I was appalled to learn recently that 60% of the respondents to a poll of 1,380 HR directors of large U.S. companies said their firms have no CEO succession plans in place. As this finding suggests, too many companies have over the past two decades ignored the hard work of building future leaders while senior executives have focused increasingly on meeting the next quarter’s earnings target. When the time comes to name a new CEO, more firms look outside. Yet strong evidence supports the notion that a well-groomed insider is a key to sustained company performance. In my analysis of 1,800 successions, for instance, I found that company performance was significantly better when insiders succeeded to the job of CEO. Other researchers, including Jim Collins in Good to Great, have come to similar conclusions working from different data sets.
Such quantitative research on CEO succession confirms but does not explain why more outsiders are being hired, why qualified insider leadership correlates with better company performance, or what relationship exists between those two trends. These ambiguities have prompted me to consider what I could add to the data-centered research from a qualitative review of a decade of my own and others’ case studies and interviews, as well as from my experience managing successions as an outside director. That review made one thing unambiguously clear to me: A critical difference between companies that manage succession well and those that don’t is the understanding that succession is a process, not an event. The process begins years before the event. Something else was clear: Both insider and outsider CEOs have strengths and weaknesses when they begin. Insiders know the company and its people but are often blind to the need for radical change—they’ve drunk the Kool-Aid. Outsiders see the need for a new approach but can’t foster change because they don’t know the company or industry sector well enough. What organizations need, then, is to find a way to nurture what I call inside-outsiders—that is, internal candidates who have outside perspective. For some companies, that may look like mission impossible. But the succession crisis will only get worse if companies don’t tackle the problem.
The CEO Does Matter
Recently, there’s been a reaction against focusing too much on the CEO—with some justification. Top teams, as much as CEOs themselves, are crucial to the execution of a great strategy. Nonetheless, strong CEOs are worth studying. They wield enormous power. And as stewards of the corporate purpose, their ability to make sense of the business environment and to craft and articulate the mission and the strategy are central to long-term success.
Nothing illustrates the point better than the last 35 years of succession at General Electric. Reginald Jones took the helm at GE in 1972. He developed the strategic-planning system he inherited from his predecessors into the model for companies everywhere. He made huge changes in GE’s portfolio, exiting the computer business and acquiring the giant inflation hedge, Utah International. Jones’s GE regularly outperformed the U.S. GDP by more than 25%. Recognizing the dawn of a very different environment in 1981, successor Jack Welch proceeded in two or three years to dismantle much of the planning and organizational structure Jones had put in place. Welch sold Utah, acquired RCA, and built a huge financial services business. Entire levels of middle management and staff disappeared. In the second decade of his tenure, GE’s market capitalization grew more than 1,000%. Welch’s successor, Jeff Immelt, is changing GE once again. He is making major investments in biosciences, water, security, and platforms for infrastructure growth in emerging countries. The stock market is giving him the same cool reception it gave Welch in his first decade, but GE is growing both revenues and profits as it changes.
What GE’s CEOs exemplify is the ability to perform four seemingly contradictory tasks (a near-impossible quadrafecta):
- Produce good short-term performance regardless of how the markets and competitors buffet the company they’ve inherited.
- Deploy resources so that organizational capabilities improve in the medium term.
- Align the talents and energies of hundreds of thousands of employees with clear strategic objectives.
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Thank you, Scott Johnson