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
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
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
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
"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
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
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
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
© 1997 Financial Times
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