The temperature wasn't the only thing that heated up this summer. The nation's corner offices were abuzz, especially at Clorox, PepsiCo and Pfizer. Last month, the pharmaceutical giant announced that CEO Henry "Hank" McKinnell was stepping down, and general counsel Jeffrey Kindler took over the job.
Then PepsiCo became the largest company headed by a female chief, after appointing Indra K. Nooyi to the top spot. Late Wednesday, Clorox joined the revolving door club and appointed Donald Knauss as CEO and chairman.
Recently, C-level shuffling has reached an all-time high. In 2005, more than 16 per cent of all chief executives lost or left their jobs, up from almost 11 per cent ten years earlier. Some CEOs leave their jobs voluntarily, often moving to privately held firms that aren't subjected to relentless shareholder scrutiny.
Others are ousted for poor performance or ethical blunders. McKinnell was probably fired primarily because of Pfizer's unhealthy stock price, but the controversy over his gigantic compensation package, which includes a $6.5 million annual pension, didn't help.
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All this executive turnover is creating concern for boards, which are responsible for ensuring a smooth transition at the top. "Probably the most important thing the board has to worry about is CEO succession," says Dayton Ogden, chairman of executive search firm Spencer Stuart, and author of a book on CEO succession. "The leadership of a company is disproportionate to all other factors in terms of determining the company's success or failure."
If the board mismanages a transition, or appoints the wrong person to the job, the fallout could last years. Forbes.com talked to executives and headhunters to gain insight into how boards can ensure a smooth CEO succession.
Remember CEOs don't live forever. It sounds simple, but so many boards and CEOs ignore the inevitable: death. "CEOs think they're immortal," says Lars Dalgaard, chief executive of SuccessFactors, a company that makes talent management software.
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Take Larry Ellison, the micro-managing chief executive at software firm Oracle. In a recent Forbes story, two top executives and board Chairman Jeffrey Henley admitted that they had no succession plan. "There is no successor to Larry, no heir apparent," Henley said. "We discuss the subject, but there is no perfect plan. Larry still wants total control."
Once you have a succession plan, share it. Dalgaard learned about secretive succession plans when he was a young manager at Unilever. When he told his boss there that he was taking another job at Novartis, the boss responded: "You don't understand. You're part of our future leader stack." That would have been good news, if Dalgaard had found out just a few months earlier, but he'd already made his decision to leave.
Says Dalgaard: "It struck me that the board had an incredibly false sense of security. They thought they had done the work of creating a succession plan--they just didn't share it with anyone."
Get to know the candidates. The company's leaders should get to know all the candidates for senior management positions. At Dow Corning, for example, 30 "high potential" employees meet twice a year with the executive team, to discuss their professional development plans. When an employee is first identified as high potential, she spends an hour telling the senior executives about herself. "Employees know if they're on the high potential list," says CEO Stephanie Burns. "If they're not, they know why they're not."
Board members don't need to know every middle manager in the company, but they should know the CEO's potential successors, and know them well. "The CEO should be exposing them to the board on a regular basis," says Joe Griesedieck, vice chairman and head of Korn/Ferry's CEO Practice. If there is an heir apparent, he could take a spot on the board, or just start meeting with directors on an informal basis.
Choose carefully: inside or outside? As a general rule, it's better to groom an internal successor then turn to an outsider. But that depends in part on a company's performance. Firms appoint outside candidates when they are performing 9 per cent below their peers, according to Paul Kocourek, a senior partner at Booz Allen Hamilton, which conducts an annual CEO turnover study. The reason: "If a company is performing poorly, it's usually not just because of the CEO, it's the entire top layer of management," Kocourek says.
In those circumstances, recruiting an outside candidate works well, but only temporarily. About three to four years after a transition, the inside candidates start outperforming the outsiders. In other words, those outsiders may be good at executing a turnaround, but the internal candidates still do a better job of promoting long-term growth. The lesson: After appointing an external candidate to the top spot, the board should work fast to groom another inside successor.
Make a clean cut. If the board lets the departing CEO stick around as chairman, it can prevent the new chief from making any radical changes. According to Booz Allen Hamilton, shareholder return is 4 per cent lower when the former CEO holds on to the chairman slot. "It's very tough for the new CEO to operate comfortably with the former CEO running [the board]," Ogden says. "Even with the best will in the world, and the obvious mentoring opportunities, I think it's better to push the new CEO off the dock."
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