The Problem with CEO Succession

The departure of a chief executive shouldn’t throw an organisation into a full-blown crisis and yet, on a regular basis, that’s exactly what happens. Panic spreads as stakeholders are gripped by the fear that a company is being run like a football club. Share prices often nosedive as a result.

This wouldn’t be the case if more boards talked openly about succession and senior executives were also prepared to have candid conversations about who might be next in line.

Chris Riquier, CEO for Asia Pacific at market research company TNS, comments: “If the CEO leaves and the business goes into a relatively quick decline, I see that as a reflection on them. To develop the talent within the business and build that level of succession, both for themselves personally and in all the other layers of the organisation, is a key role of the CEO.”

Mapping out a plan for succession across an organisation is a complex undertaking. Personal ambition and hubris become entangled with the immediate responsibilities of hitting targets and simply doing the day job.

From a leadership perspective, it’s a mistake to lose sight of why succession matters. Matthew Blagg, CEO of Criticaleye, says: “There is a worrying trend to recruit new CEOs externally. There absolutely needs to be more attention on promoting internally, so you’re bringing people through who understand the culture, the customers and can focus on creating sustainable success.

“There is also a perception that current executive teams ought to be shaken-up and a raft a changes made. Does that create better performance? I’m not so sure.”

Look within

Identifying future leaders can only result in better business performance over the long term. Ian Gibson, Criticaleye Board Mentor and former Chief Executive for the UK and Europe at Nissan Motor Company, advocates the idea of identifying and nurturing your own successor.

He adopted this point of view back at Nissan over two decades ago. “Every CEO since then, and there have been three, has come from within the business. Every production director – that’s the big operational job there – has come from within and most of the sales executives too,” Ian says.

“Probably the thing I feel most proud of is the way the business has been able to develop its own senior executives for the past 20-odd years and remain very successful.”

Culturally, Ian argues that developing from within sends the right message. “It’s an approach that, when it beds in, fosters not only good counselling, mentoring, career development and relationships, it also creates a degree of co-operative working across the organisation.

“It also strongly mitigates against working in silos, where each of the senior team are intent on improving their own performance instead of the company’s.”

Jane Griffiths, Company Group Chairman at pharmaceutical company Janssen EMEA, which has approximately 40,000 employees globally, explains that managing directors are expected to identify a number of candidates for their role. “The more people do that, the more it becomes the modus operandi and other people realise it’s important to grow your own successors,” she says.

Jane looks favourably on individuals who have nurtured others: “You should try to introduce a culture whereby it’s good to develop new people and, if they overtake you, so be it – it’s going to happen to us all at some point. I have specific goals for some people that in the next 12 months they must have identified a ready-now successor, or developed one for three years on.

“The philosophy, where possible, is one of build rather than buy, but we recognise the benefits of bringing talented people in from outside as well.”

Mike Cutt, Criticaleye Board Mentor and Non-executive Director of mobile phone retailer Svyaznoy, agrees with Jane’s ideas, saying that “every business I have worked in, I have told managers and leaders that one of their tasks was to have a successor for themselves”.

Uncertain times

It would be overly simplistic and wrong to suggest it’s always better to promote internally. Naturally, external talent will be brought in at various levels, including the very top.

Chris of TNS says: “There are different types of CEOs for different tasks and sometimes, when a dramatic turnaround or correction is required within a business, certain characteristics might be needed. Equally, once the business is back on the correct course you might once again need a completely different set of leadership skills to maintain that strategic direction and culture.

“Sometimes people are not that adaptable – you get a turnaround CEO versus one who is good at long-term stability and growth.”

The problem is when the board’s default setting is to look elsewhere for CEO and senior executive level hires, especially when the HR function lacks the capability and authority to create the right ecosystem for a diverse mix of talent.

A good chief executive, in conjunction with a strong board, should have the power to influence these things. As Matthew of Criticaleye says: “When you try to bring people through internally, there’s always the case that some won’t make it but I guarantee others will rise to the challenge. Succession can only be good for the business.”

By Mary-Anne Baldwin, Editor, Corporate

Do you have a view on this subject? If you have an opinion that you’d like to share, please email Mary-Anne at: maryanne@criticaleye.com

https://twitter.com/criticaleyeuk

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The Role of the Chairman in an IPO

Community Update Faces - 25 june 2013Why companies leave the appointment of a chairman until the last minute of an IPO is a mystery. It’s the key hire for a business, greatly enhancing the prospect of success as the chairman is tasked with building an effective board, coaching the senior management team and calling on years of experience to ensure the story a company sells to the market is both compelling and real.

“A company has to figure out what it wants in a chair,” says Stephen Davis, Criticaleye Thought Leader and Associate Director and Senior Fellow of Harvard Law School Programs on Corporate Governance and Institutional Investors. “The decision should be a part of the ordinary process of planning an IPO but frankly it’s usually an afterthought or comes late in the process.”

As IPO activity picks up, it’ll be interesting to see if the new issues have learned from the mistakes of their predecessors. John Allan, Chairman of Dixons Retail and global card processing company WorldPay, says: “It could easily take a year for a chairman or chairman designate – as he doesn’t necessarily need to be identified in the role of chairman straight away – to build a public company board. If it’s going to be compliant, it should be headed towards a majority of independent non-executive directors whereas a typical private company often doesn’t have any.”

