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?"

The Lew Platt Test

The HP boardroom has been full of sturm und drang for a decade, dating back to Carly Fiorina's arrival in 1999 as an outsider CEO. It may be hard to fathom after the recent tumult, but a steadier state did actually exist at one time.

Back in 1997 Directors & Boards caught up with then chairman and CEO Lewis Platt for a cover article he authored on "Governance the H-P Way." Platt was a lifer at HP, having joined the company as an entry-level engineer in 1966 and worked his way up to being appointed CEO in 1992 and chairman in 1993.

As I am continually reminded, words from the past have a way of echoing through the ages to resonate pertinently on present circumstances. I say no more but simply share with you the concluding paragraph of Lew Platt's article:

"A good test of whether your board is functioning well is if you can answer 'yes' to the question, 'Do I feel free to discuss anything with my board . . . to talk with full candor about anything that's worrying me?' I feel fortunate in this regard. Not all CEOs can say the same. For one reason or another, something goes wrong with the relationship between the CEO and the board, or between company management and the board, which leads to secrets, to a lack of trust, to poor board performance, and ultimately to poor corporate performance. My board has been very helpful to me with its perspective and advice, and our candid dialogue takes place in an atmosphere of mutual respect, which is the key to having a good board relationship."

Upon retiring from HP in 1999, Platt went on to serve as CEO of Kendall-Jackson Wine Estates and as a corporate director. Interestingly, he was nonexecutive chairman of Boeing Co. when its board in 2005 forced the resignation of CEO Harry Stonecipher over an affair with a company employee. Platt died later that year at the age of 64.

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.

Packard Principles

On March 15, 2002, just as the contentious merger of Hewlett-Packard and Compaq Computer was heading toward a showdown vote, David W. Packard took out a full-page ad in that day's Wall Street Journal to reprint the transcript of what he described as "an informal speech my father made in 1960 to a group of HP managers."

HP co-founder Dave Packard (pictured at left with Bill Hewlett) "spoke about HP people and values and the importance of genuine technical contributions to customers. Full of sincere and timeless truths, his words provide a window into the reasons for HP's enduring greatness," wrote his son (who was opposing the merger) in an intro to the printed speech.

The following is a passage from that 1960 speech by Dave Packard to HP's managers:

"I want to touch on other aspects of your work which are important. As supervisors you will be expected to set high standards of behavior. This is obvious and shouldn't even need to be mentioned. But the example you set is important and I am going to mention specific things which should be kept in mind. Tolerance is tremendously significant. Unless you are tolerant of the people under you, you really can't do a good job of being a supervisor. You must have understanding — understanding of the little things that affect people. You must have a sense of fairness, and you must know what is reasonable to expect of your people. You must have a good set of standards for your group but you must maintain these standards with fairness and understanding."

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.