Merrill Lynch, like many other financial companies, was caught in a bad situation. Sub- prime lending woes and a downwardly spiraling housing market resulted in enormous financial losses. Merrill Lynch benefitted from high returns for years, and showed little restraint in taking on enormous risks. Once the markets collapsed, Board members felt they had little recourse but to dismiss the CEO, Stan O’Neal, in order to placate angry investors. In addition, O’Neal reportedly had terminated any up-and-coming executives in an effort to protect his job from any hostile moves by the board. As a result, there was no talent capable of replacing the CEO. The board did not complain about O’Neal’s practice, because O’Neal had appointed all of the Board members. Had there been any form of leadership-succession planning in place, a knowledgeable replacement would have been available. Instead, the company risked going without a real leader for several months, at a time when tough decisions would likely determine how quickly it might recover from the credit crisis.
A similar scenario played out at Citigroup: huge financial losses due to risky lending and investing. Charles Prince, Citi’s CEO, had been facing much scrutiny in the financial press long before the credit problems surfaced. Thus, the lack of leadership-succession planning was sur- prising. In both the Merrill Lynch and Citigroup cases, their respective boards went outside to find successors, perhaps to establish a clean break from the shoddy lending and investing practices that had grown over the years.
In contrast, Procter & Gamble prepared well for a leadership change. Its former CEO, A. G. Lafley, dedicated a portion of his time to working with senior managers in different divisions to identify promising talent and to report these candidates to the board. Board members, in turn, visited these individuals to become familiar with them and to let them know that they were being groomed as key players. As a result, board members were well versed on key suc- cessors, and the CEO shared information with these individuals to promote their continued growth, HR knew about these selections, and there were checks and balances in the entire process. A high level of trust existed among the CEO, successors, and board members. In late 2009, the board appointed Bob McDonald as P&G’s next CEO. Mere existence of a process is no guarantee of success, however. In 2013 P&G’s Board replaced McDonald, and Lafley, the previous CEO, returned to his old job.
A final example is Johnson & Johnson. Its Covenant of Corporate Governance includes a section on leadership-succession planning, which makes quite clear that the CEO is responsi- ble for reviewing the succession plans of all key executives with the Nominating and Corpo- rate Governing Committee of the Board of Directors. The Committee has oversight of the plan, and the CEO is responsible for presenting the plan to the board at least once a year. The board then evaluates all successors presented in the plan, and the annual review of the plan is an integral part of the performance review of the CEO.
1. What key differences seem to distinguish successful from unsuccessful leadership- succession processes?
2. If you were advising a firm on how to proceed in this area, what steps and priorities would you recommend?
3. If leadership succession is so important, why don’t more companies do a better job of it?