There is plenty for an incoming chair to put in place, assess and, where necessary, fix. David Vaughan, UK&I Head of IPOs at Big Four firm Ernst & Young, says that “the task for the chairman is to set the tone at the top and to say what you want the organisation to be, establishing good governance and making sure the business has the right corporate reputation in its community”.

Chip Goodyear, Non-executive Director of oil and gas concern Anadarko, says: “The chairman will need to have a collegiate personality and be somebody who can work well with a board. My view is you do want a board who will be able to challenge management but you want it to be done in a constructive way; somebody who can bring that together is very valuable. You also want somebody who is not trying to be CEO and is comfortable in the role of chairman.”

There will be sectors where industry know-how is desirable, such as defence, financial services and oil and gas, but essentially it’s the knowledge and gravitas garnered from a stellar executive career, followed by being a seasoned Plc NED, that count the most. Jamie Pike, Non-executive Chairman of plastics manufacturer RPC Group, comments: “In general, I would say chairmen are fairly interchangeable but there are special industries where a lack of knowledge could frankly prove pretty risky. You would certainly want the chairman to have Plc experience, such as dealing with the institutional investors.”

Debbie Hewitt, Non-executive Chairman of Moss Bros, comments: “As well as complementing the executive team, the experience of the chair probably needs to reflect the timing of the IPO. The closer the IPO the more important his/her industry knowledge is. If it is some way off, an experienced chairman will have the time and capability to get to know a sector. No matter what the timing, the City and institutional investor experience are vital.”

It’s categorically not a role for the uninitiated NED, even if they are a big name. “You need an excellent board and the chairman has to make sure the governance is absolutely right,” says Dame Helen Alexander, Non-executive Chairman of media company UBM. “The last thing an IPO needs to focus on is the make-up of the board or the quality of governance. The selling process should be about the business – potential shareholders shouldn’t need to ask about compliance.”

Built to last

The chairman will have to decide if the management team, particularly the CEO and CFO, are fit to take a company public. Mike Turner, Non-executive Chairman at engineering concern GKN, says: “In the first three months, you should be comfortable with whether the CEO and CFO are up to leading the business but equally important is to get a sense of whether they can convince the City.

“They will have to spend a lot of time going round the City, which is something you don’t do in a private company, and they will need to be convincing about the strategy of the business and its future.”

If they do have what it takes, the chairman ought to prep them for investor roadshows and what to expect once public. Chip says: “For the chairman, there is always an element of coaching of the senior leadership team. But with regard to the public side, particularly if the chairman has had that experience, being a counsel to the management team would certainly be an important thing.”

Remuneration will have to be examined via the hire of an excellent Remco Chair together with the recruitment of an Audit Committee Chair, along with succession planning and an assessment of the quality of the people in the organisation. “It is very important that the chairman goes round the senior management team, especially at the executive committee level, to see what it’s like and that there is good bench strength,” says Mike. “You need to know what talent is available below the level of the CEO and CFO.”

The quality of the advisors has to be watched too. According to Helen, if a chairman comes in and they’re not happy with those already appointed, he/she should have the power of veto to bring in ones who are of the right calibre.

This is where reputation and prior knowledge make a difference. “A chairman has to understand the capital markets and listed vehicles and it certainly helps to have strong contacts and a network of tried and trusted advisors,” says Debbie.

It means treading a fine line as a non-executive. “It’s helpful if the chairman does know how to communicate and deal with advisors, brokers and investment banks, especially if it’s a company where the CEO doesn’t have much experience… Again, it’s important that they’re not seen to be able to try and lead the company,” says Chip.

Behind the scenes, the pricing of the business will be sense-checked too. A canny chairman will figure out who might profit by shorting on the IPO, making it difficult for game players to mess around with the stock but at the same time making sure the investor mix will generate enough liquidity.

Jamie says: “Liquidity in markets is very important. Therefore, if you’re buying and selling, you need people who will be selling the day after they’ve bought shares on flotation. I had this drummed into me during an IPO some years ago as it’s easy to get on your high horse but the market does need liquidity and that means buyers and sellers…

“What people often fail to understand is that when you float a business you are selling it and bringing new owners in; some of them may be short term while others may be longer but they do have rights. You cannot mess the market around and these owners must be taken into account, meaning their needs and objectives are factored in to how you run the business.”

It will vary on a case-by-case basis, but the chairman of an IPO will have to get their hands dirty if the Prospectus is to be signed with confidence. Stephen says: “The chair coming into a new public company has to exercise different skills than one joining an on-going public company, since for the latter you don’t have to re-invent everything.”

Many chairmen swear by the recruitment of a company secretary as a safe pair of hands to deal with governance and risk management. The run-up to an IPO is frenzied, intense and reputations that have been established over the years can be decimated in a flash if it goes belly up.

That’s why you spend time finding the right chairman and bring them in early.

I hope to see you soon.

Matthew

https://twitter.com/criticaleyeuk 

Five Reasons to Plan for CEO Succession

Earmarking successors for the role of CEO should never be something that’s left to the last minute and boards that persist in skirting around the issue are failing in their duties to stakeholders. Likewise, CEOs who are passionate about a business should be fast tracking the brightest talent so ready-made replacements exist when the time comes to move on.

