Boardroom guide succession planning

The Boardroom Guide

Go Deeper CEO succession planning is not enough.

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percent of public company boards report having a formal succession plan, 55 percent say they have only an informal succession plan, and 6 percent say they do not have a process in place at all. A lack of planning for CEO successors, and for other key management positions—and the resulting chaos—can have a negative impact on the bottom line.

If CEO succession is the tip of the iceberg, broader leadership development is what lies beneath the surface and feeds the process to develop the leaders of the future. Done rigorously and systematically, companies can develop generations of

JONATHAN MCHUGH

By Jane Edison Stevenson

Thinking about CEO succession? Go deeper. Conventional wisdom dictates that CEOs should start thinking about their successors the first day they step into the corner office. But enlightened CEOs now have a greatly expanded view of succession planning, because while the CEO may be the most visible executive day to day, it takes far more than one person to run a company, and one person—no matter how talented—does not a pipeline make.

But succession planning doesn’t top the agendas of all boards. According to the 2012–2013 NACD Public Company Governance Survey, while 39

Succession Planning

leaders—not just to fill an immediate need—and rely far less on bringing in outsiders to fill leadership gaps.

Korn/Ferry spoke with two CEOs—Sherilyn McCoy of Avon and Denise Ramos of ITT—who recently took the helm of their respective companies. They represent two very different companies with very different histories and challenges, but both have worked closely with their boards from day one on succession—the broad, deep process that creates effective teams and generations of leaders.

Board Chairs Douglas Conant at Avon and Frank MacInnis at ITT, as well as Christina Gold, ITT compensation and leadership development committee chair, also offered their perspectives.

What follows is some of what we learned about the experiences of these companies, where succession planning is a comprehensive process that focuses on strengthening the succession bench as much as it does on ensuring a CEO successor. The goal, Conant says, is to make attracting, developing, leveraging, and retaining talent a core competency of the company. Anything less is short-changing the organization and potentially jeopardizing its future.

A Fast Start

Both McCoy and Ramos began their tenure with boards that understand the crucial importance of succession planning as a fundamental board responsibility. Moreover, both board chairs have a deep appreciation for properly planning for all key positions, from both the CEO’s and board’s perspective. The board chairs are experienced CEOs who understand that it is the CEO’s job to build the right bench and the board’s job to hold the CEO accountable for doing precisely that.

Determining a range of future candidates, who might be appropriate choices depending on the prevailing company and external conditions at the time of the hand-off, seems complicated enough.

But how does a board, without getting involved on an operational level, work with a CEO to access the knowledge it needs on a regular basis about the broader management team or pipeline that flows to the top? That requires establishing a relationship that is based on the understanding that both the

CEO and the board have complementary roles to play, and neither is exclusive owner of the process.

“If you are to work effectively to develop the talent you need, the CEO has to acknowledge that the board has a responsibility to understand the organizational health of the company,” says Ramos.

“And a critical part of that understanding is getting continual input on the talent bench and succession plans.” There is no room for territoriality; it requires careful orchestration, commitment, and a lot of teamwork.

Ramos explains that since she started as CEO, she has been collaborating with the board on a succession process for “generation one” and “generation two” executives. It has been by the book: a quarterly review of the talent pipeline to ensure talent is linked with the strategy, as well as key criteria for CEO succession. “We regularly assess the strengths of high-potentials using proven assessment tools, then look at development plans and how they are proceeding,” says Ramos.

Succession planning has been an ­unusual challenge for ITT, essentially a brand-new company.

On Oct. 31, 2011, the company, which trades on the NYSE as an industrial products company that supplies solutions in the energy, transportation, and industrial markets, executed tax-free spinoffs of its water-related businesses and its defense business to shareholders.

“We created three new CEOs, in addition to all the other top and support functions,” explains Gold. “For the board, it became imperative to address the company’s needs relative to manpower. As we developed a strategy, our focus was on the management team and people stepping up to new jobs.”

