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Knowing when to walk away By Alison Maitland,
FT.com site; May 26, 2004 How does the boss know when it is time to say goodbye? Some cannot let go and end up being unceremoniously removed, such as Sir Clive Thompson, ousted by his fellow directors last week after 22 years dominating Rentokil Initial, the UK pest control and cleaning company. Others find that the crunch moment is eased by being headhunted into a new job. But judging the perfect moment to quit is hard, and it is getting harder. "People used to become chief executives of very large companies in their 50s and they'd assume they'd go on until retirement," says Peter Hogarth, a senior coach and managing director of global leadership services at Whitehead Mann, the executive search and development firm. "Now vast numbers are being appointed in their early 40s and it's not so simple to determine when you go." Succession planning is often seen as the answer. Procter & Gamble is trying to ensure a seamless handover when the time comes for A.G. Lafley, chairman and CEO, to depart. It announced last week that it had appointed two more vice-chairmen, creating a triumvirate from which a potential successor could be drawn. The effectiveness of succession planning depends on having a CEO who is willing to countenance mortality. "You either hire a subordinate who will take over or you hire somebody who will not cause any trouble," says Mr Hogarth. "More choose the latter because they're insecure about doing the job. But it won't stop them getting fired, because investors are very intolerant of failure at the moment." Eight to 10 years is the longest any chief executive should stay these days because business is changing so fast, says Lord MacLaurin, who as chairman of Vodafone presided over the transfer of power from Sir Christopher Gent to Arun Sarin. "The best time to go is when you feel you can't add anything positive to the company," he says. "If you feel that you have got a strategy that's working and your team is working well with you and you're producing the results for the shareholders and staff, then fine, keep going." On that basis, Lord MacLaurin might have tried to stay longer at Tesco, the supermarket group that he ran for 12 years. Indeed his decision to retire at 60 initially ran into shareholder resistance. But he had learned from seeing Sir Jack Cohen, the company's founder, casting his shadow over Tesco well into his 70s. "I just felt it was time for me to go and do something else," he says. Given how hard many find the decision, it may not be a comfort to know that more north American CEOs last year were able to choose the timing of their departure. The finding comes in a survey of the world's 2,500 largest publicly traded companies by Booz Allen & Hamilton, strategy consultants, which shows that north American CEOs have the longest average tenure at 8.4 years, compared with European CEOs' 6.6 years. Even the latter is too long for David Newkirk, senior vice-president of Booz Allen in London, who argues that three to five years is ideal. "Either the environment changes or you've solved your problem and it's time to move on," he says. "Every three to five years the CEO ought to re-enlist and ask: 'Are my skills right for the challenge the company is facing?' But that's impossible for them to answer. The kind of ego-rich personalities that end up at the top are exactly the wrong sort to want to let go." A few keep going successfully by re-inventing themselves. This was something at which Jack Welch, former CEO of General Electric, excelled, says Mr Newkirk. "He reframed the leadership challenge every three to five years." But these are the rare ones, which is why fixed retirement ages and careful succession planning make sense. The vast majority of senior executives polled last month by Christian & Timbers, a US executive search firm, considered it essential for big companies to have more than one candidate identified. Yet most companies do not put enough emphasis on succession plans and few have more than one candidate in the wings, says Stephen Mader, CEO of Christian & Timbers. "An unexpected - or even expected - departure by the CEO without a clear successor lined up can quickly become a strategic and media nightmare for a company." Coca-Cola has been through a protracted and painfully public search for a new leader following the early retirement of Douglas Daft. Steve Heyer, the only internal candidate, was eventually passed over in favour of Neville Isdell, a retired former Coca-Cola executive. Walt Disney has also suffered over the succession question with the recent shareholder revolt that forced Michael Eisner, CEO, to relinquish his role as chairman. The board has been attacked by Roy Disney and Stanley Gold, the dissident former Disney directors who have led the campaign against Mr Eisner, for having no clear strategy for his departure. "It appears that the only 'succession plan' is to keep Mr Eisner as CEO for as long as he wants," they complained last month. Many talented potential successors have left over the years, including Stephen Burke, a top executive at Comcast, the cable group that last month withdrew a hostile offer for Disney, Jeffrey Katzenberg, who went on to co-found Dreamworks, and Meg Whitman, chief executive of eBay. There are often warning signs in a CEO's behaviour that indicate it is time to pull the trigger, says Margaret Exley, UK chairman of Mercer Delta, the management consulting firm. The boss may start shifting the blame for a drop in performance to subordinates, economic conditions or the competition. Or he or she may deny things are going wrong, or fall short of agreed personal targets. Some of these problems can be remedied if they are spotted early enough by a chairman who talks regularly to the executive team. But ego can affect a chairman's judgment too. "Both chairmen and chief executives may be blocked from having a candid conversation because one or the other feels they can make things work," says Ms Exley. What can be learned from companies that manage succession well? According to Christian & Timbers, the seven Fortune 500 companies with the best track record are McDonald's, General Electric, Sprint, International Business Machines, Dow Chemical, Citigroup and P&G. Within hours of James Cantalupo's sudden death from a heart attack last month, McDonald's announced that Australian Charlie Bell would succeed him as CEO. This might sound like unseemly haste, but the financial markets were reassured. Mr Bell had worked closely with Mr Cantalupo on turning round the fast-food giant and the strategy seemed set to continue. At GE the grooming of Jeffrey Immelt, now chairman and CEO, and two other potential successors to Mr Welch, who retired in 2001, is seen as a textbook case. The company put chief operating officers in place at each of the three men's divisions to ensure a smooth transfer of power. All seven companies are large enough to give future leaders broad experience of working in different functions, business units and countries, says Kerry Moynihan, managing partner of Christian & Timbers. But internal succession is not always the answer, he adds. When a company needs to undertake a major change it may have to go outside for a CEO, as was the case with Lou Gerstner at IBM. Succession planning takes time. Asked recently why it was the right time to retire as co-chairman of Unilever, Niall FitzGerald said it was natural to hand over to a successor - Patrick Cescau - who could see the multinational through its next phase of development. "It is also, I think, that the candidate is ready," he added. "I have been training him for 25 years, so he'd bloody well better be ready."
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