The reasons for having a CEO succession plan are simple:

The tenure of the CEO is getting shorter;
It better prepares a business to communicate change at the top;
This is now a key part of the chairman’s role;
Done properly, it harnesses talent and promotes ambition;
It is in the long-term interests of the business.
In short, this is not something to be ignored or put on the back burner. Brendan Hynes, CEO of the soft drinks business Nichols, says: “This is one of the most critical issues on the board agenda, particularly for public companies. For a Plc, how well succession is handled can significantly impact on the investment decision for existing and potential shareholders.”

The responsibility for finding a successor falls squarely on the shoulders of the chairman. If the board has enough confidence in the CEO, then they too can be involved in the process, in an advisory capacity, as they know the role better than anybody else and it should be in their interests for their heir apparent to take an organisation forward.

Mike Tye, CEO of Spirit Pub Company, says: “It is a critical role for the chairman, but almost more so for the CEO to be creating their own successor. Part of the measure of the incumbent CEO is their ability to employ great talent that is good enough to succeed them… [and it requires] having a really high calibre executive board team and, just as importantly, the level below that too.”

That approach is also supported by Ian Toal, CEO of the cheese company Adams Foods, a division of the Irish Dairy Board which functions as a co-operative and therefore does not have a traditional chairman. An expert in turnarounds, Ian joined in July last year and has had to use his experience to streamline operations, cutting some £5 million of costs out of the business to put it on a profitable footing.

“When I leave in a year or so, the business will be in a very different situation as it will be fairly stable, and it will need someone to manage [operations] rather than to create masses of change,” he says, adding that his focus is very much on trying to groom internal candidates, each of which possesses different skills and styles, so they have a chance of taking on the CEO role once he departs.

Time and effort

Succession matters for both public and private companies. As everyone knows, the shelf life of CEOs is decreasing (and good ones are being poached) so the other side of this is that possessing a plan B falls under plain old best practice. Sir Brian Bender, Chairman of the London Metal Exchange, says: “A good company board will review HR issues periodically, perhaps even once a year, including recruitment, retention and succession planning for the most senior posts.”

Yvonne Sell, Director and Head of Leadership and Talent at consultancy firm Hay Group, says: “A CEO’s tenure is getting shorter while more regulation is demanding that boards keep closer tabs on performance. People know CEOs change but if you do treat it as business-as-usual, and you have planned for succession, with a CEO elect working closely with the incumbent some 18 months before the handover, it shouldn’t be too disruptive. If events do call for a rapid change, you need communication around why you are doing it.”

This is where it’s easy to make mistakes. Brendan says: “My view on succession planning is that it needs handling very carefully indeed. A regime change at the CEO level sends a very important signal to the market and it is vital that the correct message is conveyed when announcing a change. Ideally, this should be planned well in advance, with the reasons for the change clearly spelled out.”

There are no hard and fast rules about whether a candidate should be internal or external. Richard Ackroyd, Chief Executive of Scottish Water, says: “The important thing is that for every key role in an organisation you’ve got some possibilities for succession and ideally you’d like a good proportion of those to be internal, but there’s nothing wrong with external succession at the right time and in the right context.”

The primary driver is to find the best person for the job, but within the business there will be ambitious and talented individuals who expect a shot at the title. This is where diplomacy and tact is required because it’s easy to lose good people at this stage as, like Yvonne warns,“something has gone wrong internally when you have the scenario of the CFO assuming they’ll get the job and then they don’t”.

Ian says that, for him, continuity in the organisation matters for his succession planning at Adams. “The candidates are all ambitious and very good at their functional roles; I haven’t set them against each other. I’ve made [the process] competitive but not political or divisive. I’ve been quite deliberate in making sure that they are very close and that they interact with each other, but I’ve been clear that I haven’t made my mind up about which way this could go. There isn’t a timescale for my departure, which also generates a bit of hunger.”

According to Mike, it presents a great opportunity to shake things up. “Disruption can be a natural consequence of the succession process. Done the right way, highlighting possible successors can create healthy competition and high-charged performance. By contrast, if done in an insensitive way it can be potentially destructive.

“It’s important to be very straight with each candidate therefore and stress that their behaviour, in the way they vie for the top job, is critical. If you have a set of leadership behaviours they should be adhered to – either get it right or count yourself out of the race. You can’t avoid the internal challenge, but there is constructive and destructive competition.”

Alison Carnwath, Chairman of Land Securities Group, comments: “You should always do a job spec and discuss this with the nominations committee. The most important quality is leadership and a proven verifiable track record; a candidate should have a great desire to listen and learn as well as preach and direct.

“Integrity and hard work are always staple requirements, as is a stable home environment. If possible, a pleasant personality and appropriate board experience should also be sought as they will help to smooth the integration process – at least initially.”

There are no excuses for allowing a leadership vacuum to exist in a business. Besides, as Brendan says, “succession planning should be a core process for the whole business, not just the CEO role”.

Mike adds: “You can’t start this process too early either. If it’s planned succession, it should be anywhere between 18 and 24 months. Sadly, it can’t always be planned, so it’s a mistake to be unaware of the succession issues on an ongoing basis.

“And while one can’t always have an instant successor, to have identified who the successors are internally, and to have development plans for at least a couple of people, seems sensible.”

The way circumstances change so swiftly in business today, anything else would be reckless.

