Week 7: Leader Assessment & Succession

Succession Planning— It’s the right thing to do… Getting the right number of people, with the right skills, experiences, and competencies, in the right jobs, at the right time

What steps

Business Leader Confidence Index (2007)

Changes in Small Businesses

CEO Turnover by any other name

In the past five years nearly 2/3 of all major companies worldwide replaced their CEOs 35% of all new executives entering a new position will fail (Center for Creative Leadership) 40 percent of all executives entering into new positions will either leave voluntarily, be terminated or receive an unsatisfactory review within 18 months (Manchester Partners International) 70% of CEO have considered quitting, and 35% of top executives would say no to CEO position (Burson-Marsteller CEO reputation study) The typical Fortune 500 company has had 2.3 CEOs in the last decade (Center for Executive Options) the failure rate of corporate executives in the US from the 1980's-90's was about 50% (DeVries, 1992). The CEO "Revolving Door": The frequency of CEO "succession events," (e.g., the departure of one CEO and the accession of another) nearly doubled, from 6% of the largest 2,500 global companies per year in 1995 to 11.2% in Trends

CEOs are entering and departing office at younger ages. In North America in 1995, the average starting age of CEOs was 50.4; in 2001 it was European and North American CEOs performed better for their shareholders in the first half of their tenures than in the second half. 62% of CEOs have a successor lined up (Fortune, 11/18/2002) CEO succession has increased by 53 percent in the last six years, according to a study of the world's 2,500 largest companies. (The Globe and Mail, 10/16/2002) Business influencers believe that companies are better off hiring insider CEOs than outsider CEOs for long-term business success (47 percent versus 33 percent) (though externals are paid 30% higher salary) Smart CEO succession planning takes a split route: the normal, gradual development process and a backup emergency plan Succession planning should be initiated at least five years before an incumbent CEO plans to step down

National Study of Non-Profit Leaders (CompassPoint & Meyer Foundation, 2006)

Example: Survey of Natural Resource Leaders (Canada)

StartupCreating vision Establishing core technical & market expertise Build mgt. team Vision of finished business Hands-on orientation Knowledge of critical technical areas Organizing ability Staffing skills Team building capabilities High energy, stamina Charisma Broad knowledge of all key functions TurnaroundRapid, accurate, problem Dx Fix short/long term problems Strong “take charge” leader Strong diagnostic & analytical skills, especially financial Excellent business strategist High energy Risk taker Handles pressure Crisis mgt skills Negotiator Extract profit or rationalize existing business Increase market share in key sectors Manage rapid change Build long term health toward clear vision “knows the business” Sensitive to changes Anticipates problems Strong administrative skills Oriented to systems Relationship orientation Sees need for mgt succession & development Efficiency, not growth SituationMajor Job ThrustIdeal Candidate Characteristics

Dynamic growth in existing business Increase market share in key sectors Manage rapid change Build long term health toward clear vision Excellent strategic & financial planning skills Clear vision of future Ability to balance priorities (e.g., stability vs. growth) Organizational & team-building skills Crisis management skills Moderately high risk taker High energy level Excellent staffing skills Redeployment of efforts in existing business Establish effectiveness in limited business sphere Manage change Support the “dispossessed” Good politician, change manager Highly persuasive Moderate risk taker Highly supportive, sensitive to people Excellent systems thinker about complex systems Good organizing & executive staffing Liquidation or divestiture of poorly performing business Cutting losses Make tough decisions Make best deal Tough-minded, callous, be the “bad guy” Highly analytical regarding costs/benefits, not accept current way of doing things Risk taker Low glory-seeking, do dirty jobs Wants to be respected, not necessarily liked New acquisitions Integration Establishing sources of information & control Analytical ability Relationship building skills Interpersonal influence Good communication Charisma, instant credibility SituationMajor Job ThrustIdeal Candidate Characteristics

72% of companies reported that they will have increasing vacancies over the next 3-5 years, and 76% are “less than confident” they can fill them 20 years ago only 7% of CEO’s were hired from outside; now its closer to 50% A Booz-Allen Hamilton study of CEO succession at the largest 2500 companies showed that internal CEO’s delivered about 2% higher returns than did externals The most successful companies are those having a culture of succession Visionary companies are six times more likely to promote from within Succession planning should be top to bottom of mission critical roles, not just single events at the top Passing the Torch

Succession & shareholder wealth Investors react in a negative manner when selection process results in the heir apparent leaving the company Investors react positively when the heir apparent is promoted to CEO Investors respond more favorably to an external CEO (when there is no favored internal heir) Investors react negatively when someone who is external and a non-heir is promoted to the position

Example of promotional/succession criteria for PepBoys

What are your next steps in developing your leadership potential? Team feedback from each member– what is a specific leadership trait or behavior that you observe in each other? What are three personal characteristics you want to develop further? What are three technical/managerial skills you want to develop further?

