Three Years in the Valley

On the day when the news is breaking that Mark Hurd will be joining Oracle as co-president, here is an interesting passage that I have just come across from the new book, "The HP Phenomenon" by Charles H. House and Raymond L. Price (Stanford University Press). Presented without further comment about the idiosyncratic and sometimes unfathomable C-suite personnel moves in the tech sector:

Three years is a long time in the Valley and in the high-tech world. It was, for example, only three years from the acme years of both John Young and Lew Platt that the HP board ended their careers. John Akers retired in disgrace from IBM three years after its high point in revenues under his leadership. DEC’s best two revenue and profitability years ever were in 1987 and 1988; Ken Olsen was fired three-and-a-half years later after winning international accolades for the 1987-1988 comeback. Ed McCracken at Silicon Graphics delivered 52% growth and 10% net profits — bests on both scores — as SGI attained $2 billion in 1994; three years later, he was fired. Rod Canion had many great Compaq years — 1989 saw 40% growth to $2.8 billion, two years before he was cast away when Compaq lost its way. Successor Eckhard Pfeiffer in 1997 delivered 30% growth in revenue (to $31 billion) and the highest profit on record (7.7%); 15 months later chairman Ben Rosen removed him. No CEO escapes the question, “What have you done for me lately?”

Actually I do have one add-on comment: Perhaps no shareholder escapes the question, "What in tarnation is the board thinking . . . both in its firing — and hiring?"

Hit by a Buss

Any discussion of CEO succession planning has to take into account the 'hit by a bus' scenario — the sudden death or disability of the leader.

It is uncomfortable for the CEO and the board to face concerns about mortality. That's why a lot of boards don't do it. Last year the National Association of Corporate Directors reported that 44% of directors it surveyed at public companies said their boards have no succession plan in place for when the CEO leaves. To which leadership guru Marshall Goldsmith rightly reacted: "What kind of message does that send out? How about chaos, disorganization, and lack of preparedness?"

Crafting a succession scenario is especially hard to do when the leader is relatively youthful and full of energy and vitality. When he or she is at the peak of their potential, just getting underway with an organizational revival or, having done the heavy lifting of a turnaround and repositioning, ready to roll it out for greater gains to come, taking the board and shareholders along for a profitable ride.

But preparing for the unexpected must be done. The advice is familiar but that doesn't make it any less fundamental. Or timeless, going back to the Good Book: "We know not the time nor the hour. . . ."

We're obviously thinking of Mark Hurd with these comments. His sudden, shocking removal from office following ramifications of a relationship with a marketing rep for the company gives an electrifying twist to the 'hit by a bus' scenario.

Let's call it 'hit by a buss' — to distinguish moral hazards from mortality hazards.

Both concerns — as improbable as they are to ponder — must drive a new impetus to nail down a succession plan. That's the clear and compelling lesson for all boards coming out of the trouble at HP.

Why Does Succession Planning Produce So Few Successors?

As noted in the blog posting below, that is the question that Heidrick & Struggles Vice Chairman Stephen Miles (pictured) has wrestled with. In October 2009 he issued an advisory that identified three "common roadblocks," as he called them, that "sabotage effective leadership transitions at companies."

The Hewlett-Packard board's ouster last week of CEO Mark Hurd prompts a fresh focus on these roadblocks. Here is how Miles has described them:

• Favoring the 'exciting' external candidate over an internal option: "It appears boards often prefer the devil they don't know to the devil they do. They often find it difficult to imagine an internal candidate in a higher role after seeing them operate for a time in a lesser one. Internal candidates will hear time and time again that they are still 'one or two years away' from being ready, while they watch their external 'competition' being lauded for similar efforts."

• Demanding a 'ready now' successor: "The concept of a 'ready now' executive effectively eliminates perfectly viable candidates from true consideration. The fact is that a company would only know that someone is 'ready now' after the fact — when they see the executive moving to another company, probably a competitor, and proving himself there. The candidate might have been ready to lead all along, but the company missed its chance. This is actually a risk management decision — and the amount of risk a board can take is dependent on the requirements of the role looking forward combined with the complementarity of the top team."