CEOs: How to Manage a Crisis

Today’s intense public scrutiny seems to unearth business calamities on a weekly basis, whether they’re leadership gaffes, tales of wrongdoing or a disastrous technical failure. When such a crisis hits and the media demands immediate answers, it’s up to the chief executive to get the details clear, control any panic and secure the long term reputation of the business.

Andrew Heath, President of Energy at engine-maker Rolls-Royce says: “Our approach is to stick to the facts: acknowledge them and work swiftly internally, to understand what we need to do before we tell people [outside the business]. The media doesn’t necessarily like it, but both [they and] our business circles do recognise that… we don’t speculate and only put out what we know when it is factual.”

Once the details and the extent of the risks to the business are ascertained, the clear up can begin. Leslie Van de Walle, a Criticaleye Associate and Chairman of both construction supplier SIG Plc and recruitment consultancy Robert Walters, says: “Be vigilant: you need to monitor the… feedback from your audience. Be ready to react relatively quickly, with a low profile and with the facts, hoping that it will calm down the bad press before the spotlight moves on to something else. [The key] is giving an appropriate response to the events, without under or overstating it.”

It’s a case of defining your priorities and the interests of key stakeholders first and foremost. Kevin Murray, Chairman of PR consultants Good Relations Group, says: “Trust is a strategic asset and if you destroy a relationship with a customer or a supplier it is far more damaging to your business than some bad media headlines. Ask whose relationship with you is being damaged [by the crisis] and what you need to say and do to fix it. It is about developing the right strategic response, rather than the right media response.”

Enough businesses have undergone high profile catastrophes to make it clear that successfully handling the external perception of a crisis hinges on the quality of internal management and with the aforementioned focus on a business’s relationships, values and reputation.

In mining, for example, the ongoing stability of a venture is threatened when companies don’t keep local communities onside. Bruce Cox, Managing Director of Rio Tinto Diamonds, says: “It is not just the global brand reputation that is critical, but the perceived or real community concerns. They can result in lasting local reputational damage that is hard to recover from. The solution there comes from facing issues head-on, through sincere and genuine engagement with community leaders.”

The company line

When a crisis breaks, it’s the CEO who has to exercise judgement on what the impact of a crisis is on the business and decide on the appropriate course of action, rather than relying solely on the opinion of advisors and comms teams (although they certainly have their place). Likewise, it’s the leader who needs to ensure, and thereby feel confident, that the values of the organisation are understood by each and every employee right through to those in the supply chain.

Easier said than done, perhaps, but weak links in organisations are causing catastrophic consequences. Patricia O’Hayer, Vice President of Global Employee Engagement at Unilever says: “Today at any point in time anyone can mobilise a maelstrom of activity which challenges a company’s reputation, so never discount a threat as insignificant or not credible… But it’s not all doom and gloom, a company’s reputation is an asset that can be managed and bolstered each and every day.

“Invest in your employees as the first line of defence, they are the best advocates for your company… and hold your suppliers accountable to use your products, speak well of your company and adhere to your standards, [as they] too have a vested interest.”

It’s about drilling home what’s at stake to the whole business, adds Martin Sutton, Head of Corporate Assurance at National Lottery owner Camelot Group: “On the very rare occasions that a player has a problem with our lottery systems, we know that, no matter how small or temporary the problem may be, news of it will spread like wildfire on Facebook and Twitter… [but] most crises start small and like a storm approaching don’t necessarily in themselves warn you of what’s about to come.

“It’s a fine judgement and the first indications often won’t lead an inexperienced manager to think this is indeed a crisis… [so] we put all of the senior executives through a training process, which I found incredibly useful because you know what to expect in those first 24 hours that define the overall response.”

Let’s not forget that with all of this, good non-executive directors have a role to play in protecting the reputation of the business. Leslie explains: “I think it goes back to the board… If you have an experienced board that is capable of taking an appropriate assessment of the situation, the company’s leadership is likely to be helped in taking the right decisions… It’s difficult once the press get involved but it is the role of the board to take a balanced view and a balanced response.

“In a crisis, it is a question of being prepared, it is a question of being transparent and honest, and it is a question of having people who are mature and experienced. [They] know that as a CEO you will have a crisis during your tenure.”

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon.

Matthew

Cracking Chairman Succession

The succession strategy for the chairman is as important as for the CEO. All too often, this is something that gets forgotten as the lines of responsibility for who decides on the next chairman of an organisation become blurred. That needs to change.

Stephen Davis, a Criticaleye Thought Leader and Executive Director of the Yale School of Management, says: “There is far less focus on succession planning for the role of chair than there is for that of the CEO and this may be attributed to a quiet and perhaps undeserved assumption that the selection of a chair is not as critical… [Yet] it’s not sensible to ignore chair succession as… the performance, productivity and the success or failure of the CEO, is going to hinge to a very large extent on the attitude and functioning of the board of directors and, by extension, its leadership: the chair.”

Peter Waine
, a Criticaleye Associate and Partner at search and selection agency Hanson Green, comments: “Many companies duck the issue of chairman succession, but this should be challenged… I’d go further and say that it should be part of a company’s formal annual review process.”

The question is: how formal? Lady Barbara Judge CBE, Chairman of the Pension Protection Fund, says: “There should be no prescriptive legislation or regulation for how companies go about chairman succession planning. In fact, regulating such a process is not likely to be effective, particularly as each board is different.”

