GE Succession a Leadership Lesson

Longtime General Electric Co. Chairman and Chief Executive John F. Welch Jr. did for corporate succession last week what Al Gore has done for dangling chads: Turn the esoteric into a hot topic, however fleeting.

OK, so the circle of people talking about how corporate America chooses its leaders is a bit smaller than the global buzz over the most arcane aspects of presidential vote counting.

But for many of the nation’s movers and shakers, the anointment of inside front-runner Jeffrey R. Immelt as heir to Jack Welch’s corporate legacy catapulted their own succession planning to the fore.

“GE was the Super Bowl of CEO succession planning. It was a wake-up call for companies that haven’t thought about the next generation,” said Stephen Unger, a managing partner in the Los Angeles office of Heidrick & Struggles, an international executive search firm.

And, according to those who study and assist executive transitions, after years of neglect, it’s about time corporate leaders started focusing on passing the baton. A smooth and orderly CEO transition, they said, can be the difference between successfully moving a company into its next phase and any number of disasters, including productivity losses, the erosion of shareholder confidence and employee exodus.

“I was just telling a client of mine who just lost a person that there is a great lesson in GE,” said Jane Howze, managing director of the Alexander Group, a national executive search firm. “In today’s job market, part of every manager’s performance criteria should be succession planning.

“It’s never been harder to recruit people,” she said. “I’ve been in [the] executive search [field] for 20 years, and I’m finding you’re making 50% more calls to get a good candidate. And what’s the antidote to that? The antidote is to grow your own.”

Demand for executive talent is at an all-time high and increasing for a number of reasons, including the proliferation of new companies, the aging of the baby boomers at the helm of many corporations, early retirement and the rapid sacking of executives who fail to improve profits within a few quarters.

Last month, 111 chief executives left American firms, led by “dot-com” departures. That’s a 59% increase from a year ago, according to a report released Thursday by outplacement firm Challenger, Gray & Christmas Inc.

Not surprisingly, the feeding frenzy for the GE also-rans, Robert L. Nardelli and W. James McNerney Jr., began the day of the announcement. The finalists are expected to have their pick of top jobs elsewhere as have dozens of other Welch proteges.

“Most companies would be glad to hire anybody in the [GE] top 10,” said Jeff Christian, CEO of Christian & Timbers Inc., the firm that presented Hewlett-Packard Co.’s board with eventual CEO Carly Fiorina last year.

“The winners are the people who make hiring and keeping the best people a top priority, and that’s exactly what Jack Welch did,” Christian said. “His primary strategic goal was hiring the best people around, developing them and training them and knowing who the stars were.”

Yet many boards of directors and chief executives have failed to address the question of who would replace the top boss, much less any other key player, transition experts said.

“There’s been so many other pressures on corporate leaders that I think they’ve been distracted in this regard,” said Gary Kaplan, founder of Gary Kaplan & Associates, a Pasadena-based executive search firm.

One reason for the lack of attention is that succession planning is a bit like writing a corporate will. “Who likes to participate in their own death?” said Warren Bennis, a professor of business administration at USC.

Yet succession planning isn’t something businesses can afford to ignore, he said, “if they are going to be in the phone book in 2002.”

The fact that Welch had his pick of strong inside candidates was no accident.

“He chooses the right people,” Bennis said, adding that he is known for interviewing the finalists for the top 500 positions at GE.

“That is what Jack Welch is famous for. He has said he spends 50% of his time on developing people, and that’s about 49% more than most CEOs do,” said Bill Byham, chief executive and chairman of Development Dimensions International, a Pittsburgh-based international human resources consulting firm that specializes in leadership development.

For the better part of a decade, Welch, 65, has been intensely focused on determining and preparing his successor, saying in a 1991 speech, “From now on, [choosing my successor] is the most important decision I’ll make. It occupies a considerable amount of thought almost every day.”

Allen Salikof can relate to that mission. As chief executive and president of Cleveland-based Management Recruiters International, Salikof oversees executive searches in 1,060 offices in 23 countries. The company had $750 million in revenue last year. This year, his job includes searching for his own replacement.

“The board directed me to have a potential successor or successors in place by next year,” said Salikof, 57. “It’s not that they are ready to get rid of me, but what happens if tomorrow I’m hit by a truck?”

If development and selection of chief executives is important, their transition is critical, said consultants who assist that process. Internal candidates are at an advantage because they usually understand the company’s culture. But they may lack objectivity and, especially in large organizations, may not be as familiar as they need to be with all of its parts.

Going outside can be all the more risky, with as many as four in 10 such senior executives washing out within 18 months, said Bob Oberlander, who, as a senior vice president with Lee Hecht Harrison, an international career management-services firm based in New Jersey, helps companies prepare succession plans and groom candidates for promotion.

