Jim Citrin Leadership by Example

Joe Torre's departure from the Yankees and Stan O'Neal's tribulations at Merrill Lynch once again highlight the problems of leadership succession.

Across the economy, three principal factors have combined to bring the issue to the fore:

1. Corporate governance reforms have raised the accountability of executives and directors alike, making it more difficult for CEOs to survive a period of poor performance.

2. Shareholders have become empowered to take more active stances against management failings and boards that don't take action.

3. The influence of CEOs in the boardroom has been lessened by the emergence of the lead independent director -- and, in an increasing number of cases, by the appointment of a separate chairman to lead the board.

Barriers to a Smooth Succession

Despite the paramount importance of CEO succession, some boards -- and baseball team owners -- are still reluctant to face the issue head on. Often, they focus on succession only when faced with a performance crisis, as in the case of O'Neal (or, in the case of Torre, with a premature exit from the playoffs).

A board's ability to handle succession depends in large measure on how well they can address and overcome the following delicate but very real barriers that often get in the way of the process:

• Board distractions

Boards have to strike a balance between focusing on urgent matters, such as quarterly performance, merger opportunities, competitive threats, and shareholder demands, and considering the long-term priorities of the organization.

Often, strategy development and the related issue of succession planning fall to the bottom of the list. It's important for directors to make succession planning an ongoing topic on the board agenda.

• Sensitivity

Many boards are simply uncomfortable raising the issue of succession for a variety of psychological reasons. They may regard it as insensitive to put succession on the agenda when the CEO is relatively new. Similarly, they may be reluctant to exacerbate the pressure a chief executive may already be under by asking him to think about his successor.

Still, the more regularly and consistently that boards work on the issue of succession, both with the CEO's input and in the executive sessions that are ideally a part of every single board meeting, the less sensitivity will get in the way.

• The reluctant CEO

Many CEOs are reluctant to raise the topic of their own succession for two primary reasons: 1) Once they've attained the brass ring, they aren't about to accelerate giving up the power and prestige; 2) They're concerned that initiating the discussion may cause the board to question their commitment or toughness.

The CEO who exerts an overly powerful influence in the boardroom, moreover, is likely to make it difficult for other board members to raise the issue of succession. Such a situation calls for a strong lead director to ensure that the topic is addressed. The more self-confident and politically astute CEO, however, will embrace the development of a succession plan and participate actively.

• Lack of objectivity

When boards turn their attention to CEO succession, they may have a natural tendency to rely solely on their own subjective views of possible contenders. Commonly held preconceptions, such as "internal candidates are saddled with too much baggage" or "external candidates pose too great a disruption to the organization," can turn out to be severely limiting to a proper succession process.

A good starting point is to undertake an objective assessment of potential succession candidates both inside and outside the organization. This should be done against a common set of criteria that are linked to the long-term strategy of the company and the implications for leadership requirements.

• The threat of losing good people

Some boards are hesitant to execute a succession plan for fear that disappointed contenders may decide to leave. For most organizations the loss of a couple of leading figures will be devastating, and boards should make every effort to avoid this.

How the board and the CEO communicate with senior executives is crucial to mitigating this risk. If it becomes widely known that there are two or three potential successors being put through the paces to become CEO, people inside the organization may split into camps that can have a negative effect on culture and productivity.

The preceding barriers are all largely psychological. The most effective way for boards to overcome them and fulfill their fiduciary responsibilities is to create regular processes that will enable board directors to apply themselves to succession planning in an objective, emotion-free manner.

Preparedness Is Everything

One solution is for the board to establish a committee with the explicit mandate to oversee the CEO succession planning process. Another is to embed succession planning into the agendas and executive sessions of each and every board meeting. The more "normal" the process, the less disruptive it will be for everyone concerned, including the CEO.

To avoid speculation and to minimize the effect on organizational morale, politics, and the company's shares, the board should exercise particular discretion over CEO succession planning. It's fine and even advisable for the board to communicate the process that's in place, but there should be no compulsion to divulge particulars.

The more the Steinbrenners and the Merrill Lynch board members pursue their deliberations with these principles in mind -- and out of the public eye -- the better it will be for the individuals involved, and for their entire organizations.

Special thanks to Dayton Ogden and John Wood for their assistance with this article.