January 7, 2010, 8:30 p.m. All eyes of college football fans are on the field of Rose Bowl Stadium in Pasadena, California, for the biggest college football game of the year. The stage was set for the Texas Longhorns and the Alabama Crimson Tide to compete for the Bowl Championship Series' final and most important game. Each team had impressively finished the 2009 season undefeated, and the two teams had won a combined 16 national championships coming into this night. The lights could not be brighter and the stakes could not be higher.During Texas' first possession of the game, their star quarterback Colt McCoy went down with an injury and was replaced by Garrett Gilbert, a freshman whose college game experience had included only 26 passes in nine games. Before McCoy was hurt, the Longhorns seemed to have all the momentum. The Crimson Tide failed a fake punt, which led to a Longhorn field goal. Even shortly after McCoy was out of the game, the Crimson Tide failed to recover a kickoff, which led to another three points for the Longhorns. But Alabama's defense soon took full advantage of McCoy's absence and crushed the inexperienced Gilbert on their way to a 37-21 victory.
Whether it was the absence of McCoy, one of the best quarterbacks in the nation, or Coach Mack Brown's decision to stick with an inexperienced freshman quarterback that cost the Longhorns the 2010 national championship will be long debated in college football circles. For risk management professionals, however, these events underscore the importance of CEO succession planning. There are two important lessons that can be taken away from this situation.
Lesson #1:
An organization must consider the possibility of losing a top employee.
In the case of the Texas Longhorns, it was apparent the coaching staff had not considered losing their new quarterback in their pre-game planning sessions. Granted, McCoy had never been injured during his entire college career leading up to the game, but such a possibility was not unheard of. Who would have thought that Sam Bradford, the 2008 Heisman Trophy winner and the star quarterback for Oklahoma, would suffer a season-ending shoulder injury in 2009. Or that Tom Brady, one of the most successful and durable quarterbacks in the NFL would have gone down with a season-ending knee injury in the first quarter of he first week of in the 2008 season? These seemingly low-frequency events, when they do happen, result in high-severity losses.
In the case of sports teams, the loss of the starting quarterback can be a nightmare. A similar situation could happen in the corporate world when a sudden need arises to replace a top executive. For example, if the company CEO embarks on a ski trip to Colorado, there is a chance he might be critically injured during the trip. If the company president is diagnosed with cancer, there is a chance she might not have long to live. If the chairman of the board of directors is flying to France on a business trip, there is a chance he might die in a plane crash. All of these events are unlikely, low-frequency events, but if any of them actually happens, the impact will be severe. For many small- and medium-sized businesses, especially those with hands-on leadership, the death of a key employee can have a devastating effect on the entire business, sometimes severely crippling the company?s ability to survive.
Had the Texas Longhorns coaching staff envisioned the nightmare scenario of losing their starting quarterback, would that alone have changed the outcome of the game? Not necessarily. Just envisioning a scenario is not enough; they also need a viable action plan to prepare for such an event. That brings us to the second key learning point.
Lesson #2:
An organization must have a viable succession plan in place.
No team can accurately predict when the need to replace a star player will arise, but every team can prepare for such uncertainty by having an emergency plan. Under such a plan, every backup quarterback should be carefully evaluated, and the top candidate should be groomed during both practice and real games, so that he can step up when such a need arises. Had the Texas Longhorns groomed their backup quarterback better throughout the season, the outcome of the game may have been different.
Given the built-in recruiting system (and free agency system for professional sports), such succession planning is relatively easy for sports teams, but this is not the case for corporations. In fact, according to a recent survey by the Center for Board Leadership, only about half of both public and private corporate boards have any CEO succession plan in place. Even worse, only 16% of directors surveyed considered their board's CEO succession plan effective, according to the National Association of Corporate Directors.
We do not have to look far for an example of poor corporate succession planning. Last September, Ken Lewis, then CEO of Bank of America, suddenly announced that he was resigning by the end of the year. Even worse than his sudden resignation was that Bank of America's board of directors did not have a clear successor for him. In fact, it was not until December 16, nearly three months after Lewis's resignation, that the board finally named a new CEO. The slow reaction and the apparent lack of preparation for Ken Lewis?s succession drew sharp criticism, highlighting the importance of having a succession plan in place.
So what is considered a successful succession plan? At a minimum, there should be an emergency plan: the board of directors should come up with a list of top internal candidates to take over in case of emergency, and if no internal candidate is the heir apparent, then the board should at least agree on a candidate that could serve on an interim basis in a crisis situation. A comprehensive succession plan can be very complex and vary greatly among corporations. Still, there are some common key elements found in most succession plans.