It’s these nuances, varying as they do according to company and sector that renders a one-size fits all approach undesirable. Anthony Fry, Chairman of Dairy Crest Group plc, comments that “the problem with many succession plans is that they are too rigid, which often leads to people making erroneous assumptions as to their heir.”

Lead role

In times where market reactions to apparent uncertainty in an organisation can have drastic results, a plan of some description is needed. Beverley Hodson, NED at recruitment consultancy, Randstad Holdings NV and at the National Farmers’ Union Mutual Insurance Society, says: “Generally, you will have someone identified to take the reins as a result of a ‘fall-under-a-bus’ type scenario. Such an individual may then be assessed… for their suitability in a more permanent capacity. Plans vary from one company to another, but there is always a contingency plan.”

For Ian Harley, a Criticaleye Associate and Senior Independent Director (SID) at Menzies plc, who has over 25-years of FTSE boardroom experience, the SID has to drive the agenda: “Unless the chairman is happy to put a date on his departure, I don’t think it’s appropriate [for succession to be part of the formal annual review process]. And if he does this too far in advance, he risks being a lame duck. If there is a real performance issue with a chairman, the SID has to step in and address the situation.”

Sir James Crosby, Chairman of software company Misys, comments: “It is the SID’s role but, given his/her comparative lack of authority, as such it is their role to facilitate the non-executives’ consideration of chairman succession off the back of the performance reviews. This includes consultation with the CEO but centres around the collective discussion of the non-executives.”

Assuming a departure is amicable, it makes sense to heed the outgoing chairman’s opinion. “Planning your own succession, in terms of the board having not only a recognised process but also putative candidates around the board table is absolutely fundamental to good chairmanship. That doesn’t mean you hand it on to x or y as the Crown Prince – it means you hand it on in good order and with consensus and agreement,” says Anthony.

Bernard Cragg, a Criticaleye Associate and SID at Mothercare plc, says: “The existing chairman does need to be fully involved, especially in terms of specifying the role, the time involved, the challenges and opportunities. He/she cannot be anything other than an adviser in the process.”

Barbara
 agrees. “In terms of the process itself, it should be handled by the Nominations Committee and be considered on an annual basis. The chairman should be part of this process, of course, but he/she should not have a vote and certainly should not control it. After all, this is not about cherry picking or moulding your anointed successor; it’s about stewardship.”

Shop around

As for where to look for candidates, opinion is divided between the need for continuity and industry knowledge versus the importance of a fresh pair of eyes. Mike Turner, Non-executive Chairman of Babcock International plc, says: “The appointment of the next chairman from the current pool of non-executives, who therefore has a good deal of knowledge about the company and its people, is a far better approach than the appointment of a chairman who has no prior knowledge of the company. In fact, from my own experience, the appointment of such an outsider can be quite disastrous for the company.”

This shouldn’t be confused with cronyism. “The best person to succeed as chair is often someone who is already on the board,” argues Barbara.  “While the guidelines may suggest otherwise, it should not matter if the new chair has been on the board for a number of years. Such a person should not be disqualified based simply on a perceived lack of independence.”

Stephen takes a slightly different view: “In terms of whether a chair needs to have industry experience, it may be an advantage but it may also not be the most important thing you want from a chair. It could be that the ability to understand group dynamics, forge consensus and see clearly the strengths and weaknesses of the individuals is more relevant.”

If a company is truly on its game, then there is likely to be a succession in place as boards now realise their responsibility for upholding the reputation and brand of an organisation. Lord Mervyn Davies CBE, a Non-executive Director at Diageo, says: “To that end, corporate memory at the SID and chair level is critical – they need to gather experience but also ensure that is passed on.

“That is their role and responsibility so, as a NED or new Chair is appointed, it is an opportunity for a handover of… knowledge in order that the history of the board and what they have seen and gone through is passed on and understood.”

Hopefully sense will prevail among policymakers who are itching to crackdown further on governance codes. Nevertheless, when it comes to chairman succession, boards must have grown-up conversations concerning the systems they have in place for ensuring the best people are either nurtured or brought in for the role.

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

The Art of CEO Succession

CEOs should view succession as a critical part of their role. One of the most likely indicators of successful CEOs is their ability to create and develop a top team that’s aligned to the future capability requirements of the organisation. But to what extent should CEOs nurture the process of succession in their organisation?

There’s no reason why a company’s success shouldn’t continue under a different leader, but a smooth transition frequently depends upon the quality of the top management team. And the CEO has a role to play here, not only as the organisation’s current leader but also as steward of its future direction.

Darryl Eales, CEO, Lloyds Development Capital, says: “The thing that occupies me more than anything else is how to build a sustainable business – one with a clear succession. In every business, a key role of the CEO should be to consider the long-term strategic objectives for the business and, within this, how to develop a team that can maintain the growth of the business when the incumbent moves on.”

The CEO as steward

In his article, Heir to the Throne, leadership expert Kai Peters, Chief Executive of Ashridge Business School, says that: “The CEO sees within his/her organisation that there are many talented individuals, each with a role to play and some that have the ability to fulfil many important leading roles. The CEO, as steward of the organisation, is clearly interested in having the best people possible to achieve the strategic goals that have been identified.”