Starting at the CEO level and going down through leadership generations one and two, the CEO has been ensuring, with the board, that the company builds and maintains a robust pipeline of succession candidates.

Avon may be one of the few companies built on a leadership principle. It proudly acknowledges its founding in 1896 by David H. McConnell, offering women a rarity in 19th-century America: a chance at financial independence. From its inception, “Avon offered women the opportunity to be CEOs of their

The goal of succession planning is to make attracting, developing, leveraging, and retaining talent a core competency of the company.

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The Boardroom Guide

How Would You Classify Your Company’s CEO Succession Plans?

Formal (plans set forth in corporate documents)

39% Informal (general discussion but no formal plans)

55% No succession plans

6% Source: 2012–2013 NACD Public Company Governance Survey

own businesses and control their economic destinies,” the company’s homepage proclaims.

Leadership development is now back as one of the company’s highest priorities. Named CEO of Avon in April 2012, Sherilyn McCoy immediately immersed herself in succession and leadership development as part of her mission to get the company back on solid footing. She was aware of the importance of getting the leadership piece right and has a deep understanding of what she needs to do based on her long and successful career at Johnson & Johnson.

“Regardless of where I have served in a leadership capacity, I start from the perspective of driving

Developing Leaders for the Future

To plan properly for leadership, companies have to keep an eye toward the future. The CEO and board should develop a common understanding of strategic business priorities and how they translate into the specific experiences and competencies that will be required in a CEO, if a successor were needed soon, as well as three to five years ahead.

“If you are to work effectively to develop the talent you need, the CEO has to acknowledge that the board has a responsibility to understand the organizational health of the company.” ­­—Denise Ramos results and performance, and that begins with the people: having the right people in the right jobs delivering against clear goals and objectives,” says McCoy. “As a new CEO, I was conscious of remaining true to Avon, honoring and respecting the legacy and heritage, but at the same time needing to quickly assess the talent objectives and people required to turn the business around.”

The succession process is undertaken as a team, with McCoy closely collaborating with the board, and particularly with Conant. “It’s certainly a new day for us with Doug just becoming chair several months ago. We’ve been working as great partners as we define the future leadership needs and future leaders of Avon,” McCoy says.

Though the role of the CEO is important in ensuring the development of key competencies, McCoy continues, it’s critical to look well beyond the CEO at the broader management picture “to make sure people are delivering against the ‘what’ and the ‘how,’ and given the right experiential opportunities. It all has to be thoroughly integrated both from the CEO perspective, how we look at

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leaders of the future, and criteria to develop and retain them.” She is currently defining the specific development approach with the help of Conant and Mel Lagomasino, chair of the management development and compensation committee.

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“Alignment with the board on what the CEO profile looks like, and how that may change, has been critically important for us,” says McCoy. “The process won’t work if you don’t know what you’re developing toward.” With the development process, goals, and profiles as a backdrop, the board has ample, ongoing opportunities to assess CEO candidates, as well as those for other key positions, short term and longer term.

It’s a rigorous process, but one that is by its very nature somewhat open-ended. Bets can be placed and decisions can be made on the strategic direction of the company, and the team that will be required to lead it, but it’s far from a perfect science.

Outside economic forces, industrial trends, and a host of other factors can intercede and make succession planning a moving target.

In addition, leaders are not born overnight.

“People have to be given time to develop as leaders.

Continual interaction with the board is important, but the board should not jump too early,” says McCoy. “I understand the desire of the board to have things all buttoned up when it comes to a CEO

Succession Planning

successor, but I just came in as an outsider and I am getting to know all our talent. It’s important to identify your talent pool, get critical alignment with the board on what the CEO profile looks like, and ensure appropriate development.” She adds, “We have to make sure it’s a thoughtful process and give people time to learn and develop. We don’t want to limit our leadership options for the future.”

