Being Prepared for Whatever, Whenever

Boardroom Guide

Being Prepared for Whatever, Whenever

By Robin Rauzi

44

NACD Directorship September/October 2012

IMAGES.COM

When it comes to CEO succession, it’s all about options. Identifying them. Keeping them open.

Creating more. Choosing the right one when the time comes.

“If a company has too many leaders ready to step into the CEO’s job, that’s a good problem for a board to have. But that doesn’t happen by accident,” says Jane Stevenson, vice chairman of Korn/

Ferry International’s Global Board and CEO Services Practice, and co-leader of the firm’s CEO Succession Practice.

Keeping an eye on potential CEOs might seem a simple task, but it becomes exponentially complex once boards factor in the big unknown: they don’t know when they’ll need the next CEO. Will it be in the midst of a global financial crisis? At the start of an expansion into new markets? Next month or 10 years from now? To be ready, and stay ready,

CEO Succession

Stevenson says, the best boards track three “generations” of CEO successors: the immediate replacement, the ready-in-a-few-years candidates and the 10-year-out talents. That prepares them for any of these situations.

Our CEO Won the Mega Millions Lottery

The unexpected happens. In 2010, Jonathan J. Judge tenured his resignation as CEO for Paychex and then left on vacation. Just last April, Michaels Stores CEO John Menzer suffered a stroke shortly after the company announced an initial public offering (now on hold). New examples of unplanned and unexpected executive departures occur regularly.

To Stevenson’s mind, a succession plan is not the same as an emergency-response plan. The latter might provide for the chairman or COO to step in as interim CEO while the board figures out what to do. By contrast, a board with a blue-chip succession plan has a strong leadership bench in place and is ready to act. These directors have met and assessed the capabilities of their internal potential CEOs and have confidence in them because they have been watching their development for years. They also have monitored the movements of key executives from outside firms, and they know how their internal talent compares to the best in class. They are already in agreement on the skills and experience a leader will need to execute the company’s business strategy during the coming years. They don’t have to start looking; they can start to make decisions.

New regulatory requirements emerging from the Securities and Exchange Commission and the Dodd-Frank Act have raised the stakes for boards in such a fast-breaking situation. “Boards are now more clearly accountable for having a succession plan in place,” Stevenson says. “But exactly what that plan should include and how deep it should go—that’s an open question for many boards.”

A board with a substantive, ongoing succession plan is in the best position during an unexpected transition, says Peter Thies, co-leader

of Korn/Ferry’s CEO Succession Practice and a senior partner of the company’s Leadership and Talent Consulting division. “By being prepared for an event rather than just reacting to it, the board can be confident in its decision-making process—even though it will keep discussions of specific candidates private,” he says. “The advanced preparation sits well with shareholders and the media, especially during volatile moments.”

“ As a board

The Clock Is Ticking

In this scenario, the board has some time, but within a deadline—for example, when a long-tenured CEO announces he or she wants to retire in three years. But the clock can also start ticking if a company contemplates spinning off a business, thus creating a whole new CEO position. Think of Kraft’s move to divide itself into a global snack foods business and grocery business, or News Corp. spinning off its publishing arm.

In this case, a company might have time to develop or round out strong candidates who need more exposure to a specific aspect of the business, whether it’s Wall Street analysts or an overseas market. Part and parcel of a complete succession plan is a talent roster that details the current bench so that any final leadership development can be accelerated.

At the same time, a succession plan should include benchmarking outside talent as well, so that the board understands all their options and the trade-offs they might be making. The smooth promotion of a long-standing executive to CEO might send a signal of strength and stability to Wall Street, for instance, but is that worth overlooking a standout top executive from a competing company?

MasterCard, facing the retirement of its CEO in 2010, managed to both bring in an outside talent and simultaneously round out his exposure to the inner workings of the company. The company recruited Ajay Banga from Citigroup in 2009. Banga served as president and chief operating officer for eight months at MasterCard before stepping into the CEO’s job (see related story, page 46).

member, the best way to increase the odds of having wellprepared leaders to choose from… is by making sure that multiple generations of future CEO talent is being developed inside your company today.”

—Jane Stevenson

September/October 2012 www.directorship.com

45

Boardroom Guide

What—We Can’t Keep Her Forever?

Taking the long view on CEO succession is the ideal, but it is also when managing options becomes the most complex. Boards want to be developing leadership capabilities for projected business strategies—Will most of our customers now be overseas?—and un-

foreseen scenarios like a global recession.

