Photographer: Andrew Harrer

How Corporate Boards Deal With a Lost Successor

Considering who might be next in line is a process that must account for the unexpected

When American Express President Ed Gilligan died suddenly on a business trip to Japan last week, the company’s board of directors faced two problems: mourning the unexpected loss of a colleague who had given 35 years of service, and finding a new successor to a longtime chief executive. Gilligan was widely considered a top contender to replace Amex CEO Kenneth Chenault after the 64-year-old leader eventually steps down.

“Organizations have to deal with the death first,” said John Joseph, an assistant professor of strategy at Duke University’s Fuqua School of Business. Board members have personal relationships with senior executives and so may be involved in memorial preparations. In a letter to Amex employees, Chenault wrote that the loss was “ deeply painful and frankly unimaginable” to his colleagues,

Grappling with plans for succession follows. The question of who will lead the company next is a process, not an event that occurs on the day the chief executive leaves. “It signals to the market the quality of the leadership bench strength and future strategic direction of an organization, and it can affect the stock price,” Joseph said.

A company typically maintains a list of candidates, from the CEO’s next-in-line successor to others slated to fill senior roles. “If they have a process in place and something like this happens, they’re fortunate not to rely on one person,” Joseph said. This phalanx of talent won’t be strangers to the directors, who often get to know the company’s most senior managers as they present at directors’ meetings and attend board dinners.

One clue that Amex is likely to have a succession plan that extends beyond the next CEO is in its board nomination and governance committee, which includes veteran CEOs and COOs, said Michael Useem, a management professor at the University of Pennsylvania’s Wharton School of Business. Among them at Amex: the former head of IBM, Samuel Palmisano, and the former head of Novartis, Daniel Vasella.

“That to me is a very good sign that they appreciate the fact that we’re all mortal and that you not only have to go one deep or even two deep on succession planning,” Useem said. At a company the size of Amex, he noted, the top 300 executive positions could all have their own succession plans.

This is analogous to what’s done in the U.S. military, where every officer is expected to have two people trained to take over his or her job at any moment. “They may not be totally ready for it or they would already have the job," Useem said. "But if it happens, there’s someone who’s selected, trained, mentored, coached, and ready to step forward.” That tracks with research he has done at large U.S. companies, where the most senior executives say they spend more than half their time selecting, training, and mentoring their direct reports.

Over the past decade, board directors have begun to take a more active role in talent development among executives—an expansion of responsibility that includes "informal coaching of possible successors,” Useem said.

At most companies, a short list of no more than five executives is under consideration to succeed the CEO within the next two to three years, said Frank Yeary, executive chairman of CamberView Partners, a corporate-governance consulting firm in San Francisco. A broader group of 10 to 20 managers is typically held in reserve to ascend over a five- to 10-year period. Even though it’s the CEO who speaks to these executives, plans their career paths at the company, and gives signals about their place in the future framework, Yeary believes board members should get regular updates on succession issues.

“From a board’s perspective, it’s important to feel that you have good transparency about the internal pool, the developmental readiness of the pool, and that you have good cooperation from the CEO about the development plan to produce an acceptable number of talented and capable internal candidates,” Yeary said.

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