Don Elgie, founder and CEO of Creston plc, says: “One of the key functions of the CEO is to lay down a succession plan, to build it carefully and internally. But choose your own retirement date. You should not announce it externally until quite close to the exit point, or your role will risk being seen as a lame duck. For an example of how to do it right, see Sir Terry Leahy and his succession plan for the CEO of Tesco. He waited until just six months before his exit date to announce it formally and the perception was that he was still fully functional, even past that point. He chose when it was time to leave.”

In Tesco’s recent baton-passing, while new CEO Phillip Clarke appears more media savvy than Sir Terry Leahy (for one thing, he tweets!), both men are Tesco ‘lifers’: they are the product of the brand’s resilience and a testament to the culture it has nurtured. For the retailer, it’s just another chapter in an ongoing story of succession that regularly garners praise.

Lynda Gratton, Professor of Management Practice at London Business School, says: “Fostering resilience is crucial to the long-term success of a company, and one of the core aspects of this is the way in which the CEO succession is managed. I remember talking to Sir Terry Leahy when he was still the CEO of Tesco, and his pride in the stability and resilience of the company reflected in a succession process that had seen only five CEOs since its early growth.”

The risk of ill-judged choices for successive leaders, and exchanging them too frequently, can play havoc with your share price in the short-term and can do lasting damage to the brand. While uncertainty prevails outside your organisation, the importance of a strong, dependable leader that is the product of a solid succession plan should not be underestimated.

Lynda adds: “Stability can be reinforced by a smooth and dignified transition of the CEO, where the incumbent CEO is seen to support and nurture the succession process and, by doing so, to steward the senior team into the next phase of their development. It is this calm and this stewardship that, in the longer-term, become such a crucial element of resilience.”

Don’t fit the mould; lead by example

In his article, The Perils of Being Shaped for LeadershipGianpiero Petriglieri, Affiliate Professor of Organisational Behaviour at INSEAD, says: “Most people groomed to be future leaders are chosen because they seem to fit current leaders’ ideas of what good ones should be like. These ideas are captured succinctly in lists of corporate values and leadership competencies. In picking potential successors and prescribing their profiles, senior managers seek to ensure their organisation’s future and perpetuate their own legacy.”

Of course, different organisations present different challenges. If the Founder is still present, for example, it is often difficult to find someone with the right qualities to take over the role: whatever the new CEO’s credentials, he or she will not have founded the business.

Bob Holt, Chairman of Mears Group, agrees: “This is always difficult in an entrepreneurially driven organisation. The CEO must therefore encourage individuals to be their own person and to form their own views, which will challenge and enrich the management team.”

The type of successor should also depend on the stage of a business’ development, explains Chris Merry, CEO of investment banking group Matrix (and a former CEO of the executive recruitment firm Whitehead Mann): “A growing business needs different skills in order to mature from the start-up phase. This might be difficult for an incumbent CEO to see and to understand, and this is largely the chairman’s responsibility, supported by NEDs. Culture and fit are vital in most organisations and the tone should be set from the top.”

‘Grow your own’ or recruit externally?

“Fundamental to the whole issue of succession is whether the company is doing well, or not,” says Tony Cowling, President of TNS Group (and a Criticaleye Associate), who helped found Taylor Nelson Ltd in 1965 and, as CEO, led the company through a prolific number of acquisitions, including a merger with Sofres in 1997. “Where the company looks to be in a strong position in its market, such as Tesco, then recruitment from within should be best. It maintains stability, is good for staff morale and lessens the risk of disruption. When companies have performed badly or disasters have occurred – banking comes to mind – then bringing in outside management that is not tainted with these problems must be a favoured, though not essential, option. In fact, since the crisis, many banks have completely changed their management – and rightly so, many would say.”

Numerous studies highlight the preference for recruiting from within. One of the latest, by The Kelley School of Business at Indiana University and global management consulting firm A.T. Kearney, analyses data from S&P 500 non-financial companies over 20 years (1988-2007) and finds that those companies that exclusively promote CEOs from within outperform companies that recruit CEOs from outside the company.

Kelvin Harrison, Chairman of Maxima Holdings plc, says: “All the CEO’s direct reports should want his/her job and at least one of them ought to be capable of it. If this is not the case, the management team needs to be strengthened. However, a good CEO is always keeping an eye out for external talent. It is a very weak CEO that does not have diversity in his/her senior management team. When the CEO reaches the point at which he or she wishes to move on, or is taken out, then the nomination committee, or the board, should have a choice of internal and external candidates, to which they may choose to add.”

Don adds: “I would call into question any management that doesn’t have a succession plan. It should be seen as a clear risk to business continuity. Statistically, recruiting from within is considerably less risky than recruiting from outside. Often, CEOs are brought in externally when there’s a performance problem or the board does not have confidence in the current team. The CEO should work with the board to put in place, on a confidential basis, a ‘train list’ of potential candidates – those potential suitors that can take up the reigns in the event of sudden or unexpected departure.”

The risk of unplanned succession

Tom Taylor, Chief Executive of the Agriculture and Horticulture Development Board (AHDB), says: “I am a great believer in what Charles De Gaulle said; ‘The graveyards (of France) are full of indispensable people’. None of us will survive for ever so the sooner one gets to grip with a succession plan for all key positions in the organisation, the better. We have to be honest and look in a mirror. What our organisations need is someone in the CEO role that can lead and deliver results in the prevailing business climate, whatever that may be. It means we need different skills for the CEO at different times of an organisation’s development. CEOs need to be honest about that. Additionally, if one is looking to replace from within, is it really healthy to have a CEO and his/her clone in the current management team?”