At the same time, as companies merge—indeed, as whole industries converge—boards can’t accurately predict which business will dominate in the future. Consider Amazon.com, which in about 15 years shifted from being an online bookstore into a mass-scale

online retailer, a cloud-storage service, a financial transaction provider, and a publisher and media company. Should the CEO who replaces Jeff Bezos in the future come from technology, media or even payments? Given time, though, multiple executives could be given indepth exposure to all those areas.

The CEO as the Top Talent Officer The board has primary accountability for choosing the next CEO, says MasterCard President and CEO Ajay Banga, but it’s up to the CEO to give them good internal options. “Developing a good pipeline—not just potential CEO candidates but also for the second and third levels of leadership—is 50 percent of what a CEO should be doing,” Banga said in a recent interview with Korn/Ferry’s Jane Stevenson.

Ajay Banga When it comes to succession, Banga makes an important distinction between the development of a talent pipeline of future leaders and the actual transition to a new CEO. The non-executive chairman or independent lead director should head the latter effort, including any ex-

46

NACD Directorship September/October 2012

ternal search. But the identification and development of future leaders should be driven by the chief executive and overseen by a board committee.

Likewise, Banga sees different skills at work. The individual managing the event of a CEO change needs to be inclusive and draw in a wide group of board members. The leader needs some longevity to understand the company (the thought of a new chairman looking for a new CEO is “scary,” he says), have a grasp of the challenges it is facing, and appreciate the capabilities that the new CEO must possess to meet those challenges. The leader also needs to have had experience managing an organization to understand the politics and logistics of settling into a new company.

By contrast, those committee members with ongoing oversight of the talent pipeline are in it for the long haul. Though they don’t need to have had CEO experience themselves, they do need senior management experience and longevity—and they must be very processdriven. How do you build a pipeline two or three levels down from the CEO? How do you identify and develop missing skills in those people? How do you pick jobs that they should move into?

“The results may take years to play out, and there is a lot of ambiguity involved,”

Banga said. “But some people are only interested in the end conclusion—they want to see the last page first—and they shouldn’t be involved.”

Banga takes a very hands-on approach to developing his own executive team.

He uses each board meeting to introduce to the directors some of the 80 or so rising talents in the company. And each year he leads a robust “people conversation” with the board, explaining how he’s developing layers of leaders who in future years will move up to the 35-person operating committee, and later to the eight-person executive committee.

But when it comes time to make a change at the top of MasterCard, he’ll be ready to hand the final decision over to the board.

A sitting CEO “should not have an equal say in the succession,” Banga added. “Once the board and its committee are comfortable and they’ve got it down to the one person they really like, or the two they really like, they can ask me for my opinion. But finally they should be making every call. My opinion, at best, should be interesting to have.”

This article, based on an interview by Korn/Ferry’s Jane Stevenson, is excerpted from the The Korn/Ferry Market Cap 100 report, available as a PDF at www.kornferryinstitute.com.

CEO Succession

“You already see this clearly in global financial services firms,” says Thies. “Of course they’re looking for leaders who not only understand investment banking, commercial banking and, say, credit cards. But global financial services firms also need leaders with depth in technology, regulation and enterprise risk management.”

Outside talent management consultants can guide a board through the process of setting talent benchmarks for ­potential CEO successors and ensure that they meet or exceed those of peer companies. Then they will assess the depth and capabilities of the current executive team, and distill that into objective data points that reflect various attributes: communication style, organizational skills, inspirational leadership, delegating effectively, achieving results and more.

They might also look at learning agility, a measure of how well a person adapts to new and challenging situations—a particularly valued trait in dynamic companies. Armed with that knowledge, the board and CEO can take conscious steps to strengthen any weak spots. Finally, talent consultants or executive recruiters can monitor outside talent for recruitment in the future.

“Putting continual effort into understanding the relative strength of your internal leadership pipeline helps to ensure your team has best-inclass capabilities,” Stevenson says. “As a board

member, the best way to increase the odds of having well-prepared leaders to choose from three, five or eight years from now is by making sure that multiple generations of future CEO talent are being developed inside your company today.”

When to Start? Yesterday.

Inertia is the enemy of succession planning.

“It’s never too early to start considering succession plans, even at a start-up company,” Thies says.

“While it is harder for founder-run or high-growth tech company boards to go through this process, it’s still necessary. It’s more difficult because entrepreneurs and founders tend to avoid discussions of ‘life after me,’ and therefore do not focus enough on grooming their replacements.”

Once a board gets rolling, it usually quickly sees the value in the process, Thies says. A board can achieve a quick start by openly discussing the requirements of the next two or three generations of CEOs. In the beginning stages, conversations should steer clear of evaluating specific candidates, but rather focus on the big picture: where the company is headed and consensus on the type of talent needed to get it there. These discussions result in a strategy-driven CEO profile that the board can use to assess internal and external candidates.

