November 1997 - Succession planning

You could wallpaper the White House with all the pages of advice and wisdom written on the qualities needed in leadership . Any headhunter or management expert worth his salt could trot out the attributes considered the "right stuff" for a chief executive.

So it is surprising that so many companies get into a mess with their most senior appointments. It not only damages the company in the eyes of investors but destroys confidence among the workforce.

Taylor Woodrow, the construction and property group, is the latest UK company to admit that it got its most senior appointment wrong . Last week it announced the resignation of John Castle, its chief executive, after just six months.

The non-executive directors blamed a "fundamental incompatibility" for the failure of the appointment, which is expected to cost the company £400,000 in compensation. Mr Castle may have been perfectly competent in most respects but it is perhaps significant that he was the first chief executive from outside the group. The problem seems to have been that his style did not match that of his fellow directors.

His departure is reminiscent of the way that Peter Sherlock was bounced off the board of National Freight Corporation when he clashed with long-standing directors after he became chief executive in 1993.

Failed appointments seem to be on the increase. Glaxo Wellcome and W.H. Smith in the UK and AT&T and Waste Management in the US have all been prominent examples where a chief executive appointment or succession plan has gone wrong.

The cost of a mistaken appointment can be enormous. John Walter, recruited last year to AT&T as successor-designate to Robert Allen, the then chairman and chief executive, was told in July that he would not be getting the top job. His nine-month stint cost AT&T $ 26m (?15.6m) in pay and compensation.

The resignation of Bill Cockburn as chief executive at the W.H. Smith after just 18 months in the post left the company vulnerable to takeover and unable to attract another senior executive from the UK retail trade to take the job.

Neither AT&T nor W.H. Smith had sufficiently thought through an effective succession plan. Companies that can groom successors not only save on the recruitment costs of an outside search but also avoid the risk of an appointment turning sour and the damaging uncertainty that exists when a company is left under caretaker management as the headhunters carry out a hurried assignment.

The best option is probably to integrate succession planning into the overall strategy of the company, grooming a pool of people several years ahead of an expected vacancy at the top. Some companies now send their top executives to business school to learn the leadership skills necessary for running a company.

If a company, however, has no option but to look outside, greater consideration might be taken over who should be involved in the recruitment process. Yve Newbold, chief executive of Pro Ned, the non-executive headhunting arm of Egon Zehnder International, believes that non-executive directors could play a far more important role in succession planning.

Some of this work could be undertaken by nomination committees, yet such committees are still finding their feet in the companies that do have them, and in any case, they do not yet exist in about half of the FTSE 100 companies.

"The role of the non-executive director on the nomination committee has never been clearly defined," says Ms Newbold, who believes that it is one area of the Cadbury code on corporate governance that is not sufficiently spelled out.

"In those companies without a nomination committee there is no external influence on the selection of a chief executive or succession planning and even where there is such a committee it does not necessarily follow that the succession is something it considers. Many are used simply to rubber-stamp a new non-executive director and are not used to appoint executives," she says.

Too often, she says, a chief executive's appointment has been in the hands of the chairman. Some cannot resist the temptation to "clone" themselves or find someone who will do their bidding. "I do feel that in the area of succession planning, British companies need to be more professional and should involve the non-executive directors," says Ms Newbold.

This custom of the strong leader deciding his successor caused so many problems at AT&T that Robert Allen's influence was curtailed in the decision of the board to appoint Michael Armstrong, the new chairman and chief executive who took up the post last month.

But in most cases it would seem unrealistic to exclude the chief executive from a decision that is central to the company's future. Jack Welch at General Electric in the US takes the job so seriously that he puts his thoughts about a successor in an envelope which he gives to the compensation committee every year. Sometimes he opens his envelope and changes the name.

The best option may be, as Ms Newbold suggests, that the company involves the whole board. It is arguable that succession planning is an important area of corporate governance.

Headhunters are unlikely to warm to the idea of dealing with a committee but any measure that can lessen the possibility of failure, particularly as a result of a culture clash, may be worth examining.

Succession in large public companies can no longer be a matter for the chairman working with one or two other senior directors, with possibly the advice of the headhunter. Shareholders are beginning to demand a greater say in the process as they are in the levels of executive pay and bonuses.

One feature in some of the most recent resignations appears to have been behind-the-scenes pressure from fund managers. These resignations are so wrapped up in confidentiality clauses that the full story of the departure is rarely revealed publicly. But comments by analysts after the Taylor and Woodrow and Glaxo Wellcome resignations suggested that investor power may have played a role in the loss of confidence that prompted both departures.

Certainly it is possible to detect favourable investor reaction to an appointment. When Albert Dunlap became chief executive of Scott Paper he laid off a third of the workforce within a year and sold it to Kimberly-Clark for $ 6.8bn, nearly tripling the value of the investments of Scott Paper shareholders. With this track record, on the day he was appointed chief executive of Sunbeam, a maker of kitchen appliances, its share price rose 49 per cent. The most senior appointment a company can make has become a deeply price sensitive issue.

Some boards may feel uncomfortable about such overriding investor influence, whether favourable or not to the share price. If that is the case they must ensure that their succession plan is clearly in place so that they are not forced to expose themselves to the whims of the market.

© 1997 Financial Times Ltd. All rights reserved

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