Help wanted: superhero; most companies drop the baton when it comes to CEO succession. Here's what a few do right - Succession

Chief Executive, The, Oct, 2002 by Des Dearlove, Stuart Crainer

Imagine creating the perfect CEO. You'd mix the charisma of Herb Kelleher with innovation a la Andy Grove. Add a dash of Michael Dell's salesmanship to Jack Welch's ability to deliver on Wall Street's expectations. Throw in Meg Whitman's problem-solving skills and voila--the ideal CEO. Okay, so you can't build a superhero, but most companies don't even come close. When choosing leaders more and more fail to find someone suitable. The consequences are severe.

A fumbled CEO succession hurts not just staff morale and business performance, but also stock price. The early departure of a replacement can also prove costly in severance pay and tarnished reputation. With so much at stake, it's a wonder so few companies succeed at succession.

Richard Thoman lasted just over a year at Xerox, taking the tiller in April 1999 and relinquishing it in May 2000. (During his brief watch, Xerox's market capitalization fell by around $1 billion.) Other short-lived tenures include those of Robert Nakasone, who became CEO of Toys "R" Us in 1998 and left 18 months later; Gregory Wolf, who lasted less than two years as CEO of Humana; and M. Douglas Ivester, who took charge at The Coca-Cola Co. in October 1997 and was pushed into early retirement in 2000.

The growing number of CEO failures stems from poor succession planning, believes Warren Bennis, professor and founder of the Leadership Institute at the University of Southern California's Marshall School of Business. The root of the problem lies with how boards appoint successors. "Boards that go into rhapsodic overtures about leadership never really define what they mean by that word, nor do they pay enough attention to the human factor," Bennis says.

Even when boards and senior executives invest a good deal of time and energy in vetting prospects, too often they fail. Senior managers spend an inordinate amount of time considering and naming potential replacements for themselves and their subordinates. Such an approach is often very expensive, bureaucratic and out of touch with organizational strategy, says William Byham, president and CEO of the Pittsburgh-based consultancy Development Dimensions International, which specializes in leadership selection. These handpicked backups, Byham estimates, fill fewer than 30 percent of senior positions.

Blame the human factors. Most bungled successions can be traced to five failings. First, many incumbents are reluctant to give up power, either hanging on too long or trying to foist likeminded successors onto their boards. Second, when appointing new leaders, boards often choose a safe replacement, rather than someone who will question the directors' roles. Third, swayed by force of personality, boards frequently fail to define or adhere to an objective set of selection criteria. Fourth, many don't look beyond the most visible senior management candidates, and therefore fail to identify strong potentials from the next generation of executives. Finally, short-term concerns--such as antsy shareholders--are allowed to dictate the succession timetable. Add to this the usual heady mix of egos, corporate politics and greed, and you have a recipe for trouble.

When a company is performing well, succession problems tend to be a by-product of the achievements of the incumbent. Ivester, for instance, was ousted from his job at Coca-Cola after a series of misjudgments. Leadership experts blame the aura of his predecessor, Roberto Goizueta, for Ivester's failure. Goizueta dazzled directors into doing only a cursory vetting of his choice. "Did the board really take a serious look at Ivester's capacity to work with people?" asks Bennis. "Did it examine his relationship with his peers and direct reports? I doubt it."

Amid these widespread failures, a few companies seem to have mastered the art of succession. When Herb Kelleher, Southwest Airlines' colorful and long-standing chairman and CEO, stepped down in June 2001, he was succeeded by a leadership double act. Colleen Barrett, a 24-year Southwest stalwart and former executive vice president of customer relations and corporate secretary, became president and COO, while James Parker, the former vice president/general counsel, took the mantle of CEO and vice chairman. Kelleher, 70, remains chairman.

Barrett, credited with building Southwest's customerfocused culture, concentrates on the day-to-day running of the airline. She has worked with Kelleher since 1967, and has broad experience in all aspects of the business. Parker, who joined Southwest in 1986, concentrates on the financial and legislative aspects. Kelleher has not been an easy act to follow, a point Parker acknowledges. "Comparing me to Herb is like comparing a 40-watt light bulb to the sun," he has quipped.

When a plan comes together

The same comparison has probably gone through Jeff Immelt's mind. After all, Immelt, the CEO of General Electric, followed the legendary Jack Welch. Still, leadership experts consider GE's succession process a model. GE prides itself on the bench strength of its executive pool. The top job was always going to go to an internal candidate. Welch's retirement was meticulously planned and minutely observed, with media speculation focusing on three front-runners. In November 2000, Welch finally ended the agony by naming Immelt, the former head of GE Medical Systems. Welch stepped down as CEO 10 months later.