Planning Ahead

When a CEO steps down, the company is left in a vulnerable position. A successor must be able to step in, take charge and continue to drive the organization toward peak performance without a hitch.

Despite these lofty expectations, the vast majority of companies aren’t prepared with succession plans, and the solution is not to hire from the outside, contends Noel Tichy, a business professor at the University of Michigan Ross School of Business and author of “Succession: Mastering the Make-or-Break Process of Leadership Transition.”

Smart companies, Tichy said, are constantly developing internal talent so that if a change is needed at the top, a qualified candidate is waiting in the wings.

Tichy spoke further with Talent Management on the topic. Edited excerpts follow.

What is the state of CEO succession?

It’s sad. The best estimate is that as high as 80 percent do it poorly. My definition for both publicly traded companies and nonprofits is, “Does the performance of the organization improve or not under the new leader?” If it does not, you destroy shareholder value.

The majority get it wrong. At the end of the day, it comes down to whether or not you can drive your organization to improve performance with the new CEO or not. When you don’t, you’ve failed at succession. That’s my bottom line.

Noel Tichy editedWhy is succession planning so vital to a company’s success?

You have to build a pipeline of talent that is suitable for tomorrow’s world, not yesterday’s world. At the end of the day, it can’t be a last-minute fire drill where you just hire someone from the outside. The track record there is even worse than succession from within.

Why are CEOs hired from outside unsuccessful?

It is a lack of the human touch, lack of experience and inability to build a coalition of internal support. Outsiders come in and break a lot of glass, create a lot of resistance and are politically and culturally nonaligned. Organizations are technical, political and cultural. A good leader is sensitive to both the political and cultural elements and is able to navigate them and build support. The bad ones come in and break a lot of glass and create a lot of resistance, and it ends up getting them fired.

Why do companies continue to look outside to find replacement CEOs?

They go outside because they’ve failed to build a pipeline. They haven’t taken it seriously or they’re narrow-sighted on having a single candidate. They obviously haven’t done their homework. Headhunters love this because they have a whole industry for looking for outside talent.

The poster child for how to really screw it up is HP. They’ve had four outside CEOs, including Meg Whitman. That’s a company that was driven by the founders. They had talent, but they failed to really groom the next generation. Then they got caught having to go outside.

How do you plan for succession in your company?

When I work with a CEO or a company on succession, I look at two things: Where is the company going over the next decade and what does their talent pipeline currently look like.

I start all the way from the base with off-campus hiring. Companies must consider the disciplines and skill sets they want in the way of professional 22 year olds. I treat it like putting together a curriculum from first grade through high school. You have the same subject matters that remain consistent throughout. Even in the first grade, you have math, English and social studies. In order to develop a cadre of leadership, the level of difficulty increases over time.

I put it in two buckets: leader of business and leader of people. Leader of business are all of the stuff we teach in the MBA program — strategy, finance, marketing, etc. Leader of people is how do you build teams, how do you develop people and how do you appraise people? Those two buckets apply all the way to the top of the company. They just get more complicated.

All of this is done with the assumption that 80 percent of development is on-the-job experiences.

How do you implement a talent pipeline? Where do you start?

CEO, CEO, CEO. The CEO must be a coach in the trenches. Without positive involvement at the CEO level, any program is a nonstarter. 

Another very important role is HR. The reason HR is so critical is because they can sit with the CEO or the board and have honest discussions about people. It’s in their domain.

However, the senior HR person in my recommendation should not be anybody who is looking to be a candidate for the CEO’s job because it’s a conflict of interest. They are responsible for making sure that there is really rigorous data brought to that discussion. They are also a trusted adviser to the board of directors. HR is a critical role.

What role does talent management have in this process?

HR needs to be the designers and the keepers of the integrity of the audit function for human capital.

The head of HR has to partner with the CEO — but if you go underneath HR, you’ve got a number of levers you can pull. HR is all about performance. We want to try and get people who can perform well in the game. The first box that feeds into that is selection. The selection process should drive performance. You want to find round people to fit in round holes.

 Once they are selected and perform, you move into appraisals. Appraisals should support looking at future potential. If you have garbage appraisals, you’re going to have garbage data — and that’s going to impact development and performance going forward.