The first key element is the determination of a set of core competencies required from the future CEO. It is critical not to fall into the trap of focusing on the past or the present. Instead, the board of directors should look into the future and develop a solid understanding of the road map for the company for the next five years. With that, the set of criteria for future CEOs whose critical skills and experience fits the company's future road map should be developed.
The second key element is the identification and development of potential candidates. Such a practice can be quite different, depending on whether the succession planning is focused on internal or external talent. To identify and develop internal talent, the strategy should be to start with a short list of top candidates and a plan to develop their skills to prepare them for the top job. Such a plan often involves rotations within the company in different functional areas or different locations worldwide. If the focus is on external candidates then the practice often involves identification of external candidates through an executive recruiting firm. It is widely considered a best practice to hire potential CEO candidates for other important executive positions. As such, the board of directors has an opportunity to observe the performance of the future CEO, as well as an opportunity to develop their relationship with him or her.
The third key element of a successful CEO succession plan involves the mitigation of transition risk. Risks are inherent in any CEO transition. The board of directors should assess and mitigate these risks, especially in the first year of the new CEO's tenure. Specifically, experts have recommended the following best practices for mitigating transition risks. One is the agreement between the board and the new CEO on a plan for the first 12 months that includes measurable and realistic performance goals. The other is a coaching plan under which the new CEO is mentored by a professional executive coach or an experienced board member in the first year. It is the coach's responsibility to offer the new CEO a supportive and apolitical resource that should help mitigate the transition risk.
No one can predict the future, but what can make a difference is how your organization prepares for the uncertainties it will face. For the Texas Longhorns or any other sports team, there is always next year. But corporations in today's competitive and challenging environment do not have that luxury. Next year is now.
5 TRENDS AND OPPORTUNITIES IN CEO TRANSITIONS
Having a plan in place for when a CEO leaves is no longer an option, but an operational necessity. Hendrick & Struggles, an advisory firm that specializes in succession planning, forecasts five dominant trends and opportunities in leadership succession in the next decade.
1. Increased regulatory and investor scrutiny. "The SEC bulletin on succession planning issued last October provided activist shareholders a conduit to investigate and interrogate a corporation?s succession planning processes?and they will use it," said Stephen Miles, vice chairman of Hendrick & Struggles. "And it will not just be the Carl Icahns of the world, but also pension funds and unions as well as more traditional investors and analysts."
The opportunity: Investor premium. Companies that are prepared for CEO transitions will be more attractive to the investment community. ?According to a McKinsey study, institutional shareholders are willing to pay a premium of 15%-20% for well-governed companies, and succession planning is going to be a part of their calculus.?
2. "Operationalizing" of succession plans. "Simply having a succession plan in place doesn't mean that it will produce viable candidates," said Miles. "Over the past 18 months, we've seen company after company that would have talked confidently about their succession plans fail to orchestrate a smooth CEO turnover."
The opportunity: Growing HR role. "The person in the organization who will really have to step up is the head of HR. Operationalizing the CEO succession process will be delegated to them, and the qualifications of HR leaders will become more critical."
3. Demand for more qualified succession planners on the board. "Boards would never hire or appoint someone to be chair of the audit or risk committee without specific qualifications, but this has not been true for those that chair the succession process for the company. We will see greater scrutiny of those who serve on this succession committee, and see boards recruiting more 'experts' who have led these processes at other firms, be they CEOs or HR chiefs or other consultants."
The opportunity: New blood in the boardroom. "This demand for specific expertise opens up a new pool of potential board candidates beyond the traditional pool of CEOs to also include succession experts and a broader array of HR leaders."
4. Emergence of a new kind of CEO. "We are entering a new era in corporate leadership," said Miles. "The economic meltdown has had the effect of shaking out a lot of dead wood from the top ranks and forcing decisions that companies have been sitting on for five to 10 years. The next generation of CEOs coming in are much better bottom-line leaders than their predecessors."
The opportunity: Well-rounded new leaders. "Rigorous succession planning is reinforcing the importance of identifying a leader who is part CEO, part CFO, and part COO--someone who can inspire, who knows how the business makes and loses money, and who understands how the business works on the ground."
5. Reaching down into the organization for the next generation of leaders. "The next year and beyond will have the board pushing further down into the organization to gain more meaningful exposure to those who are two levels down from the CEO."
The opportunity: Internal CEO candidates. "The bias in the next decade will definitely be toward internal candidates for the top job versus the external hire. Boards are preparing for succession events 18-24 months out, and are asking CEOs to build bench strength and develop people from within."