At the time of ITT’s spinoff, there was a focus on the leadership needed to make the new company a success presently, as well as further out, and the two scenarios presented different challenges. What were the required competencies for a CEO of a new company versus one that was more established

who is head of HR, who views the development process through the lens of what the strategy will require. He’s well respected, the organization trusts him, and he works in tandem with Denise.” The head of HR has not only those in that function reporting to him but, importantly, is able to link all other key functions to HR and understands how to build competitive advantage.

Ramos says the organization has been very honest with people in letting them know about these changes in managing the leadership and development process. “People like the idea that they can grow and develop with this new process—they’re enthusiastic about what we’re doing in HR,” she

“At the old ITT, the science of HR was not our strength, but Denise [Ramos] has really repositioned human resources.” ­­—Christina Gold and stable?

“We looked at leadership from that point of view,” says Ramos, “recognizing that requirements would change over time. We made sure the board had access to the current leaders and to the bench to help them understand what successors might look like and how they were being prepared for their roles.”

A talent management officer will help ensure that leadership development remains a priority and a core competency of the company. The career framework starts with a list of required competencies—for both leadership and general management—for each level of the company. There is a defined career path for individuals at each level, with tailored development plans. Mobility across the enterprise—not just the business unit—is an important consideration for ITT to develop the broad-based leadership it will need.

Gold readily admits, “At the old ITT, the science of HR was not our strength, but Denise has really repositioned human resources. We have a former executive VP of strategy and business development

says. One important element of the new focus on development is role modeling at the top. “My direct reports all did very robust assessment and development plans. They were excited that we’re investing in them,” she says. “They initiated the same process with their direct reports, and it has cascaded throughout the company.”

Regardless of Formality, What Does Your CEO Succession Plan Include?

Development of internal candidates

80% Plans to replace the CEO in an emergency

77% Long-term succession planning (e.g., 3–5 years)

62% Identification of interim CEO

55% Use of executive search firm

31% None of the above

4% Other

Maintaining Momentum

For a company that has a culture built around deep succession planning and developing leaders, succession is not just an occasional conversation.

There is rigor in ensuring it is regularly on the board’s agenda. Most companies that have institutionalized an ongoing and reliable succession process recognize that, while it is a primary governance duty, it is the CEO’s job to drive and manage the day-to-day process.

At Avon, the CEO and board recognize the need for directors to get to know all high-potential executives on track for key leadership positions. The board needs to understand how talent is being developed for all key roles. While the development work is un-

1% Source: 2012–2013 NACD Public Company Governance Survey

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The Boardroom Guide

dertaken by the management team, the board maintains a window into the process on a regular basis.

“At the end of the day, preparing for

succession is really about preparing people to take on greater leadership roles and to contribute to the company in many ways,” says McCoy. “A steady

stream of leaders is required throughout the company, for many roles in addition to CEO. Sure, one of these people will likely become CEO, but we need to de-

In His Own Words Douglas R. Conant, Non-Executive Chairman, Avon the board needs to champion the development of talent. Leaders change, markets change, and it’s hard to find and maintain an enduring proposition without an enduring stream of talent.”

Succession Philosophy “Fortune 500 companies, all companies, go through periods of dysfunction—they’re living things. Typically, when you encounter a period of dysfunction, you have to get back to the basics and get more disciplined.

“Life has become more complicated— it’s a sea change. Organizations are flatter today, decisions are made on demand.

Things are happening so fast that there’s no time for information to travel up the hierarchy to the CEO and back down two weeks later. You have to depend on the talent on the ground for decision making.

“There has to be ongoing dialogue across the enterprise about the strategy and what the company is trying to accomplish.

“To succeed in an enduring way, you must develop well-rounded leaders who can work in a frenetic environment. If you’re not looking forward, watch out.

Even the mighty will fall.

“While the CEO manages succession,

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Process “There’s a clear distinction between operating and oversight. Management has to own the talent development process.

That’s a 24/7 role, 365 days a year.

