Knowing when to step aside

It is common sense that parents must adapt and change their roles as children grow up. But what about CEOs, who may be hired for one task, but face an entirely different one years or even months later?

by Knowledge@Wharton
Last Updated: 23 Jul 2013

The secret to long-term CEO success, suggests David Nadler, a consultant to boards and senior executives, is conceiving of a CEO's tenure as a performance with a series of distinct acts. "Each act requires the CEO to lead, think and behave in fundamentally different ways. The successful ones are those who are able to make the transitions," Nadler said during his presentation at the 11th annual Wharton Leadership Conference, sponsored by the Center for Leadership and Change Management, the Center for Human Resources and Wharton Executive Education. The theme of the conference was 'Developing Leadership Talent'.

According to Nadler's model, a CEO's tenure follows a natural arc, which begins when the CEO takes the stage, prepared or not for his or her new role, and has to solve the problems presented. Often, says Nadler, a CEO may be hired precisely because he or she is perceived to be strong in the area where the company most needs help, whether that be changing the culture or bringing innovation.

"The problem comes after the CEO solves that first issue; then it is act two and something else is needed," he says. Many CEOs fail because of what Nadler terms "success syndrome", that is, codifying a certain way of doing things, and then charging ahead with the old game plan no matter how the context has changed.

To make the point, Nadler referred to the five-and-a-half-year tenure of Carly Fiorina as CEO of Hewlett-Packard. Although her controversial acquisition of Compaq and high-profile firing in 2005 led many critics to say she failed entirely as CEO, Nadler asserted that, in his view, Fiorina actually made the right moves, at least early on in her leadership. "In act one, she was required to create a transformation at HP, develop a new strategy, break the static elements and reshape the business through the acquisition," says Nadler.

Fiorina's problems began, adds Nadler, when her act one concluded, and a new task emerged - execution. A "hunkering down," not a CEO in the limelight, was needed to get the job done. "Instead, she continued on the same approach, and the leadership model that had been successful in act one killed her in act two."

For a counterpoint to Fiorina's failure, Nadler looked to E. Stanley O'Neal, who took the helm of Merrill Lynch just three months after the terrorist attacks of 9/11 literally blew the business advisory company out of its global headquarters in Manhattan.

Unfortunately for O'Neal, the business's problems ran deeper and were reflected in a low stock price and rumors of a takeover. O'Neal approached this set of challenges with a management style Nadler described as "demanding, almost brutal at times"; he focused relentlessly on control, discipline and cost. "His feeling was, 'I have to save the company. If I don't do this, we'll be finished and thousands of jobs will be gone.'"

The company began to recover, however, and by the fall of 2003, O'Neal did something different: he changed his entire executive team, focused on growth and rethought his own leadership style. Today, says Nadler, with Merrill Lynch stock trading at nearly three times the amount it did in 2001, O'Neal is focusing on building up the next generation of leaders. He conceives of his job primarily as being a mentor, coach and supporter to two new co-CEOs, says Nadler.

What leaders who successfully transition from one act to the next share is an awareness of what kind of leadership is required at the right moment -- and they don't rest on their laurels. According to Nadler, O'Neal appreciates his past success, but continues to worry about missing other transitions in the future. This is because even CEOs who manage to navigate multiple acts will find themselves with a final challenge: exiting the stage successfully. It's a task that usually means answering the question: "Did I leave the business with effective leadership?"

Nadler focused his most recent research on CEOs who came into the job, did well for a time, but, when the situation changed, had a hard time adjusting their leadership accordingly - in other words, CEOs who couldn't move from one act to the next. With these blind spots in place, the CEOs continue to press ahead, widening the gap between their vision and the company's reality. "We call that 'the death spiral,'" said Nadler, giving the example of Thoman's insistence on setting higher and more ambitious goals at Xerox, even as his leadership team was falling apart around him.

Feeding into this negative cycle is the hard fact that CEOs may not hear frank words from their insular circle of advisors - or care to listen when the truth is spoken.

The most "heartbreaking" kind of failure, says Nadler, is when CEOs try to change but can't. "We are not infinitely malleable. Asking a person who is 55 to act dramatically differently, and pull it off naturally, is setting a very difficult-to-achieve goal."

Part of the CEO's task, then, is to ruthlessly assess him or herself as the business context changes and decide whether they have an understanding of what's needed in terms of new leadership requirements.

According to Nadler, Kenneth Freeman's recent decision to retire as CEO of Quest Diagnostics at age 52, after overseeing Quest's successful spin-off from Corning, is an example of good self-assessment. Interestingly, says Nadler, Freeman is now with the private equity firm KKR, working serially with companies who need a short burst of turn-around leadership.

The implications of Nadler's research for the boards that make CEO hiring decisions are several. First, boards should look for what Nadler calls the "sustainability factor". This means assessing the candidates' range of experience to see if they can not only handle the current crisis, but also deal with unknown future crises. "Have they run mature businesses? Handled compliance issues? Done a turn around? Grown globally? That's different than someone's who has done the same act over and over again."

Locating such a jack-of-all-trades may be near impossible in some situations, and in these cases, Nadler recommends that boards consider the idea of a "one-act CEO", hired on the basis of a renewable contract.

Such a rethinking of the CEO role, however, requires a change of mindset for both boards and chief executives. Early succession "is not part of our normal view of the heroic CEO, who stays on the bridge until he brings the ship home," says Nadler.

But as one questioner in the audience pointed out after Nadler's talk, having a one-act CEO requires a "multi-act board," one that can fit the current CEO into the board's long-term vision. Nadler agrees, pointing to how, in the past seven years, boards have become much more involved with CEO succession, whereas before they had only a signing-off role.

And with this greater freedom to select the CEO comes a greater responsibility to manage his or her tenure. Boards, says Nadler, "need to face the facts when they need to make a change."

Leading for the Next Act: Why CEOs Must Evolve or Step Aside
David Nadler
Knowledge@Wharton, 8 August

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