criteria they intended to use.
Directors were so outraged they didn’t respond, but held a press conference to denounce the shareholders’ meddling. In the future, Minow predicts, “leadership on succession will have to come from the board. Their single most important responsibility is selecting and monitoring the CEO.”
Robert Lear, former CEO of F&M; Schaefer and now executive-in-residence at Columbia Business School, notes that “succession used to be a delicate matter. Now, on the boards where I’m a director, we discuss these questions openly.”
One reason, says Los Angeles business consultant Rock N. Hankin of Hankin & Co., a director of seven companies, is that boards are more impatient for results. “Companies used to be in trouble for a year, study the problem for a year and take a year to fix things. I don’t see that willingness to wait anymore.”
That means the CEO of the future is somebody who will nail problems as soon as they arise, Hankin reasons. To find the right person, he recommends that compensation committees should track the top 25 to 50 candidates years before succession is required, then make their final decision on “the tenor of the times, what the company needs at that juncture.”
Several of Hankin’s companies are mid-sized and lack the capital and cash flow of their larger brethren. One result, Hankin says, is that managers move a lot faster. “They have to intuit some decisions that are made on a rationale of research basis at Fortune 500 companies.” Boards of mid-sized companies are usually more willing to seek succession candidates from the outside, he notes.
In his book “Corporate Culture and Performance,” Harvard’s Kotter suggests that the scale of change needed at big corporations today is so vast that it can only be implemented by an outsider, or by what he calls an “outside-insider”--someone from a peripheral part of the company.
GM’s new president and CEO, John F. (Jack) Smith Jr., is an outside-insider.
He compiled a shining track record in Europe, away from home office culture and emotional ties.
Similarly, Derek Maughan, who became chief executive at Salomon Inc. after scandal forced top officers to resign, previously ran Salomon’s Asian operations.
Another example is General Electric’s Jack Welch, who has pushed through radical changes at the country’s fifth-largest company. Welch grew up in the plastics business, which was a GE backwater at the time.
Each of these executives is younger than the one he replaced.
Anthony Miles, senior vice president of the Boston Consulting Group, sees that as a trend. “More and more companies are involved in major transformations,” he says. “In the trade-off between wisdom and experience and energy and enthusiasm, the latter is being given more weight.”