• Focusing on the high-profile CEO role and not on the whole team: "The best succession planning really involves constant assembly and re-assembly of a leadership puzzle with many pieces, including not only the CEO but the CFO, COO, sales and marketing chiefs, and other C-level officers. A trend we are seeing in the best-managed companies is that boards are looking beyond the CEO and his or her direct reports. Now boards want a detailed calibration of the C+2 and C+3 executive populations to see who's 'on deck' to take the reins down the road. Again, from a risk management perspective it is important to understand the bench strength and resulting strength or risk in the 'people portfolio.' "

Miles, who oversees the Heidrick & Struggles worldwide executive assessment/succession planning activities, also made an observation in this advisory of more than nine months ago that eerily presages the precarious position that the H-P board got itself into — if indeed it must look outside the company for its new CEO:

"Boards can, and really must, direct succession planning with an honest evaluation of current talent and the development of a rich pipeline of talent that can form the future of the company. It is this kind of forward-looking, proactive leadership that can mitigate risk and maintain confidence among internal and external stakeholders."

Into the Abyss

There is so much that is distressing in the sudden forced resignation of Mark Hurd (pictured) from Hewlett-Packard.

The distress level is so high because there is no reasonable explanation for the personal tragedy that unfolded. A man living a life of accomplishment and acclaim falls in a flash into the abyss of disgrace. And those who are in the know about why and what really happened aren't telling.

Of all the reporting and analyzing that I have read since Friday's ouster, I suspect Business Insider's Henry Blodget gets pretty close to the truth with this review of the situation — but he even has to qualify that his truth seeking is "as best we can tell."

As the shock wave of the ouster subsides, here is the next reason to be distressed about this whole affair: the early line seems to indicate that the H-P board will be going outside for a new CEO. For a company with such a history of turmoil at the top (even predating Carly Fiorina's reign), the H-P board should be one of the least likely to have yet again bungled an orderly CEO succession by not ensuring there was one or more eminently qualified internal candidates.

Why does CEO succession planning produce so few successors? That is a question that Stephen Miles, vice chairman of executive search firm Heidrick & Struggles, raised last year when he looked around at Corporate America's C-suites. Then crunching 2008 data, this expert in leadership succession issues noted that of the 80 new CEOs who were appointed among Fortune 1000 companies that year, only 44 of them — 55% — were promoted from within.

"While almost all companies technically have a succession plan in place," Miles stated, "the fact that 45% of them had to go outside to hire a CEO means that many of these plans failed to hit the mark."

He has pinpointed several ways that boards trip themselves up, which I review in the follow-on posting of August 11th. Will we see clues to how H-P "failed to hit the mark"? (No wordplay intended.) Almost surely.

Now that we have witnessed a CEO falling into an almost unimaginable personal abyss, we are about to witness a board falling into the abyss of a succession nightmare — one that, maddeningly, is all too imaginable.

A Director as CEO Successor

On June 3 major regional bank Wilmington Trust Corp. announced that Chairman and CEO Ted Cecala was retiring. He is giving up the CEO post immediately and will remain chairman until July 19. Board member Donald Foley, an independent director who was a senior executive with ITT Corp., was named CEO. The change at the top took the market by surprise, and investors did not react well.

This is the latest example of something that we see with some frequency in CEO succession — a board turning to one of its own to fill a sudden vacancy. Such incidents always raise an important question: Should there be, as a rule, on a board of 10 or 12 people at least one or two directors able to step in as CEO in the event of an emergency?

We raised this question in a classic advisory published in Directors & Boards in 1996, following of rash of cases of boards yanking one of their own to plug a succession vacuum — which, come to think of it, is often of their own making for not doing a proper job of succession oversight in the first place. John Burlingame, formerly a vice chair of General Electric Co., and board recruiter Roger Kenny (pictured, now heading the board services practice for CTPartners) teamed up to address a range of pros and cons in resorting to this stop-gap succession measure.

To synthesize their overall conclusions: yes, it makes a lot of sense for a board to be armed with this capability in the event of a sudden vacancy, which can arise from all manner of untoward scenarios. Here is one perfectly understandable situation that they posited:

"You may have the perfect succession plan in place, but there may be two candidates to whom you want to give another six months or a year before you decide on which to choose. Or, in a tragic situation, you lose your CEO and his designated successor in a plane crash. In these cases, if you can make a director the temporary CEO without disrupting the relationship of the internal management and the external directors, it may well be the smartest thing to do."

