business

Succession Planning Lessons from McCain/Palin

The Republican Presidential nominee's choice of a running mate offers corporate boards a case study in howor how notto pick their next CEO

The choice of Vice-President is the ultimate CEO succession planning decision. After all, the President of the United States is its chief executive officer. John McCain's choice of Sarah Palin—along with the way it was apparently made and the part pundits say it played in his losing the election—provides some great discussion points for any board on the topic of CEO succession, regardless of your politics.

Board Exposure to the Candidate

One of the frequent criticisms about McCain's choice of running mate was that he'd only met Palin briefly before making his decision. As Robert Draper's article "The Making (and Re-Making) of McCain" in the Oct 22, 2008, New York Times Magazine points out, McCain met Palin twice: He first spoke with her for 15 minutes at a National Governors Assn. meeting in February 2008, and then he met with her for an hour at his Arizona ranch the day she was named as his running mate. That's pretty limited personal exposure to a successor before making a decision.

Yet, some boards don't do much better when it comes to choosing their next CEOs. Typically, their exposure to potential internal candidates is through presentations these executives make at board meetings (arguably more exposure than McCain had to Palin). But as we all know, board presentations are carefully orchestrated events with little genuine interaction. Some robust Q&A with the board in the course of these presentations could give directors a greater sense of how the executive thinks about business issues. Without this, the board is simply watching executives parade through PowerPoint decks, providing a fairly one-dimensional view of their leadership capabilities.

Often, top candidates are invited to board dinners or other social events to allow some informal interaction between the board and the top execs. While helpful, these typically provide no greater insight about a candidate than a 15-minute conversation at a National Governors Assn. meeting.

The two vehicles that typically give boards more meaningful exposure to succession candidates are site visits and board strategy offsites. While these, too, have their limitations, boards often find them among the most useful ways of getting to know top execs:

•Allowing a small group of board members to visit with executives "on their own turf" unaccompanied by the CEO is nearly always illuminating. Among other things, board members get to see the executive in her work environment, away from the trappings of the boardroom. They can talk about the business issues she is addressing in this more casual setting and observe members of the executive's team interacting with her.

• Board strategy offsites—where executive team members are invited to play key roles in a 2-day strategy retreat with the board—typically generate more interactive discussion than board meetings because the extra time allows for both formal and informal discussion. Frequently, board members and executives form small work-teams on key strategic issues, enabling board members to work with executives on problem-solving.

Board Knowledge of the Candidate's Capabilities—and Shortcomings

Although John McCain's own exposure to Palin was rather limited before he named her as his V.P. pick, Draper's article points out that McCain's advisers were collecting considerable information about her, including watching a tape of an interview she had done with Charlie Rose, and comparing her with other potential running mates against key candidate criteria. This is the kind of candidate research and objective evaluation against criteria that boards should do in their CEO succession planning. Yet many do not.

In the course of a CEO succession plan we recently did for an NYSE-listed company, board members supplemented their own exposure to top candidates by:

• Hiring a PhD organizational psychologist to conduct structured behavioral event interviews and administer other tests to gather objective information about candidates' leadership capabilities;

• Conducting a climate study—different from a standard 360 review, which can often be skewed—to learn about the type of work environment the candidate created for his team; and

• Retaining a top business school professor to analyze a strategic case study all executives were asked to complete to give insight into their relative strategic capabilities.

This kind of rigor, however, is not standard practice and would actually be considered quite leading edge by most boards who are still largely using the "gut feel" test in making CEO succession decisions. In today's challenging business climate, however, this is the type of due diligence shareholders deserve before any board makes a CEO succession call.

There's No Chief Operating Officer Job at the White House

In Corporate America, one final step typically stands between the heir apparent and the corner office—the role of president and chief operating officer. Though not all companies transition leadership in this way, the vast majority name their top candidate to this post for a period of a year or more before she becomes CEO. This gives corporate boards a distinct advantage in succession planning over presidential nominees. If the candidate disappoints in this final testing ground as chief operating officer, the board can still pull the plug. Not so, with the Vice-President. Indeed, voters may have become more comfortable with Palin if the U.S. electoral system offered this feature.

The lesson for corporate boards is clear: Make good use of that chief operating officer role, if your company has it, to ensure the top candidate really is the right choice to become CEO. All too often the COO role is treated as nothing more than a CEO in waiting—not unlike the Vice-Presidency. Savvy boards design the chief operating officer position as a final testing ground, often assigning specific organizationwide initiatives to the COO and/or transitioning responsibilities between the CEO and COO in 6-month increments to see how the top candidate operates with increased authority and a corporatewide mandate.

The Stakes Couldn't Be Higher

For years to come it will be argued that John McCain's choice of running mate cost him the Presidency. Whether this is true or not, it underscores the significance of succession decisions. A bad choice on CEO succession in the corporate world can have different but no less devastating consequences—erosion of stock price, defections of key talent, strategic missteps. However you voted on Nov. 4th, the McCain/Palin scenario provides an excellent case study on CEO succession planning for boards to objectively discuss and learn from.

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