May 19, 2022

TPL Insights: Building Peak-Performance Cultures #119 The High Cost of Poor Succession Planning – Part 1

By Rob Andrews

With paraphrased content from Claudio Fernandez-Araoz, Gregory Nagel, and Carrie Green from HBR Magazine May – June 2021

Many large companies fail to pay enough attention to their leadership pipelines and succession practices. That leads to excessive turnover at the top and destroys a significant amount of value—close to $1 trillion a year among the S&P 500 alone, say Fernandez-Araoz, Nagel, and Green. A case in point: In August 2013, Steve Ballmer abruptly announced that he would step down as chief executive of Microsoft as soon as his replacement could be found. Thus began one of the most important CEO searches in the past decade—and a case study in the dos and don’ts of senior leadership succession.

At the time Microsoft was the third-most-profitable company in the United States and the fourth most valuable. Nevertheless, Microsoft didn’t have a plan for replacing Ballmer, even though he had underperformed for years. Critics cite his slow move into mobile, social media, and video along with ill-fated acquisitions and product reboots. While a few high-profile executives, such as Windows chief Steven Sinofsky and Xbox head Don Mattrick, had jumped ship during his tenure—another sign of trouble—with a workforce of 100,000, Microsoft surely could have identified other promising candidates in senior management roles, not to mention outsiders, who’d be ready to step in for Ballmer.

Instead, Microsoft started from square one, concentrating mostly on external candidates. According to the director who chaired the search committee, the board cast a wide net across many industries and skill sets, identified more than 100 candidates, talked with several dozen, and then focused intensely on about 20. Among them was Steve Mollenkopf, the COO of Qualcomm, who fell out of contention when he was promoted to that company’s top job. Alan Mulally, who had just turned around Ford and was the favorite candidate, took his name off the list in January—at which point the press described Microsoft’s board as turning to Plan B. Finally, in February, six months after Ballmer had declared himself a lame duck, Microsoft announced that an insider, Satya Nadella, would become the third CEO in its history.

Now we know that despite that bumbling succession process, Nadella was a terrific pick. He moved Microsoft away from fiefdoms and a “know-it-all” culture and toward a more open, collaborative “learn-it-all” one; built up the cloud-computing business; made Office available on all smartphones; and executed dozens of accretive acquisitions, including the purchase of LinkedIn. In his first nine months as CEO, Microsoft’s stock rose 30%, increasing its market value by $90 billion. Seven years into his tenure, it is the world’s second-most-valuable company.

But what if Microsoft hadn’t promoted Nadella? What if its hastily put together, extremely broad, and externally focused search had resulted in the hiring of an outsider? What if Mulally, who had no tech sector experience, had been appointed? Why hadn’t the board already been grooming Nadella—a 21-year veteran of the company with clear leadership competence, cultural fit, and expertise in up-and-coming areas of technology—or any of his similarly qualified peers?

While Microsoft did make the right decision in the end, its lack of planning could have led to a costly disaster. Like Microsoft, many large companies fail to pay adequate attention to their leadership pipelines and succession processes. And most of them don’t get as lucky as Microsoft did.

Implementing Solutions

Why are some of the world’s biggest and most powerful organizations getting CEO, and other senior leadership appointments so wrong? For five main reasons: lack of attention to succession, poor leadership development, suboptimal board composition, lazy hiring practices, and conflicted search firms. Here are some recommendations for fixing those problems.

Plan Succession Well Before You Think You Need To

According to PwC’s latest Strategy & “CEO Success” study, in 2018 turnover among CEOs at the world’s largest 2,500 companies reached nearly 18%—the highest rate PwC had ever tallied. Despite this trend, boards continue to be caught off guard because they haven’t spent enough time developing talent and mapping out possible lines of succession. Some believe that having a casual “if the CEO gets hit by a bus tomorrow” plan, which picks a replacement but doesn’t prepare or vet that person or weigh alternatives, is enough. It is not. Others delegate succession planning to the CEO, which is an equally unacceptable abnegation of duty. For instance, the authors know of a major company, valued at hundreds of billions of dollars, with a CEO in his late sixties who has been unwilling to properly develop any potential replacements. Unfortunately, because the firm’s recent results and stock market performance have been good, board members are afraid to confront him.

Succession planning should start the moment a new CEO is appointed. Take Ajay Banga, the former chief executive and current chairman of Mastercard: He began discussing when he might cede the CEO role to a successor even as he was interviewing for the job himself. The process should remain robust, with directors constantly monitoring and if need be, adjusting the pipeline. If there isn’t already a potential successor among the CEO’s direct reports, the board should look to the next level and consider advancement and development opportunities that will help high potential executives grow and develop. If that level is empty, directors can promote or hire high potentials into it or the C-suite.

Get a Firm Handle on Your Cultural Health, Strengths, Weaknesses, Opportunities and Threats

Succession planning should not occur in a vacuum. To connect the dots properly, a thorough assessment of the firm’s cultural and structural condition is critical. An organizational assessment that examines all the essential elements of the enterprise and how the loss of a CEO might affect the organization in total. No two CEOs are alike. Each brings unique attributes and may play a role, or multiple roles that may or may not be in their formal job description. In various scenarios, the CEO might play the role of chief strategist, in others they may play informally hold the position of culture champion, chief revenue officer, business oversight, routine breaker, cheerleader, or mad scientist/inventor. In far too many cases, a multitalented CEO is replaced by someone who satisfies the requirements of a position spec formatted by the board or a search firm, but who leave gaping holes in the organization because the search is conducted largely in a vacuum.

The key to uncovering the cultural and organizational nuances includes carefully crafted questionnaires and surveys, administered across a broad cross section of the organization, as well as one-on-one interviews with key stakeholders at every level of the company, including customers.

Purposefully Identify and Develop your Rising Stars

By now most directors know the attributes and skills that senior executives need. Typically, the list used for CEO searches includes intelligence and values. The firm also assesses candidates on strategic orientation, market insight, results focus, and customer impact, and their competence at collaborating with and influencing others, organizational development, leading teams, and change management. Meaningful succession planning calls for finding rising managers who either have the right levels of all those capabilities or, more likely, the potential to develop them. Four critical traits—curiosity, insight, engagement, and determination—signal potential, and with the proper coaching and support, people who demonstrate them can be groomed for high-level positions. (For more on this subject, see “Turning Potential into Success: The Missing Link in Leadership Development,” HBR, November–December 2017.)

One important development area for any CEO is emotional intelligence, which encompasses flexibility, adaptability, self-control, and relationship management. You might think that those soft skills would be more challenging to learn than hard ones such as calculus or coding. But as Richard Boyatzis of the Weatherhead School of Management has conclusively demonstrated, people can pick up these crucial leadership competencies even as adults.

Another way for boards to help potential successors get ready is to insist that they be given challenging rotations and stretch assignments, as was common at General Electric in its glory days and is practiced with great success at Unilever and McKinsey today. When you expose your highest potentials to new geographies, businesses, situations, and functions, you can become a leadership factory.

Next week we will wrap up our discussion on succession planning. Our work at Allen Austin is all about building cultures of peak performance. The advice the authors give in this piece apply to every middle and senior level position in your firm. Let’s have a conversation around your company’s succession planning. We’d love to be your thought partner.

Warmest Regards,

Rob Andrews
Allen Austin
Consultants in Retained Search & Leadership Advisory