Getting your bench right: succession planning tends to focus on the CEO, but getting the right C-suite rotation can be just as important

Chief Executive, The, Oct, 2005 by Sheree R. Curry

One Wednesday afternoon about 18 months ago, Timothy H. Ling took a break from work to join friends for a game of ice hockey at a sports complex in El Segundo, not too far from the Unocal offices where he served as president and chief operating officer. He never returned to work--he died of a heart attack at the sports complex. "The entire Unocal family is shocked and saddened by Tim's sudden passing," CEO Charles R. Williamson said in a January 29, 2004, press release issued the day after the 46-year-old's death. Everyone was distraught, and perhaps even a bit dumbfounded. During a 47-minute fourth-quarter earnings conference call with analysts five days later--and a couple of days after the funeral--Williamson, who temporarily assumed Ling's duties, said, "Needless to say, it's been a difficult week."

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Williamson was no doubt putting that mildly. As stewards of whole pieces of the business, COOs, CFOs, CMOs, CIOs and other C-level executives are keepers of critical knowledge, and their unexpected departures can be crippling, at least temporarily, for any company. Yet much of the debate over formal succession planning remains focused on grooming a successor for the CEO's position, and far less so on planning for the exit of his or her direct reports, let alone deeper into the organization. In fact, 34 percent of Fortune 1000 companies don't have a C-level succession plan in place, according to Drake Beam Morin, a global human capital management firm. And 60 percent of those cite a lack of time and budget as reasons for delaying leadership development.

But that delay could cost you. When your chief technology officer or HR chief announce they are moving on and you don't have a succession plan in place, you're left scrambling to fill that gap instead of smoothly transitioning. During this interim period, employees can start to lose confidence in management, which can result in a lack of productivity, bad morale and higher turnover, say human capital management experts. In contrast, companies with a succession plan that results in a hire from within "are less likely to experience this negative effect on employee morale," according to "Making Transitions Work," a report by Jeff Heynen, an analyst at the Canadian Centre for Management Development.

Letting seats sit empty or be occupied by interim directors because you're not prepared to hire from within is a flawed strategy because employees will interpret that as 'I don't have a shot at being in the top spot', says Tom Fuller of executive search firm Epsen Fuller. "Succession planning is a retention policy. If you are only engaging in it from the CEO level, you run the risk of losing some really great rock star employees who are not content to just stagnate."

And don't be in denial. Chances are one of the top executives you put into place last year will be gone before first quarter next year comes to a close. A 2005 study by recruiting firm Russell Reynolds Associates reveals that turnover of chief financial officers at Fortune 500 companies increased by 23 percent from 2003 to 2004. Just two examples: With the July announcement of Frank Mergenthaler's succession of Robert Thompson, Inter-public Group of Companies is on its fourth CFO in less than three years; and Michael Kramer, an Apple veteran who just took Susan Riley's spot at Abercrombie & Fitch, means the high-end retailer has seen three CFOs come and go since June 2003, not including two interim CFOs.

Over the past three years, 225 CFOs of the Fortune 500 have left their jobs, a similar study by executive search firm Spencer Stuart reveals. "C-suite managers move in and out of jobs regularly," says Tom Neff, chairman of Spencer Stuart U.S. and co-author with Jim Citrin of the January-released book, You're in Charge--Now What? The CEO taking office today can expect during an average tenure to replace the company's CFO twice, the CIO twice and the CMO three times, Neff says. The Top 100 branded companies actually see a new chief marketer in place every 23 months on average, according to the Spencer Stuart study.

"Boards are starting to look at how good are people at the C-level. But I think more boards than not are still relatively naive about the whole process when you go beyond the CEO," says Joe Griesedieck, vice chair of executive search firm Korn/Ferry International. "They assume the CEO has it under control. But when you look deep into the organization, you will find that talent is just not there."

CEOs who fail to develop succession plans for their senior level executives are risking more than temporary chaos; they are jeopardizing shareholder value, according to several research studies. Work-force management specialist DBM looked at companies whose stock fell between 40 and 100 percent in a 12-month period and found that about 15 percent of them experienced the departure of a C-level executive.

Another global study conducted by university researchers in Britain found that naming a successor immediately can stem the damage from an unexpected executive departure. A look at company examples showed the stock price dipped when no successor was announced, while it held steady or increased slightly for those companies that announced an immediate replacement.