Here Today and Gone Tomorrow

"...60 percent of the respondents to a poll of HR directors said their firms have no CEO succession planning process in place." Are you with them or the other 40%?


Organizations of all sizes and industries all have one thing in common; their executives are temporarily here today and gone tomorrow. Executives are being ousted, dying, or retiring and many organizations do not have an orderly succession plan to replace them. What is startling is Bower’s quote of a study in the Harvard Business Review that “…60 percent of the respondents to a poll of HR directors said their firms have no CEO succession planning process in place.”[1] Does your organization have a formalized planning program that methodically distinguishes and trains high-potential candidates for key leadership positions,[2] providing a talent pool when key leaders unexpectedly depart? I am referring to a succession planning and management process, also known as succession planning process, which is a continuous, intentional methodical endeavor organizations perform to guarantee “…leadership continuity in key positions, retain and develop intellectual and knowledge capital for the future, and encourage individual advancement.”[3] Is succession planning a valued process in your organization? In order to understand the magnitude of my question, imagine the impact to your organization if any of the following circumstances occurred:
 
1.      When the credit crisis was unfolding in 2007, both Citigroup and Merrill Lynch’s CEOs retired. According to the Associated Press article “Boards Fall Short on Succession Plans,” neither company was grooming a successor, unfortunately; this is symptomatic in today’s business world, where executives often feel threatened by their heir.”[4]
2.      Wachovia’s board of directors forced its chief executive officer G. Kennedy Thompson to retire because of stock losses.[5] Not only has the organization lost key leadership, but also intellectual capital.
3.      In June 2008, Victor Ganzi, president and chief executive of the Hearst Corporation, resigned unexpectedly due to irreconcilable policy differences with the Hearst family trust that owns the company.[6] Would your organization be prepared to replace the executive?
 
These three images should provoke an urgent response from any organization and persuade it to consider succession planning best practices to mitigate ambiguity in times of leadership change.[7] This article argues that succession planning is a valuable process because it a) prepares for immediate loss of key leadership, and b) replicates and perpetuates intellectual capital within the organization. In addition, scholarly and practical insight is offered so that organizations can take a proactive approach to succession planning, ensuring a smooth transition regardless of the reason for executive leadership departures.
Prepares for immediate loss of key leadership
Organizations that loose a CEO or an executive expectedly or abruptly, appreciate the value of a succession planning process because it prepares them for the loss of key leadership. When Foot Locker Inc. terminated President and CEO Richard Mina in 2008,[8] Mark Everson the CEO of the American Red Cross, unexpectedly resigned in November 2007,[9] and Kent Kresa, chairman and CEO of Northrop Grumman, decision to retire after reaching the board's mandatory retirement age of 65 for senior executives,[10] each organization had to determine how they were going to replace that leader. The issue each faced had to do with having an effective plan in place which guided them through a smooth transition when the loss was immediate regardless of the reason for leaving.
 
If the succession plan is effective, the organization will have a smooth transition upon making an orderly selection. If there is no succession plan, a temporary selection could be viewed as questionable, and the selection could negatively impact stock prices. Foot Locker Inc. appointed Paul Saleh, the chief financial officer, as acting chief executive until a permanent replacement could be found. [11] Dalton and Dalton assert that the selection of an interim CEO demonstrates that the board of directors do not have a succession plan in place and what is worse, “Interim CEOs have been referred to by the Wall Street Journal "as substitute teachers," in gatekeeper roles at best, with little or no authority - or intention - to usher the firm in the longer-term.”[12]more than a year to find Mr. Everson. [13] When an organization does not have an immediate replacement “standing in the wings,” it sometimes gives a negative perception to the world. It is very important to note that just because a successor has been selected, trained, and actually waiting, does not guarantee that the successor will be successful.[14] On the other hand, when an organization knows the departure date in advance, the transition can be smoother. This image could be detrimental to both the morale inside Foot Locker Inc. and to the stock price. The American Red Cross was in an even worse position because after Mr. Everson resigned, they did not have a replacement, however; they seemed to have learned a lesson from a prior experience and did begin an immediate search. According to Berkes, it took the American Red Cross
 
