UK: WHO'S NEXT? - There are three main approaches to grooming a new CEO: the relay race, the horse race and that old chestnut - doing nothing until it's too late. UK companies usually resort to the third.

by Judith Oliver.
Last Updated: 31 Aug 2010

There are three main approaches to grooming a new CEO: the relay race, the horse race and that old chestnut - doing nothing until it's too late. UK companies usually resort to the third.

Turnover at the top of an organisation's tree creates concern and upheaval within the company and arouses massive interest without. Ten years ago Lord Sheppard (then simply Allen Sheppard) had to jockey publicly for position with Sir Anthony Tennant before securing the top job at food and drinks giant Grand Metropolitan, a run-off which was then apparently reenacted, though with different players, this year. After 22 years at BOC Group, Danny Rosenkranz's appointment as BOC chief executive was a somewhat smoother, more seemly affair. Meanwhile former ICL supremo Sir Peter Bonfield quietly leapfrogged clean over all British Telecom's internal candidates to take the chief executive slot there seven months ago. So much media speculation accompanied Lord Weinstock's GEC corporate raid for Lucas Industries' top man George Simpson at the beginning of this year that it would have been difficult for Simpson to stay put even if he had wanted to.

Sooner or later all companies must decide how to handle succession for their most senior slot. Yet very few UK companies plan and implement succession as well as they could or should, claims Peter Needham, founder of executive coaching firm GHN. 'It's possible to be rather more professional than leaving it to gut feel,' he says.

'Yet the higher one goes up an organisation, the less rational the recruitment process becomes.' Organisations approach the issue too late and inadequately map, model and match the environment in which the company must operate with the characteristics required of the future leader. 'The majority of UK chief executives are totally unmatched to their tasks,' Needham says. 'Giving Cedric Brown, for instance, who started work for a state-run British Gas in 1952, the brief to run the company under privatisation was akin to giving a cavalry commander a set of tanks to control. Mismatches create a tremendous waste of opportunity and talent.'

Organisations tend to adopt one of three approaches to the succession process, says Richard Vancil, author of Passing The Baton: Managing the Process of CEO Succession. At one extreme is the relay race. With this approach an heir apparent is selected well before the incumbent's departure, typically elevated to a clear number-two status in the hierarchy and readied for the transition to the chief executive slot. The advantage of this, says Vancil, is its low-key nature and emphasis on continuity. At the other extreme is the horse race. Here, two or more executives are placed in competition. Sometimes a horse race is run with contenders identified and the entire organisation and even media watching. Heated rivalry followed by the rapid departure of unsuccessful candidates is the usual pattern.

Horse races can, however, be run more discreetly, involving either internal or external candidates or a mixture of both and the services of a recruitment agency. The third succession structure Vancil outlines is that old chestnut, the unplanned event. Caught hopping, usually by cases of illness, death or dismissal, the organisation suddenly finds itself leaderless with no heir apparent.

Of all three succession processes, the public horse race proves most divisive. And, insists Peter Wallum, director of HR resources consultancy Strategic People, counterproductive. 'Setting people against one another in the cut-throat kill or be killed approach is losing its appeal. Everyone just wastes their energy on internal fighting.' Certainly Lord Sheppard says the two years spent racing Sir Anthony Tennant for GrandMet's top job in 1986 were almost unbearable. 'We both knew we were in the running and that GrandMet either didn't want, or couldn't afford, both of us.

So we decided whoever lost would leave. After two years, it all became so frustrating we would have happily thrown a die to decide. That would have been preferable to the prolonged not knowing. GrandMet took too long and created too much melodrama in the press. Ultimately it inhibited decision-making within the company.' Soon after Sheppard triumphed, Tennant deserted the field for Guinness where he became chairman.

To go on appearances, this year history repeated itself at GrandMet when, after confirming his departure, Lord Sheppard appointed George Bull, his chief executive, as the next chairman and John McGrath, the head of IDV, GrandMet's drinks subsidiary, as the next chief executive. David Nash, the chairman of GrandMet's food sector, left the company the day the CEO announcement was made while Ian Martin, George Bull's main rival, had already departed when he was passed over for the top job. But, despite those two departures, GrandMet handled it better this time, Lord Sheppard insists. 'The process took only six months, was conducted in a fairly open style with some 20 people involved and included consultation with recruitment consultants. I discussed matters with our non-execs - Dick Giordano, Michael Hepher and David Simon - including whether or not we should look externally. Then I spoke to each of our executive directors on how they saw the succession and who they saw as chief executive and chairman. Then we took our recommendations to the nomination committee.