A big potential negative, they pointed out, in either expressly designating or having a gentlemen's understanding that a certain board member could be the CEO in extremis is the potential threat to the current CEO — does the CEO know if he has "a threatening contender" on his hands? — and also the likelihood of politicizing the boardroom, i.e., "creating a separate class of director."

Notwithstanding such risks, "having a qualified executive sitting around the table understanding the company's strategies, operations, and culture" is a kind of insurance that many companies might be wise to embrace, Burlingame and Kenny advise. But not as wise as doing a first-rate job of managing an orderly succession process in the first place.

Donald Frey: He Saw the Ugly

I never knew Donald Frey was the designer of the Ford Mustang, which he did earlier in his career as an engineer with the Ford Motor Co. and which the New York Times highlighted in its obituary of him. When I published him in 1995 I knew him as the former chairman and CEO of Bell and Howell Co. and a veteran director who had served on many corporate boards. Mr. Frey died a month ago, on March 5, at the age of 86.

I also knew him as that rare corporate leader who let it all hang out — the good, the bad, and the ugly (primarily the latter two categories) — in recording his experiences in the boardroom. His article for Directors & Boards, "Reminiscences on Succession Planning," was an unvarnished set of reflections on how CEOs and boards mishandle their responsibilities for ensuring a smooth and effective succession.

Just how ugly does it get? Here are a few of his "reminiscences":

• "I have observed cases of CEOs trying to stay on (perhaps better said, 'hang on') after normal retirement. Various reasons are offered, one being that his or her successor is not yet ready and needs more mentoring by the CEO. In one case, a hidden reason was that the retiring CEO did not make any money on his stock options. In another case, no logical successor could be identified because the CEO in earlier years systematically destroyed potential successors, so that no one is perceived by the CEO as threatening or perceived by the board to be ready at his normal retirement. (Boards almost never hear both sides of a dismissal or demotion). Lack of self confidence or paranoia are surprisingly not unknown, even with successful CEOs. For whatever reason, the sitting CEO is kept on year to year by a supine board, sometimes until the roof totally caves in."

• "Another scenario has the CEO appointing, with no board involvement, one of his internal buddies as successor. The chief characteristic of this heir apparent may be loyal service—to the retiring CEO. Loyal service does not automatically mean leadership. The ultimate result is frequently disaster, with yet another new chief executive to soon follow. This can give birth to the oft-noted strong-weak-strong-weak CEO sequence."

• "I have observed on a number of occasions how long it takes to get a consensus for needed change. The reluctance to move on an underperforming CEO is palpable at first, and changing minds takes time. Seemingly competent, intelligent men and women can sit at board meeting after board meeting watching the company go nowhere, or slowly sink—"slow leakers" I call them—and do or say nothing. Nobody seems to want to speak up. Nobody says those magical and historic words,'The King has no clothes.' "

Don was 71 when he penned these reflections, and even though he was comfortably ensconced in academia at the time as a revered professor of industrial engineering and management science at Northwestern University, it still took courage to be so candid in revealing how often "the board has no clothes" when it comes to its preeminent accountability for CEO succession.

A.G. Lafley, Coming and Going

Procter & Gamble Chairman A.G. Lafley told the P&G board yesterday that he was stepping down as chair on Jan. 1. This is a move that came sooner than many had expected, according to the Wall Street Journal's report. It was only this past July that he had given up the CEO post.

His has been a steady and successful hand on the tiller of P&G. But it sure didn't start out that way. Here is the story he tells of his being named CEO. Talk about sudden succession. It's a tale he told in the book The Game Changer (Crown Business, 2008), co-authored with Ram Charan. Here goes:

___________

It came on June 6, 2000, a few minutes before a business meeting in California. On the line was John Pepper, former chairman and CEO of P&G.

John got right to the point: "Are you prepared to accept the CEO job at P&G?" I was stunned. Just the afternoon before, I had been speaking with chairman and CEO Durk Jager about our plans for the final month of the fiscal year.

"What happened to Durk?" I asked.

"He resigned."

"Why? What happened?"