Northrop Grumman on the other-hand appears to be ahead of the crowd when it publically announced its orderly succession plan to respond to the planned retirement of Kent Kresa, the chairman and CEO. The February 19, 2003 News Release, states that Mr. Kent was retiring because he reached the mandatory retirement age and effective April 1, 2003, Ronald D. Sugar would assume the role of CEO.[15] The News Release validates that the company and the board had advance notice of Mr. Kresa’s intent to retire. The release stated that the board of directors “…accommodates the decision of Kent Kresa…,”[16] giving them time to decide who his replacement would be. The News Release also conveyed Mr. Kresa’s confidence in Mr. Sugar by referencing prior collaboration between the two. Mr. Kresa stated “Under his leadership, Northrop Grumman will be in very capable hands and will continue on a steady and consistent course."[17] On the surface, it appears that North Grumman values the succession planning process.
 
While scholars and practitioners agree that succession planning is valuable because it prepares the organization for immediate loss of key leadership, they also recognize that succession planning is valuable because it provides an orderly method to replicate and perpetuate intellectual capital within the organization.
 
Replicates and perpetuates intellectual capital within the organization
Being mindful of the fact that executives are “here today and gone tomorrow,” organizations must take action to replicate and perpetuate intellectual capital. What is intellectual capital? Intellectual capital is the economic value of the collective knowledge of the organization’s employees,[18] according to Rothwell and it must be cultivated if creativity and innovation are to advance. It also has to be replicated and perpetuated in order for an organization to remain relevant and competitive in the future. Intellectual capital consist of a) explicit knowledge, which is knowledge gained from books, lectures, and databases that are shared between individuals and teams, b) tacit knowledge, which is knowledge gained from on the job training and other knowledgeable people, c) requisite variety, which is the constant sharing of ideas internal and external to the organization, and d) dynamic core competencies, which is a distinctive set of resources based on collective organizational learning.[19] Intellectual capital is captured, replicated, and perpetuated when executives provide input to their succession plan.
 
A succession plan makes sure intellectual capital is replicated and perpetuated by use of the continual process. This process prompts the current executive to write down: his current skills and abilities, skills required in the next successor, developmental courses necessary for success, competencies expected, and review the plan on a pre-determined basis. Key talent that has been identified will have a guide which will assess which skills they currently have and pinpoint the gaps in the skills and development they still need in order to develop themselves to possibly succeed an executive. Although intellectual capital is preserved and passed on through executives, Rothwell suggest succession planning can be of greater value to an organization if intellectual capital is replicated and perpetuated through the generational approach.[20]
 
There are five generations in the life cycle of the succession planning process meaning that a succession plan is developed from the top to the bottom of the leadership hierarchy. The life cycle is summarized below:
 
1.      The first generation replaces the CEO only, causing him to become the champion of the succession plan because he understands it and can be a powerful example through commitment and support needed to make the subsequent generations successful.
2.      The second generation replaces the CEO and his direct report,
3.      The third generation is a succession plan for middle managers that are direct report to the senior executive team.
4.      The fourth generation focuses on developing everyone in the organization because everyone is considered a potential candidate for a key position.
5.      Lastly, the fifth generation focuses on external talent for the future.[21]
 
If organizations are able to replicate and perpetuate intellectual capital, resulting in continuity of corporate knowledge across the organization by executing a succession planning process on its first generation, consider the scale if the focus is on its fourth generation.
 
Conclusion
Whether real or imagined, there is an authentic urgency for organizations to have a succession planning process in place, considering today’s volatile economic climate. In the current tumultuous economy, boards are rapidly forcing leaders into retirement or stress is causing some executives to abruptly leave the job either upright, on a stretcher, or in a pine box. Regrettably, many organizations do not have a succession planning process, which identifies and trains high potential candidates as successors. Instead, organizations are risking vanishing leadership continuity and intellectual capital, loss of morale, diminished confidence from within and outside the organization, as well as potentially decreasing the value of stock prices. The risks are real and compelling, and should provoke every organization to consider implementing a succession planning process if one does not exist or revitalize the current one. Does your organization have a succession planning process? It is your choice!


