Why Is Succession So Badly Managed?

A high-profile company fails to meet market expectations. The board, with limited knowledge of the inner workings of the firm, fires the CEO but appoints an acting CEO while a talent consultant is hired to begin a search for a replacement. Given the natural bias of the search firm and the board's recent bitter experience, the replacement is often the CEO of another prominent firm, a person with a good track record but an "outsider" with limited knowledge of the business. The cycle is begun again. Sound familiar? It should. It's unfolding in two of the largest financial institutions in the world, Merrill Lynch and Citibank. And it has taken place with increasing frequency in large companies around the world, even including Japan where continuity, consensus, and culture have been honored for so long.
The questions posed in many of these cases include: What did the board know when? How could it have anticipated and helped avoid the situation? While these are interesting questions, Joseph Bower, in a recently-published book, The CEO Within, poses other questions that represent equally important challenges to CEOs and their boards of directors. They include: What are the CEO and board doing to acquaint themselves with leadership talent inside the firm? Is the board insuring that the CEO is building a cadre of insiders ready to assume positions of leadership when needed? Has the board encouraged the development of what Bower calls "inside outsiders," those with somewhat detached views of the company's strategy but with intimate knowledge of how to get things done inside the organization?
Bower's analysis of the leadership and performance of S&P 500 companies in the U.S. leads him to conclude that "insiders perform better than outsiders" whether the company was performing well or poorly at the time of their appointment, but "especially when the company had had poor prior performance." But he worries about the "cognitive and emotional baggage" that insiders bring with them as a result of their long employment in the organization. His solution, based on an intensive examination of a number of case studies, is the "inside outsider." This executive avoids, in his view, some of the shortcomings of both insiders and outsiders. He or she has successfully led portions of the business, such as international ventures, which are away from the purview of headquarters. Headquarters has given them full responsibility for performance with little direct oversight, and allowed them to develop a more objective view of the enterprise and its strategies. This enables them to entertain ideas for new directions while leading with the credibility, the understanding of the organization and its culture, and a good knowledge of its talent that "outsiders" have to accumulate over time, often with some difficulty. Exhibit A among "insider outsiders" is Jack Welch at GE, who at the time of his promotion to CEO had been a member of the organization for a number of years and was making his mark running a non-core business, plastics, with a management style that was very different from his predecessor, Reg Jones. His selection culminated a careful process in which Jones nurtured a talent pool of successors and involved the board in identifying finalists for the job.
If "inside outsiders," on balance, provide answers to the need for such things as continuity, intimate knowledge of the organization, and a fresh look at the business, why don't we see more of them? Does their identification and development require complex processes that often don't exist? (The respondents to a poll of 1200 HR managers indicated that 60 percent did not have a CEO succession plan in place.) Are CEOs reluctant to initiate plans that require substantial effort and potentially foster executive competition? Have boards abdicated one of their most important responsibilities, substituting "executive search" for succession planning and development? What, if anything, can CEOs, directors, and shareholders do about this? What do you think?