It's worth observing that power at the top can be deceptive, particularly at Coca-Cola. In 1980, when CEO Paul Austin was supposedly running the company, his judgment was impaired by the early stages of Alzheimer's, and former chairman Robert Woodruff was the one actually making the big calls. Seventeen years later, Austin's successor, Roberto Goizueta, was ill with cancer; few people knew that Ivester was essentially running Coke for at least a year before Goizueta died. And then, when Ivester moved up, he thought he had the power--but he failed to cultivate the board and Keough, and learned the hard way that he didn't have the power after all. All of that is a message to Daft and Heyer and anyone else with a stake in Coca-Cola: Power at this company can be as mysterious as the secret formula itself.

Armand Hammer Occidental Petroleum Hard to leave What happens when a CEO is charismatic, founded or identifies him/herself with the company, has been instrumental for much of its development, and is viewed as synonymous with the company/brand? They may have a difficult time letting go the reins of power They may have a investment in their own choice of successors Retirement implies their own mortality Hard to share power with others Have to face that their vision may change

Succession Pitfalls Don’t let the CEO play kingmaker – this may remind them of their own dispensibility or replace them with an unneeded clone. Boards should develop a succession culture six years in advance to monitor development Headhunter boilerplates are usually too general – identify specific criteria and examples to search for in a CEO Don’t let headhunters run the show ; let them do the recruitment, then have the board conduct the questioning and debate Be careful of fads – internal vs external recruits, and belief that someone can “save” the organization Don’t keep Elvis in the building – when the new CEO arrives, the old one leaves and does not further influence the CEO, board or others.

Have a terrific Summer !!!

Ip, B., & Jacobs, G. (2006). Journal of Small Business & Enterprise Development, 13(3), Business succession planning: A review of the evidence. Stages of succession planning Supplement

Groves, K. S. (2007). Integrating leadership development and succession planning best practices. Journal of Management Development, 26(3), Supplement

Uses of Assessment Centers Evaluation of people for promotion or succession Formulation of training plan for strengths & weaknesses Evaluation for selection of final candidates

Leadership Assessment Centers Over 3,000 organizations have used assessment centers Evaluate for promotion, succession, strengths/weaknesses training, final selection Predictive validity for leadership talent; may lack job relatedness 3-5 evaluators for candidates over 1-5 days 1-5 days for cost of $2,000-$30,000 each candidate (average $3,500) Expensive-- only.5 – 2% of internal employees can do it May be assessed only once in career while market opportunities change constantly

What are the kinds of behaviors that should be assessed & what do you think they would indicate? How can they best be leasured?

Predictors of Leadership Performance Low Predictors Graphology (85%) Interviews (81%) References (67%) Moderate Predictors IQ, cognitive ability Career Path Appreciation (conceptual skills & promotability) High Predictors Biodata (high fiscal, 7%) Personality (5-factor) Critical incidents (immediate job)

Leadership Assessment Centers Typical Evaluation Methods Biographical inventories Vocational, aptitude, personality tests In-basket exercises Leaderless group discussion Role-play Case analyses Behaviors evaluated Decision making Leadership style Interpersonal skills Management control Delegation Planning & prioritizing Risk taking Creativity Oral & written communication Assertiveness Stress tolerance

Sample Assessment Center Agenda Day 1 Day 2 Day 3 Day 4 Orientation & group formation Business game Interviews & psychological testing Leaderless group discussions In-basket exercise Individual role playing Group role playing Individual case analysis Peer ratings Feedback Counseling Further development discussions

Sources of Rater Bias Halo effect – rate high or low due to irrelevant feature or global impression Leniency error – tendency to give everyone higher ratings Severity error – tendency to give everyone lower ratings Central tendency – avoid extreme ratings for specific or on all dimensions Contrast effect – rating of one person is affected by rating of another Hawthorne effect – rating distortion (usually high) due to being attended to in a study Self-fulfilling prophecy (experimenter effect)– selective attention given to what is expected or desired Misplaced precision error – faults in the rating, design, or treatment may invalidate the precision of the other Law of the instrument – a favorite instrument will probably find only what it’s designed to find Number magic – the use of numbers carries the impression of greater precision than may be present

Team Discussion If you were on a task force to select a person for a leadership position in your company, how would you go about it? (be specific) How would you defend/explain your rationale for each step/procedure in the process?