After we'd chosen George Bull as chairman, he joined us and we went through the process again in selecting the chief executive.'

Best succession practice, Lord Sheppard believes, requires an open style but, more importantly, the assistance of powerful non-executive directors who are truly independent of the whole process. For the dangers of top executives selecting their own successors without guidance from other directors or advisers are only too obvious. 'There is a strong tendency for leaders to try to clone themselves, believing that their own qualifications, experiences and behaviours are ideal for the company's future leaders as well,' says Donald Hambrick, author of Changes at the Top. Moreover, the more dominant the leader, the more powerful he (and it usually is a he) is and the more likely he is therefore to have problems appointing a successor, warns psychologist and business writer Dr Harry Levinson. 'First, if he is truly rivalrous, he cannot stand to appoint someone who may do the job better. Second, the greater his power, the more likely he has defeated his rivals unequivocally. Some of these contenders leave, others lose motivation. In a short time organisations contain few promising young executives with either the ability or desire to make a bid for the top spot.'

GrandMet has filled its recent top-level appointments from within the organisation, which shows that, 'our management development programme is clearly working,' according to GrandMet director David Tagg. More than 80% of recent vacancies among GrandMet's top 220 staff have been filled through internal appointments.

However, not all organisations give appropriate attention to either chief executive selection or the development of systems which ensure a good supply of internal candidates with appropriate experience and skills, argues Mike Haffenden, director of Careers Research Forum. 'Choosing a new chief executive is probably the most critical decision an organisation can make,' he says. 'Yet it seems harder to be recruited as a graduate trainee than as the leader of the company. The former are subjected to a barrage of interviews, psychological tests, assessment interviews, induction programmes and on-the-job training.' The latter often undergo a more ad hoc procedure which results, he says, in some leaders proving less effective than they could have been. Research conducted by Haffenden among 40 top UK companies suggests that many board members consider themselves unprepared for their new positions.

Opinion is split on whether candidates for top jobs should be informed of their special status. BT tells its fast-track managers of company expectations but Wallum warns against raising hopes. 'Today's rapidly changing commercial environment makes it difficult to make promises. Everything changes and, when the job becomes vacant, you may require a different type of person.

Moreover, people's levels of performance change.' Potential stars can lose their sparkle. Organisations, therefore, should work much harder to create larger pools of talent.

'Career development is neither a matter for organisations to plan secretly nor for individuals to pursue independently; explicit contracting has to occur,' Haffenden says. 'And a combination of visible CEO commitment with a strategic plan is necessary to achieve a pool of talent capable of orchestrating change.' Yet, increasingly, those with executive aspirations must take responsibility for their grooming process by developing their competences and seeking feedback on performance.

Failure to undertake satisfactory succession planning has left the UK's engineering industry, for one, extremely short of home-grown timber.

Headhunters Spencer Stuart, for example, spent five months considering possible successors to Sir David Lees, chief executive of motor components, defence and industrial services group GKN. The agency was forced to search beyond the engineering sector and go outside the UK because of the scarcity of suitable candidates; CK Chow, divisional director of industrial gases company BOC Group, was finally chosen. Failure to groom for the top in the engineering industry is responsible for the paucity of chief executive material, says Dr John Viney, chairman of executive recruitment agency Heidrick & Struggles International. 'The engineering industry is not producing top executives because it has failed to set up attractive management programmes,' he claims.

Yet even those companies with extensive managerial development programmes may need to bypass internal candidates. BT, for instance, prides itself on its development programme, says head of succession planning Eileen Kay. Both experience and competences are measured and high-flyers appraised on a quarterly basis. Managers with potential are targeted early on to ensure they gain appropriate experience. Nevertheless, BT looked outside the company when appointing current chief executive Sir Peter Bonfield, formerly of ICL. Looking outside, however, does not mean the system is failing, says BT. The company's global ambitions simply meant there were specific requirements for an international operator who held the confidence of the City, and Sir Peter fitted that bill.

While importing external candidates can dampen the motivation of internal candidates, some situations call for a new broom at the top, says Hambrick.

'The evidence suggests that major organisational changes tend to occur only after a new chief executive has been appointed. Long-tenured executives are more committed to the status quo. As tenure mounts, an executive develops habits and establishes routine information sources.'