Endnotes
 
 


[1] Bower, J. L. (Nov 2007). Solve the Succession Crisis by Growing Inside-Outside Leader. Harvard
Business Review 85(11), pg. 90-96.
[2] Rothwell, W. (2002). Effective Succession Planning 2nd Edition: Ensuring Leadership Continuity and
                Building Talent from Within. New York, NY: AMACOM, pg. 18.
[3] Rothwell, W. (2005). Effective Succession Planning 3rd Edition: Ensuring Leadership Continuity and
Building Talent from Within. New York, NY: AMACOM, pg. 6.
[4] Associated Press (Nov 2007). Boards Fall Short on Succession Plans. Retrieved from
                http://readingeagle.com/article.aspx?id=67668 on December 9, 2008.
[5] Augstums, I. M. ( Jun 2008). Wachovia Replaces Ken Thompson as CEO on Interim Basis with Current
                Chairman Lanty Smith. Retrieved from
http://abcnews.go.com/Business/IndustryInfo/wireStory?id=4977739 on January 6, 2009.
[6] Perez-Pena, R. (Jun 2008). Hearst CEO Abruptly Resigns Over Internal Disagreement. Retrieved from
                http://seattletimes.nwsource.com/html/businesstechnology/2008005512_hearstceo19.html on
January 6, 2009.
[7] Heidrick & Struggles ( ). The Board of Directors’ Role in CEO Succession: Q&A with Heidrick &
Struggles. Retrieved from http://www.heidrick.com/NR/rdonlyres/162BDFFE-CD60-48B7-B69C-A98BDC7FD40C/0/HS_CEOSuccession.pdf on December 13, 2008.
[8] TradeTheNews.com (Oct 2008). CEO Foot Locker USA, Richard Mina Terminated Effective
Immediately.  Retrieved from https://www.tradethenews.com/stock-news/Consumer-
discretionary/Foot-Locker-Inc/FL/467807 on December 17, 2008
[9] Berkes, Howard (Nov 2007). CEO’s Resignation Punctuates Turmoil at Red Cross. Retrieved
from http://www.npr.org/templates/story/story.php?storyId=16747746 on December 20, 2008.
[10] Northrop Grumman Corporation (Feb 2003). Northrop Grumman Announces CEO Succession Plan:
Ronald Sugar Elected CEO, Effective April 1, 2003 Kent Kresa Will Remain Chairman. Retrieved
from http://www.irconnect.com/noc/press/pages/news_releases.html?d=36926 on December 17,
2008.
[11] TradeTheNews.com (Oct 2008). CEO Foot Locker USA, Richard Mina Terminated Effective
Immediately.  Retrieved from https://www.tradethenews.com/stock-news/Consumer-
discretionary/Foot-Locker-Inc/FL/467807 on December 17, 2008
[12] Dalton, D. R. and Dalton, C. M. (2007). CEO Succession: Some Finer – and Perhaps Provocative –
Points. Journal of Business Strategy 28(3), pg. 6-8.
[13] Berkes, Howard (Nov 2007). CEO’s Resignation Punctuates Turmoil at Red Cross. Retrieved
from http://www.npr.org/templates/story/story.php?storyId=16747746 on December 20, 2008.
[14] Rothwell, W. (2005). Effective Succession Planning: Ensuring Leadership Continuity and Building Team
                Talent from Within. New York, NY: AMACOM, pg. 15.
[15] Northrop Grumman Corporation (Feb 2003). Northrop Grumman Announces CEO Succession Plan:
Ronald Sugar Elected CEO, Effective April 1, 2003 Kent Kresa Will Remain Chairman. Retrieved
from http://www.irconnect.com/noc/press/pages/news_releases.html?d=36926 on December 17,
2008.
[16] Northrop Grumman Corporation (Feb 2003). Northrop Grumman Announces CEO Succession Plan:
Ronald Sugar Elected CEO, Effective April 1, 2003 Kent Kresa Will Remain Chairman. Retrieved
from http://www.irconnect.com/noc/press/pages/news_releases.html?d=36926 on December 17,
2008.
[17] Ibid.
[18] Rothwell, W. (2002). Effective Succession Planning: Ensuring Leadership Continuity and Building Team
                Talent from Within. New York, NY: AMACOM, pg. 37.
[19] Ehin, C. (2000). Unleashing Intellectual Capital. Boston, MA: Butterworth-Heinemann, pg. 166-170.
[20] Rothwell, W. (2002). Effective Succession Planning: Ensuring Leadership Continuity and Building Team
                Talent from Within. New York, NY: AMACOM.
[21]Ibid, pgs. 57-67.


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