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CEOs should already be looking for their successors

 


Forbes | November 4, 2015


Forbes Poland interviewed Russell Reynolds Associates' CEO Clarke Murphy for their article, "CEOs should already be looking for their successors." The following is a translation of the original article found here.

Entrepreneurs are not good heads of large corporations. Steve Jobs and Mark Zuckerberg will go down in history as exceptions. Large companies are looking for people for specific tasks, objectives to be accomplished. Some time ago – for people who would cut costs, today – for  leaders of digital transformation and specialists on cybercrime. And they should always have a list of their potential successors - says in an interview with Forbes Clarke Murphy, Chief Executive Officer of Russell Reynolds Associates, a company recruiting the heads of the largest companies in the world.

For what company did you last search for its CEO?

Duke Energy, the largest utility in America. I also recruit brand members for companies like United Health Group. I also help private equity firms with companies they own. For some companies, I have been helping their brands prepare CEO succession for 5 years.

5 years?

Yes, I help appoint successive people to the board, or help plan who next will be most likely to replace the current CEO. A well-functioning organization is like a monarchy - there is always a succession list to the key positions. This is even more important than the decision as to who will take the chair right now, because it determines the vision of the company's development and provides stability. One of the most important questions I ask each member of the board is who they see as their successor.

In Poland, they'd be afraid they'd be soon fired.

But this is a natural element of career planning, and – in the case of your own business - a condition for its survival. If the CEO does not have a plan for who specifically will replace him in a year or two, or in a few years' time, this is a bad omen for the entire company and for the CEO himself, which is often a painful lesson particularly in a family businesses. Poland has so far been quite untypical, as the oldest, already capitalist enterprises were set up barely a quarter of a century ago, so this will just start to be a problem.

It already has. There wasn't any greater problem with the succession after the unexpected death of the richest Pole, Jan Kulczyk. But for example in TVN, there were no successors among the founding family and the company had to be sold.

We once had a client in a similar situation in Brazil, within the sugarcane industry. One of the partners wanted to float the company, while the other dreamed about already going on retirement. They had not prepared earlier either any common scenarios, or candidates who would later implement their vision. The global crisis had just hit, and it was necessary to make a quick decision. As a result, they sold the company to a private equity fund, so the company ceased to exist as a friend-family business. But actually today there are few large companies that undergo succession unscathed. One of the few positive, almost textbook examples is McDonald's. In this corporation it is clear that theoretically, almost anyone has the chance to become the future CEO.  But on the other hand, you won't have the chance to become the CEO of McDonald's if you don't climb up all the ranks, starting from a janitor or a cook frying burgers. Each and every year, the board develops a detailed list of the potential successors to all of the key managers. This strategy paid off the company most in 2003, when within a period of only nine months two successive CEOs died. First was Jim Cantalupo who died of a heart attack, and who had been with the company for 28 years. Only a few months later came the death of his successor - Charlie Bell, who had been working at McDonald's since he was 15 years old and who was appointed to the board when he was only 27. Just after three months into his tenure, it turned out that Bell was in the terminal stage of cancer. He was smoothly replaced by Jim Skinner, whose first task was of course to designate his potential successors (editor: the current CEO is Steve Eastbrook).

This is of course a drastic example, but it is only one of the reasons why succession should be planned for at least three years into the future. That is how much time it takes on average to prepare a manager to enter the board. Depending on the strategy, this will be either a mirror image of the current CEO who, for example, is to retire or else someone with completely different competences, who will introduce the company to new markets, or prepare for sale.

Today, CEOs tend to be very young people whose start-ups grow to the size of corporations, such as Facebook or Airbnb. It's difficult for me to imagine these 20, 30-year-olds already planning who will replace them in a few years' time...

Entrepreneurs are rarely good CEOs of corporations at all. Especially when their businesses grow rapidly and unexpectedly. Faster than it takes these people to prepare to lead their organization, which suddenly becomes a business employing hundreds or thousands of people. Mark Zuckerberg is one of the few exceptions so far. It's a new situation. It used to be the case that the owner had a few years to choose his successor, having the chance to observe his employees in various positions. Even Steve Jobs, whose personal management of the company, as it  seemed, was the guarantee of Apple’s success, designated Tim Cook much earlier. In the case of representatives of the young generation, who are no longer seeking ‘comfy jobs’ but hopping from company to company, or else setting up their own companies after a few years spent within a corporation, finding successors within the company will be increasingly difficult in the future. Executive programs wherein people were tested for years in various functions are becoming increasingly rare in corporations.