A combination of outside and inside experience is the BOC Group answer to its recent nine-month search to fill the senior slot vacated by Pat Dyer in January. Internal candidate Danny Rosenkranz, head of the vacuum technology and distribution service business, became group chief executive after 22 years with the company. As chairman, BOC plumped for David John, a non-executive of BOC and director of Inchcape plc. A chairman's main role, says a BOC spokesman, is external liaison. John, with his experience of Asia, where BOC business is growing, brought ideal external experience, and was already known through his work as a non-executive director. Replacing anyone with the status of BOC former non-executive chairman, Dick Giordano (who retired in January) was bound to be difficult, BOC admits. 'It's hard to find someone of his status. They are simply not around.'

Finding chief executives is not easy, concludes Viney who has spent 16 years filling board-level appointments. 'Many UK companies have failed to develop their executives and we have increasingly to look abroad.' Yet those companies forced to look outside their own doors should not, perhaps, berate themselves too much. 'Despite all its resources and internal programmes, IBM came to us three years ago to recruit their next chief, Lou Gerstner.

If IBM can find itself headless, anybody can.'

Family Business - Why keeping it in the family doesn't ensure a smooth succession. Among all UK businesses, it is the 2.4 million family firms which suffer greatest difficulty in securing smooth succession at the top. Today the average life cycle of a family business is 24 years, which coincides with the average tenure of the founder. Only 30% of family businesses reach the second generation, less than two-thirds of these survive through the second generation, and only 13% survive through the third generation.

Chief among reasons for this high mortality rate, says Colin Barrow, head of the enterprise group at Cranfield School of Management, is the failure to survive the process of succession from one chief executive to another. 'Few people find it easy to come to terms with their own mortality, and it may be hard for an entrepreneur to recognise the time when he or she is no longer the best person to run the firm,' Barrow says. 'Very often businesses fail to plan for succession early enough; any planning is often precipitated by death or ill health which are generally the times when the family finds it hard to give the matter the thought that it requires.'

Successful succession, explains Peter Leach, chairman of the Stoy Centre for Family Business, is generally the result of a major planning exercise that begins many years before the event itself. Owners, however, tend to be doers rather than planners and this working style discourages formal planning. Moreover the family and senior employees in the firm may prefer to ignore issues relating to death or retirement of a family member. 'There is a minefield of interrelated processes - psychological, emotional, individual, organisational and external - all operating against any kind of planned effort to manage the succession problem,' Leach says.

Most successful transitions, says Leach, result from establishing a partnership with the next generation based on mutual responsibility, respect and commitment.

Leach warns, however, that if no family member has the ability to run the business or, if the rivalry between family members is so extreme none would accept one of the others as leader, alternatives (which include appointing non-family members) should be explored.

Once a successor has been selected, the important elements of transition include: early planning, intergenerational teamwork, a written succession plan (to include a detailed timetable of the founder's reduced participation in the business as well as the training and mentoring programme attached to the successor's expanding role and responsibilities) and the setting (and keeping) of a definite date for the handover.

Early planning and an articulated succession plan is responsible for the smooth handover now occurring at the family-owned 160-year-old printing and publishing services company, Pindar Group.

Deputy chairman Andrew Pindar, 38, is the fourth generation to manage this £50 million Scarborough-based business and will become chairman when his father, Tom, retires. Andrew started work at Pindar as a trainee in 1979 after graduating from Leeds Polytechnic but believes his ultimate role in the 700-employee firm was not a foregone conclusion.

'It was never cut and dried that I would take over,' he says, 'it would have been dangerous for the stability and prosperity of the company if it had been.'

Andrew believes that the lack of fatherly pressure to join the business in the first place and the subsequent encouragement he has received to bring his own style to the business helped to secure a smooth handover. 'I have worked in a variety of jobs of increasing responsibility within Pindar and my father also encouraged me to involve myself with other boards and committees to gain broader experience of the commercial world,' he says. As part of the succession plan, Andrew assumed the role of deputy chairman three years ago, with his father retaining chairmanship of the group board in order to provide a guiding and coaching role. Family ownership and direction, says Andrew, means that Pindar is not beholden to short-term public account. But he is not driven by sentimentality. 'The values and strength of family interest shouldn't be underplayed, but the flipside is that people can sometimes end up corrupting a business because they miss the point that it must make a profit and keep reinventing itself.'.

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