How to Prepare for a Crisis at the Top

In April 2004, McDonald’s Corp. Chief Executive Officer Jim Cantalupo was hours away from addressing a cohort of the company’s owners and operators in Orlando, Fla., on its turnaround from a period of expensive innovations, sagging sales and dwindling profits. Then tragedy struck.

According to published reports, Andrew McKenna, McDonald’s nonexecutive chairman, received a 5 a.m. phone call informing him Cantalupo had died of a massive heart attack.

With its top executives and most board members also in Orlando as part of McDonald’s biannual meeting, the fast food company was able to announce both Cantalupo’s death and his successor before the stock markets opened that morning. Charlie Bell, a 43-year-old Australian and McDonald’s president, was named CEO. He also addressed the company’s owners and operators that morning.

It wasn’t long after that Bell, presumed to be McDonald’s long-term answer at chief executive, began experiencing stomach pains. After three weeks as CEO, Bell had exploratory surgery and was diagnosed with colorectal cancer.

After a few months on the job during treatment, Bell returned home to Australia. He died in January 2005. Jim Skinner, a 33-year McDonald’s veteran who had begun his career flipping burgers in the restaurants, was named CEO. Skinner retired in June 2012 and was replaced by Don Thompson, McDonald’s chief operating officer.

In less than a year, McDonald’s had to enact its top executive succession plan twice — both in emergency situations with seemingly little hesitation.

Rich Floersch, McDonald’s executive vice president and chief human resources officer, remembers each succession well.

“I can remember the first dinner meeting I was at in 2004 with a lot of my peers at other companies,” said Floersch. “And they were like … ‘I can tell you what happened that day. My CEO called me in and said: What is our emergency succession plan?’”

The Two Sides of Succession
McDonald’s prominently illustrates the importance of emergency succession planning, but many firms do not have a comprehensive plan in place.

Further, recent data suggests that for some, CEO succession in general may not be top of mind. Between January and July 2012, 11 of the 42 CEOs who assumed new posts at S&P 500 and Fortune 500 companies were external hires, according to an annual study by executive search firm Crist|Kolder.

Floersch, who attributes McDonald’s recent emergency transition success to its deep commitment to internal talent development, said having an emergency succession plan in addition to a long-term one is imperative.

But what constitutes a sound emergency CEO succession plan? According to Bruce Sherman, principal at HR advisory Shields Meneley Partners, the first step is to beat down false perceptions of what an emergency succession plan is. For starters, it is more than a few names stuffed in an envelope by the board of directors, the group that owns the C-suite succession process.

Sherman said emergency succession, especially at the CEO level, is composed of many parts, most of which require the firm to evaluate a lot of uncertainty in the moment: What is the specific circumstance? Can the company get by on a short-term fix, or does the business strategy require an immediate long-term leader?

If the strategy calls for an interim, will it be a board member, or perhaps a retired company executive who would be willing to return for a short time? How will the plan be communicated? There are numerous variables.

“I don’t love situations where there isn’t a best practice,” said Howard Fluhr, chairman and former president and CEO of The Segal Co., a human resources consultancy. “I don’t think there is one here. It’s very situational.”

However, having an emergency succession plan is about managing risk. The less uncertainty there is about who will step into the CEO role should it suddenly become vacant, the less a company will be exposed to the financial and strategic liabilities that come with indeterminate leadership during its vulnerable period.

Therefore, all stakeholders involved in the process should champion a two-pronged succession effort: one focused on identifying a long-term strategy and list of candidates to fill the role of CEO, and another identifying who could step in immediately without hesitation in the wake of emergency, said Rick Ketterer and Colleen O’Neill, partners at HR consultancy Mercer.

Some candidates may be considered for both plans. It is HR’s role to prepare the behind-the-scenes efforts that ensure the organization has a wealth of individuals available to fit the different job profiles required for each situation. Still, a few barriers persist.