Have you ever had a problem with finding a suitable candidate for a client?

We had the biggest problems when the crisis struck. In 2008, probably the greatest number of CEOs in history lost their jobs. In their place, we had to quickly recruit new ones. Mainly specialists in cutting costs. Yet at the same time the rule is that in these situations companies rather promote people from within their organization, who know it well. That's 75% of all recruitments for top management positions. The most difficult search we had was for Harley Davidson, where their credit subsidiary had financial difficulties. At the same time, the CEO James Ziemer was leaving for retirement, after 40 years in HD. Although it was said that Ziemer's departure was in no way connected with the decline  the company was experiencing for the first time in 20 years, it was clear that his successor would have the difficult task of lifting the company out of the crisis. We believed the concern needed 'fresh blood'. And we found Keith Wandell. He was the first CEO from outside the organization since 1981. He managed the company's restructuring, bringing in savings of more than USD 300 million per year, helped the company enter new markets, and the company's stock rose until this day by 200 percent. After Wandell's retirement (in May this year) the CEO position was taken over by Matt Levatich, a man who had already been designated as his successor from within. An engineer, who was earlier on the board, responsible for operations.

During the times of the crisis it was mostly people with experience above all in finance, especially CFOs, who were promoted to CEOs, or recruited as CEOs from the outside. In 2011, they accounted for as much as one third of the CEOs of Fortune 500 firms. Who now will have a chance for promotion?

During the times of the crisis, this was necessary, as what was needed was control and greater predictability. Finance executives follow the rules and structures, are stable and much less likely to take risk. If, however, a company needs to adapt to rapid changes, and this is what we are facing now, CFOs at the very top of companies are not the best choice. Today one needs to find a good balance between predictability and taking greater risk. The scale shifts in favour of skills in the second of these areas, having a clear vision and a good feel of digital trends.

It’s no wonder that the CEOs in large corporations are software engineers or engineers, such as e.g. Jeff Immelt at GE, or Rex Tillerson at ExxonMobil. Today, the proportions are such that half of the CEOs of Fortune 100 companies graduated in Economics or Accounting, while a quarter are graduates of technical studies - but these proportions will certainly change. Especially since all companies, regardless of industry, need to not only participate in the technology race and digitalization of business, but also deal with cyberthreats. One can expect on boards  more and more CISOs (Chief Information Security Officer), expert on network security.

Is that what the phrase "digital era managers" is about?

That’s even more complicated. A digital manager is not necessarily a technology specialist. It’s about the need for a new approach to management. An approach that requires analytical thinking, understanding of large sets of data, which allows one to run the company in a new direction. Sometimes this entails a complete re-organization of the entire company - media are probably the best example. Digital transformation is, however, more a way of thinking about the future than just the use of new technologies. To carry out digital transformation, we are looking for leaders who will enliven the core business or expand it via a new business. Positive disruptors. Such an approach can be seen e.g. in the most recent strategy of Google, whose CEO (Larry Page) gave power to computer engineer Sundar Pichai, while he himself is developing a conglomerate Alphabet, which is to deal with technology, life sciences, investments and research.

Does one need to be ‘born’ a CEO, or is one educated and prepared for the role during the course of corporate games, politics, or - if you will - strategy?

To be able to lead companies, especially large companies operating on a global scale, one rather needs to have talent, be cut out for it. Here, craftsmen rarely succeed. Some CEOs, who had led corporations in the years 1997-2010, came from the times of prosperity, progressing earlier smoothly through successive stages of their career while their companies were improving their results systematically and without any major problems. In times of crisis, they simply were not up to the job. And they won’t be now. Especially in a situation where for a few years now we have had to deal with rapid technological change, crises in cyberspace, something we had never earlier experienced. It turns out that many CEOs have learned to lead and “be CEOs” under certain conditions, but do not have the ability to adapt to changes and react quickly to them. Good CEOs must be naturally very open people, who are huge optimists and born leaders, able to pull people with them. Keeping in the company of talents, especially those who think ‘digital’, is today one of their greatest challenges.

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CEOs should already be looking for their successors