“By being prepared for an event rather than just reacting to it, the board can be confident in its decisionmaking process— even though it will keep discussions of specific candidates private.”

—Peter Thies

Continued on page 49

Succession Policy Analysis

Source: The Korn/Ferry Market Cap 100

September/October 2012 www.directorship.com

47

Boardroom Guide

ROLES OF STAKEHOLDERS Current CEO

Board

Chief Human Resources Officer

Succession Candidates

Investors/ Regulators

INVOLUNTARY, IMMINENT DEPARTURE OF CEO ■■ Drive process (led by chairman/

■■ Make interest in CEO role

■■ If viewed as a proxy for

■■ Understand what

lead independent director

known with board leaders

CEO, recuse

■■ Establish committee to screen

■■ Commit to accelerated

■■ If independent of CEO,

candidates and participate as needed in candidate evaluation

process additional to day job

■■ Appoint working committee to

■■ Positively engage in

drive process

evaluation process

manage the process with board, provide view on CEO profile and internal candidates

the board’s plan for action is around replacing the CEO and the ongoing plan going forward

■■ Prepare for considerable short-

■■ Place company ahead of

term time commitment ■■ Consider interim options

No role

including nonexecutive director stepping into role

■■ Take development

feedback from board to position for “next time”

■■ Agree on PR strategy

■■ Engage with board at

■■ Actively engage in defining the

every opportunity

CEO profile

Board

self ; understand may not be “ready now”

Current CEO

■■ Provide mentoring

and coaching to internal candidates ■■ Consider flight risk and

likely multiple succession events ■■ Learn from experience

and design strategic succession process for board

Succession Candidates

■■ Meet with

chairman/ lead independent director to discuss process; monitor progress and outcome NB: If active investor is board member, this would be a different scenario

Chief Human Resources Officer

Investors/ Regulators

VOLUNTARY BUT UNEXPECTED NEAR-TERM (1-3 YEAR) DEPARTURE OF CEO ■■ Drive process (led

■■ Determine appropriate role to

■■ Make interest in

■■ If viewed as a proxy

■■ Understand

by chairman/lead independent director)

take with board

CEO role known with board leaders

for CEO, recuse

■■ Establish committee

developing CEO profile

■■ Commit to

■■ Lead/ support succession

accelerated process additional to day job

CEO, manage the process with board, provide view on CEO profile and internal candidates

what the board’s plan for action is around replacing the CEO and the ongoing plan going forward

to screen candidates and participate as needed in candidate evaluation ■■ Appoint working

■■ - If appropriate, participate in

process ■■ Identify and assess immediate

internal successor candidates to committee to drive process be considered and set up the ■■ Prepare for considerable needed accelerated leadership short-term time development experiences commitment needed

■■ Positively engage

in evaluation process ■■ Place company

ahead of self ; understand may not be “ready now”

■■ Consider interim options

■■ Communicate closely with

■■ Take development

including non-executive director stepping into role

internal candidates in light of board risk analysis

■■ Agree on PR strategy

■■ Manage timing of departure

feedback from board to position for “next time”

■■ Actively engage in

to allow completion of succession ■■ Engage with board process at every opportunity

defining the CEO profile

48

NACD Directorship September/October 2012

■■ If independent of

■■ Meet with

chairman/ lead and coaching to internal independent director to candidates discuss process; ■■ Consider flight risk monitor progress and likely multiple and outcome succession events ■■ Provide mentoring

■■ Learn from

experience and design strategic succession process for board

NB: If active investor is board member, this would be a different scenario

CEO Succession

Continued from page 47

From there, the focus inside the company will be on developing current executives into leaders who match the profile.

Meanwhile, the board can size up the external market to fill any talent gaps and scan for potential future candidates.

Once a succession plan is fully developed, directors, or the appropriate board subcommittee, can review progress on executive development at board meet-

ings. At least biannually they should have an in-depth discussion of candidate readiness, Thies says. Directors should also meet and interact with potential successors to see them in action above and beyond formal board meeting presentations.

Choosing a company’s chief executive is a board’s most important responsibility—and yet it’s a duty that can’t often be put on a convenient or predict-

able timetable. Board members can’t know if they’ll need a CEO replacement tomorrow, or three generations of leaders from now. But a board with a robust succession plan will know this: It has options.

Robin Rauzi is the editor at the Korn/Ferry Institute. For a complete copy of The Korn/Ferry Market Cap 100 report, please visit www.kornferryinstitute.com.

