Scrambling to Find a Successor

Why so many companies aren't ready when the boss departs

What companies make good examples of succession planning done right? — Robert Handfield, Raleigh, N.C.

It's sad to say, but your question would be a heck of a lot easier to answer if you had asked for examples of succession planning done wrong. That list keeps getting longer. As we know, Citigroup and Merrill Lynch recently lost their CEOs, and it quickly became obvious that neither company had a successor in the wings. What was less obvious was how such a thing could happen.

Certainly examples of outstanding succession planning exist: Just look at Johnson & Johnson, Goldman Sachs, Microsoft, and Caterpillar. Indeed, research shows that well over 50% of companies promote their CEOs from within. Such companies understand a central tenet of business—that a well-crafted succession plan vastly minimizes disruption when the CEO leaves, expected or not. Imagine what it felt like inside Citi and Merrill in recent weeks, with people, top to bottom, asking themselves, "What will happen to me in this mess?" and "What will the devil-we-don't-know be like?" So long, productivity! In-house succession has the added virtue of being cheaper: An outside hire usually requires enough money to fill a Brinks truck.

But if good succession planning makes so much sense, why isn't it more common? Well, sometimes a board must go outside to shake things up. IBM hired Nabisco's Lou Gerstner in 1993, for instance, to transform its culture. More recently, Siemens hired Peter Loescher from Merck to separate itself from practices that had damaged its image. In other cases, a company can have a controlling shareholder who wants to do succession his way. Viacom's Sumner Redstone and Fidelity's Ned Johnson come to mind.

But when a push for change or a controlling shareholder aren't the case, and succession planning still doesn't happen, the fault lies with the board. Sure, boards have other big tasks, like grappling with the CEO over growth opportunities and strategy. But we'd suggest two more reasons why succession planning can fall off the agenda.

The first we've written about before—so-called shareholder activists pressuring boards into a bunker mentality, which can foster an obsession over the minutiae of financial reports. We say so-called because real shareholders don't want their boards to fixate on rounding errors rather than growth and succession. We're not advising boards to ignore financials, but no director, flying in once a month to pore over reams of data, is going to uncover schemes. That's why the board's job when it comes to financial oversight is to make sure management has the control systems and high-integrity people in place to do the detective work.

The second reason is more emotional, in that the topic can be, well, so awkward. After all, succession planning requires boards to talk candidly about what qualities are missing in the current CEO and the timing of his or her departure, and it compels the current CEO to chime in without seeming defensive. It's sort of like a married couple trying to calmly discuss who the perfect replacement spouse would be. Pretty squirm-worthy stuff.

Now, we've heard it said that boards don't have good succession plans because senior management ranks are so thin in today's "perform or die" culture. We'd spin that argument to say that if senior ranks are thin, it's because so few companies have the foresight to ask managers to take on cross-functional assignments. They let them rise to the tops of their silos—and retire. This is particularly prevalent in financial institutions, with virtually no crossover among trading and retail and investment banking because of "expertise demands" and pay differentials. One big exception is JPMorgan Chase CEO Jamie Dimon, who acted as Sandy Weill's junior partner for 16 years, accruing experience and knowledge along the way.

Alas, Dimon cannot run everything! Nor can financial company boards keep scrambling to find someone like him when their CEO walks away. Succession planning has got to be deliberate. It has to be a discipline. And if boards don't impose that on themselves, perhaps authentic shareholder activists soon will.

Before it's here, it's on the Bloomberg Terminal.