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How to Do CEO Succession Planning Right

Best Buy’s CEO unexpectedly resigned last week, leaving the struggling tech retailer to look for its next leader. While there isn’t a one-size-fits-all solution, here are proven strategies to get it right.

April 17, 2012
Related Topics: Succession Planning
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Best Buy’s CEO Brian Dunn resigned last week after some of his personal indiscretions came to light. Since then, the struggling tech retailer appointed an interim CEO and announced it would take the next six to nine months to screen internal and external candidates to find the right match.

In stark contrast, McDonald’s appointed three CEOs from within its ranks within a two-year period in the 2000s — and in each instance made the announcement almost immediately.

The differentiating factor in these scenarios is what Stephen Miles, vice chairman of executive search firm Heidrick & Struggles, describes as an operational succession plan.

“If you have an operational succession plan and you’ve developed internal candidates, you can announce usually the next day,” Miles said. “If you have to go to the external market or if you have to go outside and compare outside to inside; it’s somewhere in the four- to nine-month time frame.”

Internal vs. External
While there isn’t a one-size-fits-all solution to the quandary of unexpected CEO turnover, there are factors companies can take into consideration to make a more informed decision.

For instance, companies that are sailing along smoothly typically find a CEO internally, whereas the reverse is usually true if the company is in the midst of some type of transformation, Miles said.

High-profile examples of the latter include Lou Gerstner of IBM, Stephen Elop of Nokia and Alan Mulally of Ford — each of whom came from the outside when their respective organizations were undergoing transformational change.

“Oftentimes when a company does need to go through some level of significant change, the person from the outside can be more dispassionate — both about the people inside the organization and around the strategy — and make the difficult transformation decisions,” Miles said. He added that those who have been with the company all along might be unable to do this.

On the other end of the spectrum, examples of internally developed CEOs who’ve taken the reins of steady, healthy organizations are Kenneth Frazier of Merck & Co., Carlos Rodriguez of ADP and the highly publicized ascension of Tim Cook at Apple after Steve Jobs’ passing.

What is somewhat unique about Cook assuming the role of CEO at Apple is that he wasn’t altogether unfamiliar with it. When Jobs had taken medical leaves of absence, it was Cook who oversaw the company’s day-to-day operations.

Even though medical emergencies don’t incapacitate many sitting CEOs, there are still opportunities for organizations to test drive internal candidates for this role. According to Miles, many companies use the No. 2 position to see a potential CEO successor’s skills in action.

“You pick the person who’s going to be your [next CEO] and then you give them somewhere around a year to 18 months in that COO role to give them a broad view of the company — that for me is the test role,” he said. “When it’s done well, it’s an incredible apprentice model in terms of getting someone in a viable position.”

Identifying the Right Leaders
For starters, talent managers need to assess the company’s current situation and pose this question to their boards: Where do we want to be as a company?

“[The board] needs to do the hard, strategic work — and then out of that strategic work falls out the leadership algorithm, if you will, for the four or five things that really matter for this company,” Miles said.

Speaking in general terms, Miles explained that one leadership characteristic that’s highly valued today is the ability for a leader to have a vision, but at the same time be flexible when circumstances call for it.

“We live in an increasingly complex and ambiguous world, so you need somebody who’s able to deal with the levels of complexity and ambiguity in a meaningful way,” Miles said. “You need somebody who has the IQ and the ability to take advice from people around them in order to define a path forward when it’s very foggy.”

Another quality that’s celebrated today is the ability for a CEO to build and work effectively with a distributed leadership team.

“[That means] using your direct reports in a distributed way so it’s not [that] you have to make every decision; you have to do everything; you have to perform,” Miles said. “It’s breaking down some of the hierarchy and being able to get the most of the team around you.”

It’s also beneficial to select a CEO who has or can forge a good working relationship with the company’s board.

“The best CEOs are transparent,” he said. “They’re open. They build relationships with their board. They take their board and their shareholders on a journey.”

Not Just Another Process
While operational succession plans may sound like a no-brainer to keep a company’s leadership engine running smoothly, many companies don’t invest sufficient energies into this process for a couple of reasons. For starters, some companies don’t believe in succession planning until they find themselves in an event — that is, after the CEO has left.

“In order to have an operational plan when you have an event — and most of those events are not planned — you need to be doing the work outside of the event really well,” Miles said.

Others don’t because the process can be laborious and often requires the energy of the CEO as well as the board, which can sometimes be lagging.

Another stumbling block is the tendency for some sitting CEOs to feel threatened by succession plans — and the last thing boards want is to cause commotion among their star players.

“[Some boards say,] ‘We have a great CEO; he or she is 45 years old. Why would we be doing anything? We don’t want to signal that we’re unhappy,’” Miles said.

In that case, the best way to avoid potentially awkward conversations and eliminate suspicions or distrust is to build the succession planning process into the fabric of the organization.

Deanna Hartley is an associate editor at Talent Management magazine. She can be reached at dhartley@talentmgt.com.

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