Risk & Compliance

Why Succession Planning Is So Hard

As the abrupt exit of HP's CEO illustrates, it isn't easy to put the "success" in succession planning.
Alix StuartAugust 19, 2010
Why Succession Planning Is So Hard

Earlier this month, Goodyear Tire and Rubber announced that the final stage of its CEO transition was under way. Richard Kramer, a 10-year company veteran and onetime CFO, will add chairman of the board to his duties in October, six months after assuming the CEO position for which he had been groomed.

“This is the next step and a natural evolution of the well-thought-out and orderly succession plan,” said Goodyear’s lead director James C. Boland in the press release announcing the transition. Added former CEO and outgoing chairman Robert Keegan: “I can retire with confidence, knowing that Goodyear is in good hands.” The company’s ailing stock price even bumped up in the days following the announcement, just as it had when Kramer initially became CEO.

If only it were always that easy. Three days after Goodyear’s press release, Hewlett-Packard officials found themselves in the uncomfortable position of announcing the abrupt ouster of CEO Mark Hurd, with no permanent replacement at the ready. Since then, the company — admittedly no stranger to dramatic exits, having lost its last CEO, Carly Fiorina, and board chairman, Patricia Dunn, under similarly rapid-fire circumstances in recent years — has been lambasted for not properly preparing for the future.

“Everything went wrong,” says John Sullivan, former chief talent officer at HP spin-off Agilent Technologies and now a professor of management at San Francisco State University. “It is clear…that no succession plan is in place” at HP, he noted in a recent blog posting.

The Laborers International Union of North America, which has been urging companies to disclose more about their succession plans, just sent a shareholder proposal along those lines to HP following the disaster. What the company currently offers in its Securities and Exchange Commission filings “is kind of minimal,” says Jennifer O’Dell, assistant director of the union’s corporate affairs department. “We don’t want to know who the next person in line is; we just want to know they have a plan.”

But as many experts acknowledge, even companies that have good plans in place to groom the next generation of leaders are not guaranteed that those leaders will emerge at the right time, or even at all. “A good process does not mean you have someone ready to go at every moment in time, because CEOs come and go unexpectedly,” both voluntarily and involuntarily, notes George Davis, a consultant in Egon Zehnder’s CEO succession practice.

Adds J. Michael Cook, former chairman of Deloitte & Touche and a member of several large-company boards in the past decade: “I think boards are working hard on the succession process, but the job is getting more difficult.” Each of two boards Cook has served on “has spent considerable time on succession planning,” putting similar processes in place, but “with very different outcomes,” he says.

In one case, says Cook, the company has a long-serving CEO and multiple candidates “who could step into the CEO position tomorrow if need be.” In the other, the company has had to hire new CEOs externally three times during his tenure, even as it has hired in new and better-qualified executives to report to the CEO. “If you judged bench strength at one company, you would probably give us more credit than we’re due, and at the other company, you would give us pretty low marks. But we gave it the same level of attention and process at each,” he says.

The disconnect between processes and outcomes is also true for the CFO position and deep into the finance department, says Dennis Beresford, an accounting professor at the University of Georgia who serves as chairman of the audit committee at Fannie Mae, Legg Mason, and Kimberly-Clark.

Beresford says his committees typically look at succession plans for the top 20 or 30 people in the finance department, including the heads of internal audit and financial reporting. “There are inevitably going to be some positions that are well backed up and others that won’t be,” he says. That means that while there may be “someone who could hold the fort temporarily” in some cases, the company would ultimately have to hire from the outside to fill some roles. “You’d love to have someone to fill all those positions, but it just doesn’t work that way,” says Beresford.

How often do such unexpected departures occur? Numbers are tough to get at, since few are as highly publicized as Hurd’s exit, which came after the revelation of expenses authorized for a female contractor who accused Hurd of sexual harassment. Most SEC filings offer only the most oblique of explanations. (Hurd’s exit was in fact characterized as a “resignation” on the 8-K the company filed with the SEC.) The vast majority of CEO departures are “resignations” or “retirements,” even when the situation is one of duress, as when Sara Lee CEO Brenda Barnes stepped down after a stroke last fall, or when Omnicare CEO Joel Gemunder announced his surprise immediate retirement this month after nearly 30 years at the company.

However, an analysis of disclosures from the CFO Midcap 1500 (public companies with revenues between $100 million and $1 billion) in the past five years, based on data provided to CFO by Audit Analytics, shows just how rare it is that boards have to deal with the common scenario-planning axiom of an executive being “hit by a bus.” No more than two, if any, of either Midcap 1500 CEOs or CFOs have died in any of the past five years.

More common, but still rare, are dismissals that are obviously for cause. Including executives who were placed on administrative leave while their companies investigated suspected wrongdoing, and those who resigned while suspected of misconduct, CEOs and CFOs who were “dismissed” accounted for 5% or fewer of all departures in the Midcap 1500 in each of the past five years.

To be sure, the abrupt departure of a CEO can be good news for an ambitious CFO, since finance chiefs are often the designated pinch hitters in such scenarios, as is the case at HP and Sara Lee. However, both CFOs and boards should consider that fact with some caution. If a CFO is considered a feasible permanent successor to the CEO, it’s preferable to have a board member step in as interim CEO, says Beresford, “because it doesn’t prejudice the process of who will be chosen as the permanent CEO.” (Indeed, HP CFO and interim CEO Cathie Lesjak has already indicated she is not seeking the position full-time.)

At the same time, a board shouldn’t rely too heavily on a CFO to fill in, considering that he or she may be gone before the CEO. The number of CFO departures in the CFO Midcap 1500 has outpaced CEO departures in each of past five years, according to Audit Analytics data.

Editor’s note: the original version of this story understated how rare deaths and dismissals of CEOs and CFOs in the CFO Midcap 1500 have been during the last five years. The story has been revised accordingly.