Working Without a Net: Being Without Good Succession Plans Has Never Been Riskier
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October 17, 2008
October 17, 2008
It's a precarious time for many leaders - as well as their organizations. Consider the example of Robert Willumstad, who until recently was CEO of struggling insurance giant AIG. His ouster was part of the deal in which AIG received an $85 billion government rescue package. On September 18, 2008, just three months after he had replaced Martin Sullivan, Willumstad was replaced by Edward Liddy. We can only imagine the succession planning angst involved in such a fluctuating, crisis-laden situation (Associated Press, 2008a; Karnitschnig et al., 2008; Reuters, 2008).
But AIG is not alone. Case in point: the sudden departures this year of Wachovia Corporation's Ken Thompson, Washington Mutual's Kerry Killinger, Fannie Mae's Daniel Mudd and Freddie Mac's Richard Syron. And last year there was the departure of Citigroup's Charles Prince and Merrill Lynch's Stanley O'Neal. John Thain replaced O'Neal only to see the company bought by Bank of America. Thain is now part of Bank of America's succession planning strategy. Even shorter than Willumstad's and Thain's tenure was that of WaMu's Alan Fishman; he was CEO for less than three weeks before J.P. Morgan Chase bought WaMu (Associated Press, 2008b; Dash, 2008; James F. Reda & Associates, 2008; Zibel, 2008).
Although these may seem like extreme examples in organizations making today's headlines, in many ways they're not unique. Amid the economic downturn and crisis in the financial markets, many executives and other managers are under extreme pressure. If they haven't already lost their positions, there's the danger that they could in coming months. And, even if their own positions are safe, they may need to replace other leaders in their organizations. Yet, i4cp's research indicates that many companies are unprepared and so could find themselves in serious trouble.
Why are succession plans so critical? Former General Electric CEO Jack Welch and former Harvard Business Review editor Suzy Welch argue that succession planning avoids disruption and employee trauma when the CEO leaves, whether the departure is anticipated or not. They cite Citigroup and Merrill Lynch as two examples of poor succession planning. Both companies lost their CEOs in 2007, and neither had potential successors lined up inside or outside their organizations. The Welches wrote, "People all over the company were asking themselves, 'What will happen to me in this mess?' and 'What will the devil-we-don't-know be like?' So long productivity!" They say that succession planning should be company policy, dealt with openly and deliberately and at the top of corporate board agendas (Welch & Welch, 2008).
But according to a recent survey conducted by i4cp, a surprising number of companies are not prepared for the departure of a leader. The study found that more than two-thirds of polled organizations are not immediately ready to fill a position vacated suddenly by a leader.
One slice of good news for i4cp member companies is that larger organizations tend to be better prepared. A breakdown of respondents by company size revealed that 66% of those from organizations with more than 10,000 employees say they are "prepared" or "very prepared" to immediately fill a leadership role. Nonetheless, this suggests that even many large organizations aren't truly ready for a succession event.
A sizable proportion of organizations are even unprepared for an exit at the very top of the organization. Just a third of respondents to the i4cp study stated that an internal interim successor has been identified should their CEO suddenly leave. Again, large companies are better prepared, with 75% of respondents from companies with more than 10,000 employees reporting that they have identified an interim CEO successor.
So, at a time when the World Bank president proclaims that the global financial institution is verging on the "tipping point" of disaster (Cho & Appelbaum, 2008), what measures can businesses take to ensure that their succession planning is effective? Following are some strategies that companies can consider:
Documents used in the preparation of this TrendWatcher include the following:
But AIG is not alone. Case in point: the sudden departures this year of Wachovia Corporation's Ken Thompson, Washington Mutual's Kerry Killinger, Fannie Mae's Daniel Mudd and Freddie Mac's Richard Syron. And last year there was the departure of Citigroup's Charles Prince and Merrill Lynch's Stanley O'Neal. John Thain replaced O'Neal only to see the company bought by Bank of America. Thain is now part of Bank of America's succession planning strategy. Even shorter than Willumstad's and Thain's tenure was that of WaMu's Alan Fishman; he was CEO for less than three weeks before J.P. Morgan Chase bought WaMu (Associated Press, 2008b; Dash, 2008; James F. Reda & Associates, 2008; Zibel, 2008).
Although these may seem like extreme examples in organizations making today's headlines, in many ways they're not unique. Amid the economic downturn and crisis in the financial markets, many executives and other managers are under extreme pressure. If they haven't already lost their positions, there's the danger that they could in coming months. And, even if their own positions are safe, they may need to replace other leaders in their organizations. Yet, i4cp's research indicates that many companies are unprepared and so could find themselves in serious trouble.
