Heirs Not Apparent

By Jeremy Smerd

Jan. 3, 2008

The decisions by Merrill Lynch and Citigroup to ignore their own succession planning processes and look outside the companies for CEOs represent a failure of their boards of directors to properly plan for a void in leadership, experts say.

    “The board is ultimately accountable to make sure there is succession when it comes to the CEO,” says consultant Gary Rich, a former head of HR for American Express in Europe, the Mideast and Africa. “But I don’t think the board has a clear sense of what [talent] is beneath the CEO.”

    Experts say an over-reliance on incumbent CEOs to plan for succession makes it all but impossible for the board to obtain independent assessments of potential successors. HR, rather than being used as an independent resource, generally plays a supportive role to the CEO in succession planning.

    But when a board loses confidence in its CEO, it loses confidence in successors as well, says Alan Johnson, a compensation consultant. That’s one reason why boards look for CEOs outside the company in times of crisis.

    “The board’s main responsibility is to pick a successor, and some people think that trumps everything else,” Johnson says. “And if they’ve failed on that, they’ve failed on what their major responsibilities are.”

    Implementing its CEO succession plan might not have helped either Citigroup or Merrill avoid the aftershocks of the massive write-downs related to subprime mortgages, but it could have eased the transition, experts say.

    Soon after Merrill’s Stanley O’Neal resigned, the company announced his replacement: New York Stock Exchange Euronext chief executive John Thain. The void left by Charles Prince at Citigroup, which had no ready successor for him, has been more deeply felt.

    Shortly after Win Bischoff was appointed interim CEO at Citigroup, he sent a letter meant to placate employees concerned about massive layoffs, possible restructuring and diminished bonuses. The letter followed closely on the news of companywide cost-cutting measures, like the immediate suspension of all travel and other expenses for employees who don’t generate revenue.

    “We will continue to reward performance, seek to pay competitively and take the steps necessary to help assure your success,” Bischoff, who also is chairman of Citi Europe, wrote in the letter.

    Citigroup declined to comment on its succession planning, and Merrill also did not respond to requests for comment. Both companies state in their corporate governance charters that the board is responsible for succession planning, including executive leadership. The boards are expected to meet with the CEO to ensure succession planning is effectively managed.

    While the shake-ups and the leadership void that followed may not reflect a failure of human resource leadership to effectively steward a company’s succession planning, they offer some lessons.

    Succession planning is fraught with office politics and emotion, especially for a CEO who has spent a life climbing to the top of the corporate ladder.

    “Succession planning is like planning for a funeral,” says Brian Wilkerson, national practice director for talent management at Watson Wyatt. “It really is playing with people’s mortality.”

    A succession plan that evaluates candidates with measurable data is likely to give the CEO’s preferences some additional perspective and is less likely to crumble should the outgoing executive lose the confidence of the board.

    By developing a strong framework for objectively measuring and analyzing the strengths and weaknesses of employees, HR gives the board information it can use to make independent decisions about CEO succession, says Bob Brotherton, the director of leadership resources at Wachovia Corp. in Charlotte, North Carolina.

    “When you go through that process, you’ve got a list of potential candidates that rise to the top,” he says.

   Succession planning may be doomed to failure simply because it is trying to achieve certainty in a future that is anything but predictable, says Peter Cappelli, director of the Center for Human Resources at the Wharton School of the University of Pennsylvania.

    “So, instead of succession planning, we need a more flexible, broader process that develops candidates more generally for leadership positions,” he says.

Jeremy Smerd writes for Crain’s New York Business, a sister publication of Workforce Management.

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