No CEO succession plan a risky way to run a business

CEO succession planning may be the corporate equivalent of eating healthier: Everybody knows they ought to be doing it and swears they will—but then they don’t.

A recent survey by global executive search firm InterSearch Worldwide revealed only 45 percent of executives from 34 countries say their companies have a process for CEO succession planning.

Lack of a succession planning process leaves a company vulnerable on numerous fronts when a CEO leaves. Witness the turmoil at American Apparel, now looking to use a “poison pill” to prevent ousted CEO/founder Dov Charney from upping his stake in the company, or the fact that retailer Target has been helmed by an interim CEO since the May departure of former CEO Gregg Steinhafel in the wake of the company’s stunning data breach problem and its failure to ignite in Canada.

“Both Target and JC Penney are sweating it out,” observed Patricia Lenkov, a NYC-based executive recruiter who works with C-level executives and board directors. Last year, JC Penney famously brought back former CEO Myron Ullman, supposedly on an interim basis, to replace Ron Johnson, who had replaced Ullman.

“Operating without a CEO succession plan is a risky way to run a business,” said Lenkov. “When you don’t plan for succession and you have an opening, by default you’re doing it quickly rather than strategically, and it’s a suboptimal situation, affecting everything from stock price to day to day operations to the ability to retain talent.”

Nervous tension

A CEO search is expensive and time-consuming, and sends a message to stakeholders that there is a lack of preparation on the company’s part. “Management successsion can hurt or help the value of a business, whether it’s privately or publicly held,” attorney Mark Doyle, partner at Irvine-based law firm Tredway Lumsdaine & Doyle LLP, who works with clients on succession planning, told Advisen. “It’s something that investors look at – and they should — when evaluating a company.”

A leadership vacuum—or even the possibility of it—makes investors nervous because they recognize it will mean distraction from the company’s strategic focus, and a disjointedness. The pressure is on companies to move quickly because business changes more quickly now than it used to. Companies run the risk of not being able to execute on the strategy because of both the distraction and the possibility of losing other key talent, according to Robin Toft, president and CEO, Sanford Rose Associates – Toft Group, who recruits CEOs and board members.

“There is a lot of risk around the possible loss of talent,” concurred Mary Herrmann, managing director of executive coaching practice at BPI Group. “Instability makes people nervous, and they look for security elsewhere. And when they leave, institutional knowledge and culture go out the door with them.”

Linda Henman, author of Landing in the Executive Chair and a consultant who has worked with executives and boards in Fortune 500 companies, said too many companies end up having to rely on an interim CEO, which is a red flag about lack of preparedness.

“My first question is always, ‘who is your replacement?’” she said. “Your emergency plan should not be to bring in an interim CEO.”

How long is too long?

Inertia about succession planning can result in a CEO overstaying his or her welcome, which has dangers of its own. Xueming Luo, Vamsi Kanuri, and Michelle Andrews wrote in Harvard Business Review about the relationship between CEO tenure and company value. They studied 356 US companies from 2000 to 2010, measuring CEO tenure and assessing the strength of the relationship between company and employees (looking at areas like retirement benefits and layoffs, and the relationship between customer and company). They then looked at stock returns.

“All this allowed us to arrive at an optimal tenure length: 4.8 years,” the trio wrote.

In some cases, the risk can be in talking about too much about CEO succession. “When you have talented, celebrity CEOs like Berkshire Hathaway’s Warren Buffett, New Corp.’s Rupert Murdoch, or Starbucks’ Howard Schultz, Wall Street often believes it will be too difficult to fill those shoes of someone who becomes bigger than life, so they don’t like to speculate on who comes next,” observed Brian Cohen, president and CEO of consulting firm Strategic Growth Advisors, and a former president and CEO of Pacific Specialty Insurance Company.

Neither Buffett nor Murdoch has been public about a successor, and Schultz returned to the CEO spot after an 8-year absence during which the coffee chain lost its caffeine. “It can take one or two CEOs later for the company to get back on track after an icon leaves,” said Cohen “That’s a lot of lost value.”

Know when to say when

So, if succession planning is so important, why don’t companies do a better job of it?

“Companies and CEOs don’t plan succession for the same reason they don’t lose weight. The benefits are in the future,” said Henmann. “Disruption and discomfort occur now, so why mess with today if things are ok?”

While it may be a disruptive process, it’s not nearly as disruptive as a CEO-succession scramble. “Replacement planning is a small step of succession, which is really a systematic approach of getting someone ready,” Henman said. “You have to start playing favorites. What if I favor Sue instead of Bob because she’s the successor? But then that can disincentivize Bob, who may also be a critical part of the process.”

CEOs are often disinclined to talk about succession planning because they just don’t like to think about what it will be like for them personally and for the company when they aren’t running the show, said Doyle.

“It’s sort of why we don’t talk about death,” said Lenkov. “They don’t want to think about what happens after or the finality.”

It’s especially difficult for someone who has worked so hard to get to a certain level, observed Cohen. There also is often a fundamental tension between the board and the C-suite, he added.

“Succession management involves a conversation that is very challenging to have, so that tension pushes it to the bottom of the list of things that get done at a corporation,” said Lenkov.

There is also the idea that it’s easier to let it go both when things are going well and when there’s a crisis. “It’s time consuming,” said Hermann. “In a crisis, like after the financial downturn, companies were very focused on just getting through it. And in good times, it can seem like a nice to have rather than the necessity it really is.”

No plan = risk

For Cohen, the risks are too great to ignore–and is one insurance companies should be looking at.

“How many carriers have on their application a question about succession management?” he said. “If a company doesn’t have a process in place they are creating a risk. And if you’re insuring a commercial risk it should be taken into consideration ins a much more serious way.”

Agreed Lenkov, “It should absolutely be part of a risk-management program.”

When done right the transition is barely a hiccup. When former Burberry CEO Angela Ahrendts announced last fall she would be leaving to join Apple in June 2014, the luxury goods maker immediately announced that creative director Christopher Bailey would assume the CEO role.

“GE is of famous for its succession planning, starting on Day 1,” said Lenkov. She called just-retired Ford Motor Co. CEO Alan Mulally “a superstar” for his succession planning. “It was a long-planned process, and he did a great job in grooming Mark Fields,” she said.