"I don't have time to go into that now. I just need to know whether you're prepared to do the CEO job for P&G."

"Of course I am."

"Then get on a plane as soon as you can and come directly to my office when you arrive back in Cincinnati."

I turned to my colleagues and told them something had come up. I had to leave. On the plane, I considered this sudden and totally surprising turn of events. I tried to put first things first: What would I need to do in the next 24, 48, 72 hours? And what would I need to do in the first week, first month?

Job one was to determine the state of P&G's business. At 6 a.m. on June 7, I began digging into the numbers — business by business, region by region, customer by customer. Unfortunately, we were in worse shape than I had expected. We were 23 days from year-end and there was no way we were going to make the month, the April-June quarter, or the 1999-2000 fiscal year.

After briefing the board on Thursday, June 8, we issued another profit warning. P&G's stock opened more than $3 lower in the morning I was announced as CEO. By the end of the week P&G's stock price was down more than $7 from Monday's close. It was not exactly an early confidence booster for me.

_____________

So, end of the new CEO story, but the beginnings of another new story — the reinvigoration of P&G. Well done, Mr. Lafley.

Ken Lewis Advice: 'Keep a Level Head'

With the sudden resignation of Ken Lewis, the Bank of America board now faces a classic succession crisis: the much earlier-than-foreseen departure of an iconic CEO, with no clearly defined and vetted successor ready to step in. And this is happening at one of the most important financial institutions in the country and to the country, in terms of helping the capital market system return to full and fair functioning.

The New York Times calls it "a remarkable boardroom drama," and describes the directors as being "stunned by the turn of events."

Take heart, BofA board members. Your own CEO offered some sound advice on what to do in such a situation. Here from an article by Ken Lewis published in Directors & Boards in 2006:

"Directors must have grace under pressure. Given the regulatory environment in which we now operate, the likelihood that your company will face an issue at the board level at some point during your service — related to accounting, disclosure, compliance, an ethics breach, or something else — is high. Directors must accept that issues arise in all organizations.

"What distinguishes companies is how managers and directors respond. The first job of a director is to keep a level head, get the facts, and give management the opportunity to take appropriate action. It is only when management fails to act, or to acknowledge the issue, that directors must act decisively and hold management accountable. Figuring out which situation the company is in — and when directors need to take independent action — may not always be easy. But it's the most important judgment directors will ever be called on to make."

At the time he authored those words, there probably was no stronger or more highly regarded CEO in the country. The intervening years have not been kind to the man or his reputation. This particular piece of wisdom, originally dispensed to be a best practice to boards generally, has applied in a most particular way to his own board over the past 18 months, what with the near collapse of the financial system, the TARP funding, the Countrywide and Merrill Lynch purchases, the Merrill bonuses, the Paulson/Bernanke gangtackle, and other "issues at the board level." (Some of those directors, in fact, can no longer keep a level head, seeing as their heads were lopped off a couple of months ago in a board putsch.)

And now, with Ken Lewis dropping the "early retirement" bombshell on them, the BofA directors find themselves yet again having to embrace their beleaguered leader's advice to "keep a level head."

FMC's Bob Malott Stepped It Up

The news that FMC Corp. was joining the S&P 500 stock index this month brought to mind a former chairman and CEO of FMC who wrote one of the hardest-hitting articles on director responsibilities that I have published as editor of Directors & Boards.

Robert Malott (pictured) was his name, and we titled his article — to perfectly reflect the no-nonsense nature of his commentary — "Directors: Step Up to Your Responsibilities."

Malott joined FMC, which we described in the article as one of the world's leading producers of chemicals and machinery, in 1952. He was elected CEO in 1972 and chairman of the board in 1973. He retired in 1991, but stayed on the FMC board as chairman of the executive committee and also was serving on the boards of Amoco Corp. and United Technologies Corp. when we were working together in 1992 to publish his article.

How about these four pointers of Bob's for showing what it means to step up to your responsibilities:

• "If a CEO wants strong board members, he will get them."

• "If a CEO wants the board involved, it will be."

• "If the CEO feels the board role includes tough-minded evaluation of his own performance, the board will oblige."

• "And if the board chooses, evaluates, and rewards a CEO on the basis of shareholder value, the directors will get a CEO who puts shareholder value first."