Ketterer said one big challenge is getting the board of directors to give serious consideration to planning for emergency succession. Often the board and other stakeholders become so focused on longer-term, big-picture succession that emergency plans tend to run thin. For instance, there may be a name under consideration, but can that individual handle the complexity of the role’s responsibilities should an emergency occur?

The other challenge is garnering CEO buy-in. To a sitting CEO, emergency succession may feel a bit like planning his or her own funeral, which doesn’t engender enthusiasm or urgency, said Paul Winum, senior partner and global practices leader at CEO succession advisory RHR International LLP and co-author of Inside CEO Succession: The Essential Guide to Leadership Transition.

These issues compound HR challenges, especially those the chief human resources officer faces, as it is this individual who should establish a culture of succession readiness within the C-suite, Winum said. But because the board owns CEO succession, the CHRO is often asked to play more of an ancillary role in the process.

This isn’t to say that HR’s role isn’t important. The CHRO is the functional liaison in the emergency succession planning process. Paula M. Singer, CEO and chief strategist of organizational development firm The Singer Group, said the CHRO’s role as chief architect of leadership development, performance management and high potential programs makes him or her the key knowledge holder about the organization’s talent. “They’re doing the heavy lifting,” she said.

Likewise, making sure that “all the machinery is working properly” on a functional level is vital to ensure the organization is constantly preparing its workforce for future leadership roles and is ready for any emergency, McDonald’s Floersch said.
This means CHROs should make sure to keep a strategic and objective point of view when called upon in the succession process. As an adviser to the board and CEO on talent, Floersch said having an objective point of view with the business strategy and shareholders in mind — and not any other agenda — gives the CHRO credibility in the discussion.

Not a One-Time Deal
Part of that objective assessment is to champion the importance of behavioral and cultural fit. “To me, HR’s role is to come in and say, ‘Hey, behavioral and cultural fit matters,’” said Gary Hourihan, senior vice president at Farient Advisors, an independent executive compensation and leadership consulting firm.

Hourihan said CHROs also shouldn’t be afraid to propose new ways to incentivize enthusiasm for CEO emergency succession planning. Some companies, he said, have even begun to tie succession planning to executive compensation and year-end bonus plans to drive engagement and urgency on the matter.

Further, emergency succession planning should not be a singular event. Hourihan said organizations should re-evaluate emergency successors and their transition plans for each C-suite position every three to six months.

Singer, of The Singer Group, also said revisiting emergency succession should happen at least once, if not twice, per year. Candidates for emergency succession may change from one year to the next depending on how the business strategy evolves. Also, situations regarding potential interim emergency candidates — an outside board member or retired executive — may also change, leaving emergency plans susceptible to risk if not re-evaluated.

Strive to Collaborate
Company size is a factor, too, according to Meg Bradt, managing director at Boyden, an executive search firm. In some instances, the CEO of a small firm might have so much influence — say he or she is the chief visionary or creator of a technology or service that is essential to the success of the business — the risks associated with his or her sudden departure may be insurmountable.

“The smaller the company, the less likely the infrastructure is strong enough and the processes are in place,” Bradt said. “You’ve also got smaller pools of people to pull from.”

Bradt said it’s worth evaluating the level of unique knowledge or skills the chief executive brings to the business and to consider how those characteristics can be replicated in the event of an emergency.

Finally, CHROs should make emergency succession as collaborative as possible. Singer said this rings especially true when seeking CEO buy-in. If the CEO rejects the need to prepare his or her emergency succession plan, CHROs, the board and other important stakeholders would be better off pushing hard to get the chief executive involved in the process — though the CEO need not be involved in every detail.

Floersch said buy-in from the CEO and other key stakeholders is what helped McDonald’s be prepared for its recent emergency succession scenarios.

“We benefit from having a CEO and now a new CEO who both [think] that talent management and leadership development are one of their top three priorities,” Floersch said. “It makes my job a lot easier when I have those two things working.”