“With maybe five board meetings and six committee meetings a year, there is no way the board can deal with a massive subject like talent development across the enterprise beyond setting the tone at the top and making sure it is a top priority.

“Boards need to have good discipline around making management know it’s accountable to the full board for a rich talent development discussion at least once a year, with the compensation committee reviewing the subject on a more regular basis. There absolutely must be full visibility into succession planning for all key roles in the company.

“Boards need to get a good feel for the depth of talent for all key roles, from ready now to three to five years out. Visibility of candidates throughout the year must also be part of the talent development plan.”

Getting to Know Candidates “Boards need access to second- and thirdgeneration talent. The board has a terrific opportunity to help with the development of talent, encouraging not only those who are ready now but further out.

“Boards are increasingly enlightened today about the importance of talent and want to get a feel for people beyond paperwork and presentations. We want to get to know candidates in an informal way over lunch and in the thick of things at board meetings.

“All board members have been around the block. They know it’s all about character, competence, and chemistry. You can get a feel for that in informal conversations.

“You need to look for opportunities to make it personal and connect people to the enterprise. Boards should be more active in helping create a culture of inclusion and connection while supporting the cultivation of talent.”

Final Say “My job is to be a coach and sounding board for Sheri [McCoy] and, with other board members, to make sure we get the right people on the bus, to support management’s talent development efforts, and to make sure we have disciplined people, leveraging disciplined thinking, and taking disciplined action.

“The comp committee is mission critical.

It should be involved in helping to bring to life the employee proposition for high-­ potentials, making sure they are properly identified, challenged, and rewarded.

“Insecure CEOs won’t be CEOs for long. The stakeholders will sniff them out.

Boards feel more culpable than ever before, so, from a board perspective, there is much greater engagement in talent management.”

Succession Planning

velop talent broadly.” With the pace of change in business accelerating, she says, there is an even greater need to develop the bench strength equipped to handle

change and to drive future growth.

One way to develop the breadth of leadership required to lead the Avon of the future is to make sure high-poten-

tial executives are regularly exposed to new experiences and challenges. “I’m a great believer in putting people outside of their comfort zones,” says McCoy,

In His Own Words Frank T. MacInnis, Non-Executive Chairman, ITT Succession Philosophy “It’s kind of axiomatic: in the same way that deals don’t happen when you want them to, the actual timing of succession is often difficult to plan.

“The maintenance of a bench is essential to the smooth operation of a company into the future—as important as designating a successor to the CEO. “It’s a perennial issue because the CEO has so many current, pressing obligations.

It’s difficult, especially for a young, active manager in the CEO chair, to maintain a focus on succession.

“The most important role of the board, long term, is to make sure management positions at all relevant levels are known quantities, and, as important, if there is an absence of succession candidates in part of the company, what is being done to remedy that.”

Process “Collaboration between the board and the CEO, along with the budgeting process and the strategic planning process, must include personnel moves, terminations, and what is needed to fulfill the strategic plan from the personnel side.

“The head of HR is a crucial partner in providing detailed information on highpotential executives, particularly those in the three- to five-year time frame that most succession charts aim to show. Collaboration among the CEO, HR, and appropriate committees helps identify the competencies the company will need to complement the strategic plan.

“Oversight of succession management must be renewed at least once a year— at a fast-moving company with changing strategic goals, maybe even more.

“Some companies spend an hour at each board meeting discussing succession planning, and that’s not too much at a large company with a lot of moving parts.”

Getting to Know Candidates “It’s a very tricky management challenge to allow high-potentials to know—without letting them assume too much—that they are considered as such, to have the opportunities to show their talents, and to assess their capabilities for future management purposes.

“One practice I initiated as a CEO, and have brought to ITT and other boards, is something we affectionately call ‘breakfast with the victim.’ It’s an effort to ensure, to the greatest extent possible, that the board can put a name with a face when talking about succession management and specific succession issues. At every regular board meeting, we have breakfast with one individual, agreed on in advance between the CEO and the chair, for a freewheeling back and forth with the board.