Beautiful stuff. And Bob also tells in his article a candid story about how he came to lead FMC:

"I was invited to become FMC Corp.'s chief executive office in a very civilized manner. The chairman of the board's search committee invited me to dinner in San Francisco, and over drinks broke the news. I was the board's choice for the top job.

"My response rather startled the director. Instead of the usual, 'I am honored by the board''s confidence in me, etc.' I replied flatly, 'How do you know that I'm the man you want?'

"No board member had asked me what I stood for, or what I would do as CEO. As it happened, I had a number of plans, most of which represented a significant break with the status quo. The directors needed to know about those plans. They needed to accept them. They needed to give me the authority to move forward decisively, without being routinely second-guessed. And they needed to hold me accountable for achieving what would now be mutually agreed-upon goals."

Something makes me think that the board never regretted its choice, however naively made, of Bob Malott as FMC's CEO. As the company steps up to inclusion in the S&P 500, let's give a nod to its past leader who not only stepped up the company's governance but, even more, stepped up Corporate America's governance thinking and practices.

Succession: Accept that Nightcap Invitation

The passing of Robert McNamara, which I reflect on in my previous post, offers the opportunity to share this story of how he was offered the presidency of Ford Motor Co. This is a tale McNamara told in his book, In Retrospect: The Tragedy and Lessons of Vietnam (Vintage Books, 1996).

"In the summer of 1960," McNamara writes, "Ernest Breech, second in command under Henry Ford II [pictured], was getting ready to retire from Ford. In July, Henry, John Bugas [a rival senior executive with an eye on being named president] and I went to Cologne, West Germany, to visit our German company, which was headquartered there.

"We returned to our hotel about 2 a.m. after one of Henry's nights on the town. The elevator stopped at the floor where John and I had rooms, and we started to get off. Henry, whose suite was one floor above, said, 'Bob, come on up for a nightcap.'

" 'I don't want a nightcap,' I said. 'I'm going to bed.'

" 'Henry, I'll join you,' said John.

" 'I didn't ask you,' Henry told him. 'I invited Bob.'

"I went on up, and it was then that Henry asked me to become president of the company.

"I told him I would think about it, talk to Marg [his wife], and give him an answer within a week. A week later I accepted. I was formally elected by the board in late October."

A fun moral of the story: A request to join in on a nightcap can be more than just an invitation for a late-night toddie.

CEOs Have First 100 Days, Too

All the focus this week on President Obama marking his first 100 days in office should call to attention that this period of time is crucial in the life of every new CEO.

I went back into the Directors & Boards archives to dig out "The CEO's First 100 Days," an article I published in 2002 by two longtime and respected CEO recruiters, Dennis Carey and Dayton Ogden. Their prime thesis: If a new CEO is to succeed, the most important thing he or she can do is to move quickly to put their own team in place.

"Personnel is policy, goes a favorite Washington saying," the authors write. "It is no less true in the private sector. Indeed, the reason so many companies falter after a new leader takes charge is usually due neither to flawed management nor leadership style but rather the inability or failure of a CEO to assemble his own senior team that can enthusiastically implement a new strategic direction."

Here are two specific tactics they offer:

• Look Right Away for the Stars: "New CEOs ought to spend less time on grand planning and more time on determining whether top managers fit their vision. With this knowledge, the CEO can weed out the disloyal, push aside the deadwood, and pass over ineffective veteran managers to elevate star players several rungs below," Carey and Ogden write. The board should encourage the new CEO to conduct what the authors call an "independent human capital audit" to better learn about the talent he has and facilitate the selection of a new team.

• Do a Board Reassessment: "The fact that a new CEO inherits a board someone else appointed doesn't make change any easier," the authors acknowledge. They recommend that a leadership change is a good time for the board to do its own internal assessment — a process that would "encourage some of their members to step down and make room for new blood." This is a "delicate matter," they recognize, but nonetheless the board, with the best interests of the corporation in mind, ought to create an opportunity for the new CEO "to select some of his most trusted advisers as directors."

"The 'first hundred days' is a yardstick usually reserved for a new President in the White House," Carey and Ogden observed in their article seven years ago. "But it is exactly the type of timetable more CEOs need to follow."