Why are succession plans so critical? Former General Electric CEO Jack Welch and former Harvard Business Review editor Suzy Welch argue that succession planning avoids disruption and employee trauma when the CEO leaves, whether the departure is anticipated or not. They cite Citigroup and Merrill Lynch as two examples of poor succession planning. Both companies lost their CEOs in 2007, and neither had potential successors lined up inside or outside their organizations. The Welches wrote, "People all over the company were asking themselves, 'What will happen to me in this mess?' and 'What will the devil-we-don't-know be like?' So long productivity!" They say that succession planning should be company policy, dealt with openly and deliberately and at the top of corporate board agendas (Welch & Welch, 2008).
But according to a recent survey conducted by i4cp, a surprising number of companies are not prepared for the departure of a leader. The study found that more than two-thirds of polled organizations are not immediately ready to fill a position vacated suddenly by a leader.
One slice of good news for i4cp member companies is that larger organizations tend to be better prepared. A breakdown of respondents by company size revealed that 66% of those from organizations with more than 10,000 employees say they are "prepared" or "very prepared" to immediately fill a leadership role. Nonetheless, this suggests that even many large organizations aren't truly ready for a succession event.
A sizable proportion of organizations are even unprepared for an exit at the very top of the organization. Just a third of respondents to the i4cp study stated that an internal interim successor has been identified should their CEO suddenly leave. Again, large companies are better prepared, with 75% of respondents from companies with more than 10,000 employees reporting that they have identified an interim CEO successor.
So, at a time when the World Bank president proclaims that the global financial institution is verging on the "tipping point" of disaster (Cho & Appelbaum, 2008), what measures can businesses take to ensure that their succession planning is effective? Following are some strategies that companies can consider:
- First, prepare for the unexpected. Too many companies are unprepared to immediately fill a leadership void. Make sure the succession plan meets this basic need.
- Second, keep the plan fresh. The i4cp study indicates that companies fall short on tracking and monitoring their plans. Only 38% of all respondents (and 60% of the largest companies) stated that their companies review or refresh their plans a minimum of every two years.
- Third, make sure your organization has a succession plan that is right for its goals. If the plan is designed to be a catalyst for development, for example, it will need to be set up one way. If it's designed primarily for risk mitigation, it will need a different set of characteristics.
- Fourth, consider adopting a rating system. This is a common practice among a majority of companies with over 10,000 workers. However, rating systems need to be as fair and objective as possible so that succession plans are not widely viewed as an exercise in favoritism and organizational politics.
- Fifth, consider using benchmarking for high-level executives. The process requires detailed information-gathering on prospective leaders, both inside and outside the organization. Developing profiles on potential leaders can help directors spot the candidates whose experience, strategies and visions dovetail with those of the organization (Ogden & Wood, 2008).
- Sixth, if the system is intended to develop leadership skills, then make sure there's a strong communication component. Let potential future leaders know what is and isn't working with regard to their performance in their current positions, and clearly outline expectations for advancement.
Documents used in the preparation of this TrendWatcher include the following:
- Anderson, C. (2008, March). Talent management: Succession planning gains momentum. Chief Learning Officer. Retrieved from wwwclomedia.com
- Associated Press. (2008a, June 15). AIG fires CEO, hires former Citigroup boss. Retrieved from msnbc.com
- Associated Press. (2008b, September 7). WaMu ousts CEO Killinger. Retrieved from komonews.com
- Behan, B. (2008, January 24). Shareholder proposals on CEO succession planning. BusinessWeek. Retrieved from businessweek.com
- Cho, D., & Appelbaum, B. (2008, October 7). Unfolding worldwide turmoil could reverse years of prosperity. Washington Post, p. A1.
- CNN. (2008, September 23). $900,000 salary for Freddie Mac CEO. Retrieved from cnnmoney.com
- Dash, E. (2008, June 3). Wachovia forces out its chief. Retrieved from wwwnytimes.com
- James F. Reda & Associates. (2008, October 9). CEOs parachute to safety. St. Petersburg Times, p. A1.
- Karnitschnig, M., Solomon, D., Pleven, L., & Hilsenrath, J. (2008, September 16). U.S. to take over AIG in $85 billion bailout; central banks inject cash as credit dries up. Retrieved from www.onlinewsj.com
- Ogden, D., & Wood, J. (2008, March 28). Succession planning: A board imperative. Businessweek. Retrieved from businessweek.com
- Reuters. (2008, September 19). New AIG CEO Liddy: Insurer's "mess is solvable." Retrieved from www.insurancejournal.com
- Welch, J., & Welch, S. (2008, March 9). Planning for succession low on corporate list. Retrieved from business.theage.com.au/
- Zibel, A. (2008, September 5). Washington set to oust Fannie, Freddie executives. Retrieved from nysun.com
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