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May


Nothing succeeds like a good succession

Sun, 19th Mar 2006

TO LOSE one top executive may be regarded as a misfortune. To lose two, even if the second is honorary president, looks like carelessness. Pace Oscar Wilde, the boardroom ructions at Vodafone, the world's largest mobile phone company, are earnest rather than funny, speaking volumes about succession and leadership assumptions in the UK's largest companies.

It is often argued that succession planning is, or should be, one of the most important roles that boards undertake. Yet despite the lip service, most large firms have either unsatisfactory succession plans or none at all, according to US research (and the US is better than elsewhere). The reason is partly psychological. Although a temporary contingency plan for what happens if a chief executive falls under a bus is obvious common sense, formal succession is like planning your own funeral - even more sensitive because the current CEO may not be the best judge of the successor.

As a result, although it is inevitable, the need to replace a leader always takes a company by surprise. The results of this permanent unreadiness have been all too visible at Marks and Spencer, Rentokil, and J Sainsbury as well as Vodafone effects include leaders who stay too long (or who hang around in emeritus positions looking over the shoulder of the new person, as at Vodafone), abrupt strategy lurches, compromise appointments, and drooping performance because senior managers take their eyes off the ball to plot against each other rather than competitors.

In a further twist to the tale, sagging performance leads to briefer CEO encounters and more short-termism, in turn creating greater pressures on the next one in the hot seat. According to consultancy Booz Allen, underperforming European chief executives get just 30 months before they are given the boot (compared with 4.5 years in the US), 'an astonishingly and counterproductively short period of time ... the threat of rapid dismissal focuses existing CEOs on short-term performance, preventing them from completing (or even launching) the transformations that many European companies need'.

But Vodafone's travails illustrate something else. Of course who is in charge matters, but it matters more at Vodafone - where differences over strategy are reflected in a struggle between the new and old guards - than it would at a more stable firm. To illustrate, consider the acknowledged Exhibit A of succession planning, GE. GE makes a fetish of management development. Its chief executives are always appointed from within, enjoy tenures vastly longer than the norm, and are regularly feted as the world's best managers of their day.

But you can turn that around. The reason that GE's CEOs are so effective may be that they are the products of, and work in, a brilliantly effective system. Crudely, it may not have mattered if it was Jeff Immelt or one of his internal rivals who inherited Jack Welch's mantle. Part of the CEO's importance is symbolic. As as former GE manager points out: 'Jack did a good job, but everyone seems to forget that the company had been around for over 100 years before he ever took the job, and he had 70,000 other people to help him.'

In other words, good firms don't need leaders to make a vast difference. Bad ones do. One motor industry study found Toyota was unique in that a change of CEO made no difference to its performance at all. Changing CEOs at the firm, notes Stanford University's Jeffrey Pfeffer, is like changing lightbulbs: the system is so robust that the difference from one to the next is minimal.

In turn, this gives some clues about what succession committees should be recruiting leaders to do. If the company is successful, the successor should probably be internal and incremental. If the firm is wobbling and there is a presumption in favour of change, an outsider may be the best choice. Beware of charisma, however. Strong egos who believe their own hype are some of the most dangerous people on the planet, habitually overestimating their power of control and the degree to which success is due to them alone, and underestimating the difficulty of change.

In fact, large-scale change has such a poor record that companies need to be absolutely sure they really need it. Is it Vodafone's global growth strategy that is running out of steam, or its execution? If the latter, then a strategic review won't help just as the replacement by the present Vodafone CEO of old-guard senior managers will not buy much time if the system they work in is flawed.

A good succession arrangement, on the other hand, is one that reverses the vicious circle of constant change. It makes each succeeding appointment decision easier - by making execution the strategy and building a reliable system that delivers it over and over again. The job of the leader is to make the transition to the next one as boring and unremarkable as possible. In light of which, the column inches devoted to Vodafone's need for strong leadership may bode ill for investors. As Oscar Wilde also noted: 'When the gods wish to punish us, they answer our prayers.'

The Observer, 19 March 2006


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