One of the best recipes for failure is when a company is taken by surprise, yet the idea of replacing a CEO should never come as a surprise, as the one certainty is that the tenure of the CEO will end at some point and a replacement will be needed.

“Any good leader needs broad shoulders, and by virtue they should think about who will follow them once they leave,” says Simon Howard, Executive Chairman of Work Group plc. “It’s largely about giving yourself options from the top team and you do that by ensuring you develop the best talent around you. How a CEO goes about succession is a matter of individual style, but they must consider how they are going to nurture the process. And they must be open about it, internally at least, because if it is communicated properly, everyone knows where they stand. Instilling an air of certainty – that the CEO will go and how succession will be handled – is paramount.”

Chris adds: “Having clear succession plans for each key role is sensible risk management. For a regulated financial services business, succession planning is of interest to the FSA in assessing proper governance and management, and quite rightly so. The smaller the business, the harder it is to have a qualified successor in place for each key role. In CEO succession, logically, it’s the responsibility of the chairman to recruit the CEO, but this is not always done. And many see it as a threat to have a successor in place before having decided to go … unless he/she is at, or approaching, natural retirement age. Naturally, there is a tension between ensuring one’s own survival and protecting the business.”

John Leighton-Jones, HR Director at TT electronics plc, says: “Succession planning at the executive level is usually driven and directed by the nominations committee. Succession plans should be reviewed twice a year. This review should be used to baseline the capability requirements of the next CEO. The requirements should be shaped by examining the business strategy over the next five years against the global challenges, risks and opportunities likely to face the business in the future. Evaluating the impact of the challenges will help ensure that the next CEO has the leadership skills, capabilities and experience to respond to the changing environment.”

Retaining value on exit

While all CEOs leave behind a legacy, some endure for longer than others. Those that last have done so because the skills and value of the CEO has been absorbed by the top team and become a part of the fabric of the organisation.

Bob agrees: “Retaining the value of an exiting CEO is largely about ensuring that the core values and strategies of the organisation are understood and accepted by all stakeholders.”

Or, as Gianpiero puts it: “Rather than merchants of hope, as Napoleon called them, leaders are more like custodians of it. Iconic leaders are people whose personal trajectories mirror closely the ambitions of their communities. They lend their faces and voices to principles and aspirations that people hold dear at a point in time. They don’t tell stories; they are stories that match their times.”
One of the most likely indicators of successful CEOs is the quality of the team they create around themselves. Therefore, a key skill of a CEO is to create and develop the top team in line with the future capability requirements for the organisation.

Simon says: “The CEO must appreciate that his/her success is more a matter of team achievement rather than the result of single-handed autocracy. And he or she doesn’t have to aim for the slam dunk of one perfect successor, rather ensure that the top team is cohesive and working together so that there may well be more than one possible successor. Of course there’s always a risk of losing talented people along the way, but top talent is more likely to stay if individuals have been sufficiently developed within the top team. Some of the most talented CEOs I have met aren’t 24-hours-a-day workaholics, rather they have developed a top team around them. Key to this is that succession has been a natural part of the top team’s development plan.”

Tom adds: “The key to effective CEO succession lies in being confident enough in your own ability that you can safely develop talent below you in the knowledge that they will never be able to replace you until you are ready to move on. When one is planning to move on you should give others opportunities to tackle some of your tasks on your behalf in the knowledge that you are still there to guide them – and if needs be take corrective action – while you are still in a position to do so. It is too late once you have left!”

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon

Matthew

www.twitter.com/criticaleyeuk

Role of AIM-Listed Chairman

Although the Alternative Investment Market (AIM) is a public one, its relatively relaxed regulations and its application of the ‘comply-or-explain’ rule mean that the role of the board can be very different to that of companies on, for example, the main list.

The old adage states that “the chief executive runs the company and the chairman runs the board.” This is also true for AIM companies, but, owing to the nature of organisations listed on this market (typically small, growing companies), the chairman is likely to be more involved in the operational side of the company than his/her counterparts on the main list.

“AIM companies invariably have smaller boards [than most companies on the main list] and, hence, their directors are much closer to the business: what goes on, issues, operations, etc. In smaller companies, the board will become involved with actions that they would not be able to concern themselves with in larger firms. This has advantages in that one can see that one’s decisions are having a direct impact. The chairman in a smaller company is going to be much more closely involved in helping the CEO run the business and that can be a lot more fun,” says Paul Clarke, Associate at Criticaleye and Non-executive Director of Brookwell.

Complying with the Code

Neil Matthews, Partner & Head of Equity Capital Markets at Eversheds, comments that, although AIM-listed firms are not required to adhere to the UK Corporate Governance Code, in relation to board composition, they should comply in the name of governance. Having this framework in place can make it easier to move up to the main list if that becomes an option.

“Any AIM company would be well advised to follow the corporate governance code,” says Neil. “Some will become ‘super’ compliant, but it is advised at least to have the minimum amount. This almost certainly means having a separate CEO and chairman.” By following the code, organisations are demonstrating they are comfortable with corporate governance and that they have strong non-executives.