Often, the executive is quite capable, Oberlander said.

“There is great potential in this person. But they haven’t taken the time to help the person fit into the organization. It’s, ‘Well, cast them out and get a new one.’ But it’s very costly.”

The 13-month period in which Immelt is set to work alongside Welch is not too long, even for an insider at a corporate giant such as GE, which will have more than 400 million employees once its $45-billion acquisition of Honeywell Corp. is complete. The last time Immelt held a job at GE’s Connecticut headquarters was in the early 1980s, and his 18-year tenure has included stints at only three divisions of the company, which operates in 100 countries.

James S. Turley is in the middle of a 13-month transition, during which the Ernst & Young chairman-elect is trying to get to know better the Big Five accounting firm with 78,000 employees. In the last two weeks of November alone, the 23-year veteran visited the firm’s offices and clients in Mexico and Japan before spending Thanksgiving with partners in Malaysia.

“There were many of our partners and key practice leaders that I needed to get to know much better, said Turley, who, like Immelt, was 44 when he was selected last May from a small pool of inside candidates to replace outgoing chairman Philip A. Laskawy. “It’s really been a learning process.

“We’re a relationship business, and a piece of this is transitioning the relationships from Phil to me, both internally and externally,” Turley said. “I think it’s more of a challenge when you don’t have the transition time.”

Outsiders need as much insight as they can get on the culture of the organization, its strengths and weaknesses and its talent pool, said Richard Hagberg, an organizational psychologist whose Foster City, Calif.-based firm helped assess Hewlett-Packard before it launched its CEO search and presented its findings to Fiorina upon her arrival.

“She needed to understand what her team looked like,” he said.

Hagberg had been brought in by then-CEO Lew Platt to assess the computer maker’s ability to achieve its strategic goals. During that process, Platt, who has acknowledged missing out on the development of the Internet, suggested the board look for a new CEO.

“He had the foresight to see the organization needed to change in some fundamental ways, and he had the courage to put his personal self-interest aside to the betterment of the organization,” Hagberg said.

Ken Barksdale, the founder and former CEO of RewardsPlus, a 4-year-old online benefit-administration company, made a similar move recently, stepping aside in order to bring in a more-seasoned leader to steer the Baltimore-based concern through a period of rapid growth.

“Egos cannot play a role in a successful company,” said Barksdale, 41. “If you’ve got what’s best for the company in mind, and everybody wants to succeed, then you look at what you need at what positions, and you put that in place.”

While new companies necessarily have to go outside for experienced executives, it can be a morale buster at established companies.

“We’ve got so many organizations that are looking to replace CEOs and hiring search firms to find them,” Kaplan, the executive recruiter, said. “What Welch said is, ‘I’m making this selection from an internal field.’ Look at the signal that sends not only to the executive class within GE but to the young MBA at GE. It says, ‘This is an organization that puts its money where its mouth is in terms of promotion from within.’ ”

Under Welch’s 20-year tenure, GE has become a sort of finishing school for corporate leaders, many of whom have gone on to head major companies, including Conseco and Owens Corning. Executive candidates are identified early, put through an intensive in-house training program and then moved through the company. Although Welch earned the nickname “Neutron Jack” for laying off thousands in streamlining moves, his attention to development allowed him to build a deep bench of well-trained managers and corporate leaders.

Many companies did not emerge from the downsizing and right-sizing era so well. The massive layoffs of the early 1990s disproportionately eliminated middle managers who might now be in positions to take over corporate helms, said Byham, the corporate leadership specialist. What’s more, the corporate ladder has gotten a lot steeper.

“Ten, 20 years ago, the big companies were full of deputy jobs and assistant jobs that were in between levels, where you could go around and learn from people. When they flattened companies, those jobs were eliminated,” Byham said. “The old organization had maybe 10 levels. Now the organization has maybe six. That means the jump, the difference between the competencies required at each level, is much greater.”

The most unusual aspect of the GE succession, USC’s Bennis said, is how textbook it was.

Not only did Welch cultivate a bevy of potential successors, he made sure each of the candidates had his own successor in place in the event he was selected or chose to leave.

“In many ways, what Welch and his board have done is probably the most complete, thorough long-term succession plan of most any company I can think of,” Bennis said. “Now that doesn’t mean [Welch] couldn’t have made a mistake in Mr. Immelt. But the process was good.”

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Turnover at the Top

The rapid turnover of chief executives of American firms has been accelerating for a variety of reasons. Number of departures in each of the last 16 months:

*

November: 111

Source: Challenger, Gray & Christmas Inc.