“Individual sessions with high-potentials make the person aware that the board is interested in him or her for future management opportunities in the company.

At the same time, it gives the board the chance to get to know people.

“When the board is faced with the need for a replacement in a critical management position, we know the individual, his or her

aspirations, and familiarity with the challenges of the company. That’s invaluable information for the board.”

Final Say “Boards can be too involved in succession.

The real danger is when boards become infatuated with individuals, and during the honeymoon period, they can do no wrong.

“The board has so many obligations and duties, it has to rely on the HR department and the CEO’s individual assessments of direct reports to provide the needed input into succession.

“Many boards look at project execution primarily in terms of financing and an accurate bidding process. They don’t look enough at the human element that goes along with project execution and is required to make it successful.

“Awareness and constant refreshing of development and succession are paramount.”

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The Boardroom Guide

Does Your Company Have a Policy Prohibiting a CEO From Staying On as a Board Member After Retirement?

Yes

13% No

87%

“stretching them and giving them opportunities to see things with different eyes and hear with different ears.” People can spend too much time in a given geography or function, which doesn’t provide the opportunity to see things from a multidisciplinary perspective. That range will be even more important to develop people for a global economy. “It’s critically important,” she says.

“People learn by experience, so creating those experiences is crucial, and then providing coaching and mentoring so they understand the nuances of influencing others as a leader.”

ITT has a similar enterprise-wide view of leadership and development. Ramos says she works with all of the business units together, rather than as disparate parts. The idea is to train future leaders to think of corporate leadership as a team rather

Source: 2012–2013 NACD Public Company Governance Survey

expect it will become part of our DNA going forward.”

Ongoing dialogue about succession and development between the CEO and the board is a key to success for both Avon and ITT. How do they maintain the right balance regarding responsibilities and accountability?

“Our board knows that the CEO has to manage the process,” says McCoy. “We’re developing leaders for many different roles, multi-generationally, and for a complex global environment.” But the board needs to understand the top talent and the “critical few,” as well as to help determine what skills and experience will be important for any future leader.

“The board and the CEO have to be in sync on this,” says McCoy, “and there has to be a consistent view of leadership, future needs, and development in the company.”

“I’m a great believer in putting people outside of their comfort zones—stretching them and giving them opportunities to see things with different eyes and hear with different ears.” ­­—Sherilyn McCoy than as heads of separate businesses.

But one-on-ones with the board enable directors to get to know candidates for top positions. Preboard meeting dinners and breakfasts—without the CEO—allow directors to get to know the CEO’s direct reports in a personal, unstructured way. “The people-development side of succession planning is the responsibility of the total board—a top-of-thehouse priority,” says Gold. “We understand that this process is critical to the success of the company. It’s always in the back of our minds: what if we need a replacement for Denise? Just think about companies that are left in disarray if they are not prepared.

The board has to have a line of sight into management if something untoward occurs. If we’re not facing reality, the company is at risk.

“The board recognizes the importance of succession, including assessments and development plans for future leaders. It’s crucial to the success of our business to focus on people,” Gold continues. “We

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Gold says that she believes the ITT board is involved in the right things and at the right level.

That is largely because Ramos has kept the board informed. “We are continually talking about ‘generation one’ and ‘generation two’ leaders as well as high-potentials, so the board is comfortable that succession planning and development are ongoing priorities,” says Ramos.

“The competitive advantage of recruiting and retaining the best people is part of ITT’s culture,” explains Ramos. But beyond that, ITT wants to help people grow, develop, and spread their wings.

“It’s the servant-leadership concept,” she says.

“Good leaders put this goal ahead of other things, and it’s fortunate that this focus also engenders employee engagement and loyalty.” D Jane Edison Stevenson is vice chairman of Board & CEO Services at Korn/Ferry International. Contact her at Jane.Stevenson@kornferry.com.