NOMAD

Created to allow smaller companies to float shares with a more flexible regulatory framework than is applicable on the main market, AIM has no requirements for capitalisation or number of shares issued. Based on the ‘comply-or-explain’ option, AIM allows companies to comply with its rules or explain why they will not comply. In return for granting this leeway, the Exchange requires continuous oversight and advice by the issuer’s underwriter – the NOMAD.

“The role of the NOMAD is central to AIM’s regulatory model, as these brokers play the role of gatekeepers, advisors and regulators of AIM companies. In advising each firm as to which rules should be complied with and the manner in which existing requirements should be met, NOMADs provide the essential service allowing firms to abide by specific regulations, reducing regulatory costs in the process. Clearly, the chairman should have a close working relationship with the NOMAD,” says David Pearson, a Criticaleye Associate and former Chairman of Vividas Group plc, a one-time AIM-listed company.

Investors

One of the major differences between main-list chairmen and their AIM-listed counterparts is that, due to the nature of AIM investors, the chairman may have to become an advocate with major shareholders.

Conventional thinkers believe that the CEO and finance director should be the only directors that deal with investors, as institutions usually want to talk to the people who run the business. However, it is considered best governance practice for the chairman to meet one-on-one with key shareholders, mostly institutional investors. “That is very good because I can talk about the company away from the chief executive and finance director. It gives investors a view of what we’re up to, where I see the company going and how that all ties back,” says John Brackenbury, Criticaleye Associate and Founder and Chairman of Avanti Communications plc.

Paul says, “Where the shares are illiquid and investors cannot exit, then the chair may well be contacted by the investor if attempts to deal with the CEO have not been successful.”

Conversely, there are those that believe that the investors should be dealt with exclusively by the board, arguing that the management team should be concerned with running the organisation, not courting investors.

Succession planning

Another key part of the chairman’s role is in the succession planning of the leadership team.

“For example,” says John, “Every July I have a meeting with the chief executive because, if he was run over by a bus or our technical director was run over by a bus or our finance director was run over by a bus, you’ve got to have plans in place. This is particularly important relating to knowing who is coming up through the ranks so that, in the event that we need to replace someone quickly, we know if we will need to go outside, or deal with it internally. I actually do sit down and review that annually.” The chair also has to consider the succession plans for his/her own position.

What makes a good chairman?

A successful chair of an AIM-listed company will understand the business, be able to mentor high-level executives and have a good grasp of corporate governance regulations and guidelines.

“A good chairman is someone who is experienced in a public company, is a good listener and is available to the CEO at any time. He/she should respect that he/she does not run the company but can give good advice in a fashion that can influence the CEO without taking over and running the business,” says Paul.

“A chair also has to be able to summarise discussions, round up the dissenting opinion so that all agree a course of action, bring up issues that need to be discussed, not panic or react to a problem as a CEO might and remember that he/she does not run the company. Lastly, the chairman will not know everything so it is helpful that they have a good network of contacts,” he continues.

It is imperative that the chairman keeps the board looking at the medium- to long-term, rather than just the day-to-day operations. “In a well-run AIM-listed company, the chairman can help to ensure that sufficient board time is allocated to strategic and medium/long-term issues when the temptation is often to get sucked into urgent matters,” says Andy Morrison, former CEO, Xtract Energy plc.

The CEO perspective

The most important element of a chairman’s role, aside from running the board, is the relationship he/she has with the CEO. This partnership is vital to a smooth running organisation.

“Following the retirement from the board of our previous chairman, I recently had the task of recruiting a new candidate for the role,” says Stuart Green, CEO, ZOO Digital Group plc. “From a City perspective, it is important for the chairman to be credible as an ambassador for the company, with a good track record with other quoted companies, strong in corporate governance and seen to be independent. From a business perspective, we wanted someone with the capability to understand our proposition and the market. And from a personal perspective, I wanted someone who would work closely with me and provide support and guidance to help me and the business to grow. It would be easy for an established CEO to see an incoming chairman as a potential threat, and I know that some CEOs are really only looking for someone to turn up to meetings once a month and provide the rubber stamp. But AIM is for small companies that need all the help they can get to grow and be successful, and I think it is vital to capitalise on the contribution of a good chairman. Having the right credentials is obviously important for the role, but good chemistry is the secret sauce for an effective and productive chairman/CEO relationship. I’m pleased to say that we found the right guy for ZOO!”

Tips to aspiring chairmen

It may seem like a natural progression to move from CEO to chairman, however, it is not a sweeping generalisation to say that ex-CEOs don’t always take well to playing second fiddle to the CEO. “There is no guarantee that a successful CEO can become a successful chairman, as the requirements of the roles are very different,” says David Pearson.

Chairmen have to remember that they don’t run the business. Paul says, “You are there as a good counsel and advisor. As a good chairman, you are there to influence and bring together all the views and, in extremis, you are the man in the chair seat and may have to take the difficult decisions, such as removing the CEO. The chairman has to lead that sort of action.”

David recommends taking some training in governance, familiarising yourself with the listing rules and spending time with a NOMAD discussing what a successful AIM company looks like. “Do your due diligence duly and diligently,” he says.

The Role of an AIM-listed chairman

• Run the board
• Be involved in choosing a NOMAD
• Succession planning
• Deal with major investors/shareholders
• Hire and fire the CEO
• Be a sounding board and counsel to the CEO

Please get in touch if you have any comments about the issues in today’s update.

I hope to see you soon

Matthew

www.twitter.com/criticaleyeuk