ROLES OF STAKEHOLDERS Board

Current CEO

Succession Candidates

Chief Human Resources Officer

Investors/ Regulators

NO IMMINENT CHANGES ANTICIPATED WITH CEO ]?” BOARD’S FULL SUPPORT ■■ Own and have a point

of view on the short-, midand long-term business strategy and implications for leadership ■■ Actively engage in

■■ Lead strategy development ■■ Be clear and transparent

about career (and personal) plan ■■ Partner with board to create

CEO profile

■■ Proactively

■■ Treat CEO succession

■■ Regard CEO

take accountability for personal development

planning as an opportunity to own part of the board’s strategic talent agenda

succession as a critical area of risk and governance best practice

■■ Positively

process

defining the CEO profile, and periodically reassess it in light of changing strategy

■■ Develop pipeline to

■■ Joint ownership of

■■ Implement annual board

engage in assessment and review process

succession process with CEO

reviews

■■ Participate in

■■ Create environment and

■■ Board owns decision;

opportunities for management and board to interact

board events, and seek opportunities to work with board

committee makes process and screening decisions ■■ Commit to building

firsthand, broad-based knowledge of internal pipeline

give board multiple and multigenerational options

■■ Genuinely accept that

successor may require different attributes than self understand external candidate landscape

leadership development programs

■■ Ensure clear communication

■■ Assure

■■ Regularly benchmark your

■■ Coach top candidates and

■■ Mandate/be involved in

talent against top talent externally ■■ Require annual reviews

to internal candidates provide them with “stretch” opportunities

current and accurate performance review

■■ Include CEO

in succession profile development and board review

succession planning as a key performance indicator for sustainability in investment decision making

■■ Mentor and guide internal

■■ Communicate

■■ Support and coach CEO in

managing the process ■■ Partner with CEO

candidates

■■ Prepare annual reviews and ■■ Develop own progress updates

capabilities in preparation for enterprisewide role

■■ Partner with board to

■■ Embed as a critical HR

■■ Implement benchmarks

and track top candidate performance and development, both internally and externally

to board insistence that succession planning be done properly

■■ Provide own assessment of

internal candidates to board ■■ Provide cultural-fit

perspective on external candidates (if any)

September/October 2012 www.directorship.com

49

Boardroom Guide

The Unlikely Successor How Newell Rubbermaid found its next CEO sitting right in the boardroom.

By Barry Adler The decision by Newell Rubbermaid Inc. to pick Michael B. Polk—one of the company’s directors—last year as its new CEO is rich in ironies.

Michael B. Polk

If Polk, then a No. 2 at consumer products giant Unilever, had expressed interest in joining the board with the CEO’s chair in mind, Newell Rubbermaid would have been unlikely to nominate him to the board in the first place. And if the company had tried to recruit him as a director with the CEO succession in mind, Polk would have said no. He was excited by the challenges where he was and didn’t know enough about Newell Rubbermaid to see why such a move would make sense. “I was not looking for anything other than a board role, and I told the search committee that,” Polk recalled in a recent interview with Stephen P. Mader, Korn/Ferry’s vice chairman and managing director of CEO and Board Services.

50

But 18 months later, with CEO succession work fully underway for a transition the following year, Polk and Newell Rubbermaid began to fall for each other—even though neither party was acknowledging it. Newell’s directors saw the breadth of his global experience and were impressed by his impact as a strategist and operational manager. They became convinced Polk had what it would take to run Newell, a global marketer of diversified consumer and commercial products.

With $6 billion a year in revenues, the company was full of complex challenges, selling numerous brands and products in markets through multiple channels.

At the same time, Polk’s seat on the board afforded him a firsthand view of the steady progress the company had been making and the opportunities that existed in its future. He also felt a strong connection to not only his fellow directors but also Newell’s senior management team.

There were two major obstacles, however. The first: both Polk and the board valued his directorship, and neither party wanted to sacrifice that relationship in order to put him into the potential CEO pool. Second, there were a number of personal and professional hurdles to clear.

Polk wasn’t able to relocate to Newell’s headquarters in Atlanta, Georgia; and he had an attractive long-term financial package that he would forfeit upon his departure from Unilever.

Several months into searching for its next CEO—reviewing both internal contenders and a slate of highly qualified external candidates—it became increasingly

NACD Directorship September/October 2012

clear to the search committee that the ideal candidate sat right beside them. Polk had caught their eye, and they decided to seize the opportunity and deal with the dangers.

Newell’s search had begun normally enough in 2010, when President and CEO Mark D. Ketchum told the board that he wanted to retire sometime in 2012.

The company decided to use its executive committee as the search committee.

