W ith so much hanging on successful leadership, you might expect boards to be experts at picking the perfect candidate to pilot their companies. Recent chief executive shake-outs at BP, Nokia and LG Electronics suggest otherwise.

Concerns over succession are not confined to the handful of premature CEO departures that play out in the media spotlight. Berkshire Hathaway’s announcement last month of Todd Combs as an investment manager prompted speculation that he could be the chosen successor to 80-year-old Warren Buffett.

In Creating People Advantage 2010, a recent global executive survey conducted by Boston Consulting Group and the World Federation of People Management Associations, half the respondents identified gaps in their ability to generate tomorrow’s CEOs. Yet, paradoxically, CEO succession ranks higher on boardroom agendas than ever.

Treating succession as an “event, rather than a process or a discipline” is a common failing, says Roselinde Torres, a partner at BCG who leads the company’s leadership practice. History has a habit of repeating itself, she says: the loss of one CEO triggers a search, internal candidates are scrutinised and headhunters summoned. Then the directors make a choice and succession drops off the agenda – until next time.

Yet sustained investment in succession can pay dividends. A long-standing policy of developing future leaders allowed McDonald’s to appoint the current CEO Jim Skinner to replace Jim Cantalupo and then Charlie Bell, who died within a year of each other, without hiring externally. Richard Floersch, chief human resources officer, says McDonald’s now requires managers right down to individual restaurants to name “ready-now” and “ready-future” candidates who could replace them. The relevant employees then agree on a career development plan.

At Procter & Gamble, CEO Bob McDonald has had his feet under the desk for just over a year, but already half a dozen hopefuls are locked in competition to succeed him. Between now and the next succession, the contenders will be wined and dined, mentored and given development roles designed to reveal “how they stack up against each other”, says Moheet Nagrath, global HR officer. “It’s a constant process that takes place year in year out.”

The P&G model resembles the General Electric horse race in which Jack Welch pitted successor Jeff Immelt against rival contenders James McNerney and Bob Nardelli, both of whom left to run other companies. While less of a gamble than grooming a single heir-apparent, who could fall from grace or be poached by a competitor, contests still need managing to deliver the best candidate.

Getting succession on the agenda can be a challenge in itself. Although boards are ultimately responsible for CEO appointments, the fact that non-executives do not work in the business means that, in practice, it is the incumbent CEO, assisted by the chief human resources officer, who develops the succession pool and puts forward candidates. “If CEOs want to duck the succession issue they find ways of doing it,” says Joseph Bower, a professor at Harvard Business School and author of The CEO Within.

Criteria for choosing between candidates are not hard and fast. If the outgoing CEO has done well, a business may be tempted to go for a clone who, it hopes, will do the same. But this risks picking leaders to fight yesterday’s battles. As Chip Goodyear, former CEO of BHP Billiton, puts it: “There’s not one right CEO [for a business].” A strong financial manager may suit a recession; whereas an upturn may favour an entrepreneur.

At BHP Billiton, Mr Goodyear developed a handful of managers who could replace him. The board chose Marius Kloppers. But all the frontrunners, Mr Goodyear says, “could handle a CEO role”.

Mr Goodyear, who joined BHP as chief financial officer, is himself no stranger to the highs and lows of leadership transition. Having parachuted into the CEO job in a leadership crisis in 2003, he transformed the organisation after its merger with Billiton into one of the world’s most successful mining businesses. Last year, however, he joined Temasek Holdings, Singapore’s sovereign wealth fund, as CEO-elect. But disagreements on strategy led to his appointment being terminated before he took up the role. Of this experience he merely comments: “When you come in from the outside …there are going to be risks.”

Being involved part-time in the business means boards have limited chances to study candidates close up, potentially favouring the biggest self-promoters. One way round this, says Richard Emerton, a senior client partner at executive search group Korn/Ferry Whitehead Mann, is to give candidates special projects so directors can “observe and interrogate them on a genuine business issue”. Better still, he adds, is if the incumbent can be prevailed upon to hand over some of his or her responsibilities so the board can watch how the contenders shape up in actual CEO roles.

Persuading CEOs that this is a good idea could prove tough, however. In the October issue of the Harvard Business Review Anne Mulcahy, former CEO of Xerox, described how hard she had found it to “give up power and accountability” to Ursula Burns, her preferred successor.

According to Shlomo Ben-Hur, a professor of leadership and organisational behaviour at IMD, thousands of years of human history have primed leaders to mistrust power-sharing: “As the chief of a tribe, you don’t necessarily want to assign a deputy. You want to remain [powerful] until the very end.”

How much consideration should companies give to external candidates? Analysis by Booz & Co, the consultancy, suggests that internally appointed CEOs generate higher shareholder returns than external hires. But that is not to say companies can ignore the world outside. If competitors are generating better candidates, you need to know about it.

One company hoping to break the rule that insiders outperform outsiders is Unilever. In 2008, its board selected Paul Polman, a former P&G and Nestlé executive, as its first externally appointed CEO. “We had three outstanding internal candidates. But Paul was better, so he got the job,” says Sandy Ogg, chief human resour­ces officer.

The divisions that succession contests create can return to haunt a new leader. If the contest is bruising, there is a strong chance the defeated candidates will leave – followed shortly by their protégés and associates, who may have concluded that their own prospects look gloomy, with their guy out of the picture.

P&G acted to forestall such an outcome. Before taking office, Mr McDonald sat down with Mr Nagrath and outgoing CEO A.G. Lafley to draw up a list of high-fliers at risk of leaving that he would get to know as soon as his appointment was announced. “If you don’t know the new leader,” Mr Nagrath says, “it’s only human nature to ask ‘where does that leave me?’”

The appointment of a new CEO might solve the immediate problem of who will lead the company. But, if followed by an exodus of tomorrow’s rising stars, the problem won’t stay solved for long.

Get alerts on Work & Careers when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Comments have not been enabled for this article.

Follow the topics in this article