In addition to Nonexecutive Chairman ­Michael Cowhig, the small group included the chairs of the audit, nominating/governance and compensation committees—and notably not Polk. Although the search was being delegated to this smaller group, the final selection would be a full board decision, with the committee providing periodic updates during the course of the search. With the help of an outside search firm, Newell’s internal candidates were interviewed and external candidates were identified and also interviewed. Near the finish line of that extensive process, however, the search committee began to suspect that Polk might make a superior candidate.

As it happened, in another unlikely twist, Ketchum had himself been plucked from the board, albeit in the middle of an urgency. He was named the interim CEO in 2005 when Joseph Galli resigned. But even with that transition as precedent, the search committee realized that it was on new ground here. It was one thing to temporarily elevate a director as interim and then determine to make an interim appointment permanent; it was an entirely different matter to pick someone from the

CEO Succession

board during an orderly succession process.

So when Polk came into focus, Cowhig and the other committee members came up with novel ways to handle the situation.

The key to managing Polk’s candidacy without disrupting his ongoing directorship was to keep him outside of the rest of the succession process. By the time he was engaged, Polk was not competing with alternative candidates, nor did the committee feel that Newell Rubbermaid was competing with Polk’s role at Unilever. They had rightly calculated that their discussion would be about whether a responsible set of terms could be established that set Polk up to succeed. If not, both parties could step away on that premise alone, and Polk could continue as an effective director.

Because of the decision to use a small search committee, Polk also hadn’t been involved in any of the succession interviews.

That enabled the committee to keep him insulated and separate from the final CEO candidates. They also kept preliminary negotiations with him to themselves; if the contours of a viable deal could be reached, only then would the committee bring Polk forward to the board as its first choice.

After 18 months as a director, Polk had a grasp of Newell’s future possibilities and a sense of how well he could shape them. For their part, the members of the search committee had come to know and value Polk to an extent that would not have been possible had he simply popped up as a strong outside candidate. By virtue of their time with him, they were confident enough in his abilities to take not just the next step, but go the extra mile. They would see whether they could meet the requirements of his candidacy for CEO that they otherwise might have seen as far too risky for a smooth and cost-effective transition.

When the committee was ready, it briefed the organizational development and compensation committee, while

Cowhig met individually with the remaining board members, covering the pre-negotiated conditions to gauge if the board would approve them. When that was clear, the search committee pursued Polk as a finalist, but with the freedom to turn to any of the other candidates if it or Polk reconsidered.

He didn’t. Polk became president and CEO on July 18, 2011.

The board also took full advantage of Ketchum’s availability to overlap with Polk’s initiation for continuity’s sake. He remained a director for three additional board meetings.

The successful outcome of Newell’s novel succession underscores the value of trusting in the search. For all the best-laid plans, in the end the search committee and the board was open to finding the right person no matter where that person happened to be: inside, outside—or even in the next chair. D Barry Adler is a freelance writer. This article is based on an interview by Korn/Ferry’s Stephen P. Mader and excerpted from the report, The Korn/Ferry Market Cap 100, available at www.kornferryinstitute.com.

Seven Lessons From One Highly Unusual Search From the Newell Rubbermaid succession process, Korn/Ferry’s Stephen P. Mader distilled these lessons: 1. The committee. Form a small search committee of directors whose leadership and judgment are highly trusted by other board members. The committee should have the support of the full board to act as its surrogate. Members should also be able to devote significant extra time to the task.

2. The preliminaries. Start the search with a facilitated strategy review that begins with individual interviews with each director and the outgoing CEO, followed by a full group discussion. In the end, the executive committee needs to reach alignment (without the participation of the outgoing CEO).

3. The CEO’s role. Ensure that the incumbent CEO remains a vital consultant to the search process and serves as a key advisor to the search committee. But the CEO should not be on the search committee or lead the process.

4. The director-candidate. Never appoint a director with the anticipation that he or she will be the next CEO. In the un-

likely event that a director emerges as a candidate, the committee must choose a deliberate course of action: ■■ Bring the candidate into the process with the understanding that his or her director status will terminate regardless of the outcome; or ■■ Keep the candidate out of the main search process and proceed along a parallel path designed to keep the candidacy “reversible” and the directorship viable, should either side not want to go further.

5. The conversation. Maintain clear communication, particularly one-on-one talks between the search committee chair and the full board. Address issues as they surface.

6. The overlap. Set the minimal needed overlap between the new and outgoing CEOs. It’s always easier to lengthen the overlap, if needed, than to shorten it. Two board meetings are usually sufficient.

7. The next time. Understand that developing senior managers as viable internal candidates for future successions requires a minimum of three years of focused effort with a high level of board participation.

September/October 2012 www.directorship.com

51