Inside the Art of Succession Planning
The new focus on company culture, sudden CEO departures and major external shocks have highlighted the importance – and complexity – of grooming future leaders.
One of the many lessons of the past 12 months is the need for directors to be prepared for the unexpected. This is clearly the case when it comes to major external shocks such as extreme bushfires and pandemics – but it is also true of internal shocks such as the sudden departure of a CEO.
There have been several high-profile, abrupt departures from the top echelons of large Australian companies over the past year, leaving companies scrambling to find a successor.
Pat Regan was forced to leave the top job at QBE Insurance in early September after an employee complaint. In the same month it was announced that Rio Tinto chief executive Jean-Sebastien Jacques would exit the mining behemoth in the wake of the destruction of Western Australia’s Juukan Gorge. Last December Jayne Hrdlicka resigned suddenly as CEO of The a2 Milk Company amid simmering tensions with the board. Last November Brian Hartzer was forced out of the top position at Westpac.
In most of these cases, there was no obvious internal replacement. Hrdlicka was replaced by Geoffrey Babidge, who ran the company for eight years until 2018, as an interim CEO. Westpac replaced Hartzer with Peter King, who last September announced his intention to retire from the country’s second biggest bank. QBE and Rio have yet to announce their new chief executives.
Other companies that have recruited external CEOs in recent months include Boral, which appointed Coles and The Star Entertainment Group director Zlatko Todorcevski to run the building supplies group, and record-keeping technology provider Link Group, where QBE executive Vivek Bhatia will take over as managing director in early 2021.The sudden departures, combined with the need for boards to focus far more on company culture after the Hayne royal commission, have prompted some boards to turn their attention to succession planning, says Peter O’Brien, managing director at executive search firm Russell Reynolds.
“It has put the fire under some boards about the need to be prepared for what might lie ahead. In the past two months I am having more conversations with clients about culture as it relates to CEO and board succession than I have ever had in Australia before,” O’Brien says.
“Until now you’d be surprised at how little recession planning work was done. Hayne has accelerated it dramatically and well beyond financial services.”
Geoff Campbell, a principal of leadership advisory firm The Adelante Group, adds: “We see a lack of basic ‘101’ development activity for CEO
successors in many Australian corporations.”
This is despite the fact that CEO succession is the most important role of the board, notes Jason Johnson of search firm Johnson Partners.
Not to mention the downside of getting it wrong. A study by consulting business Strategy& found that of the world’s 2500 largest public companies, those that poorly execute CEO succession forgo on average $US1.8 billion ($2.5 billion) in shareholder value, compared with companies that implement leadership changes through a planned succession process.
Directors agree that under some circumstances, such as when a significant cultural or strategy change is required, a CEO may need to be brought in from outside.
“Otherwise, the objective is to go internal,” says Kathleen Conlon, chairman of rare earths group Lynas and a director of steel producer Bluescope.
Some boards appear to be active in succession planning. At ANZ Bank, group executive of digital and transformation Maile Carnegie, group executive of retail and commercial banking Mark Hand and group executive of institutional banking Mark Whelan are all considered credible successors to CEO Shayne Elliott.
“As the CEO is appointed, boards should start the process immediately for their successor”Jason Johnson, Managing Partner, Johnson Partners
After Westpac’s King said he would stay in the top job for at least two years, the board knew it had no time to waste in grooming internal candidates. Jason Yetton, chief executive of specialist businesses, strategy and transformation, and Guilherme Lima, chief executive of the business division, would both be seen as future CEOs, as may Chris de Bruin, who will begin his role as chief executive of the bank’s consumer division early next year.
Qantas has a sound track record of grooming internal CEOs and it is widely believed the airline promoted Tino La Spina from chief financial officer to the head of Qantas International in mid-2019 to give him operational experience. His position was made redundant in August, thanks to the coronavirus pandemic all but killing off international travel. Earlier this month La Spina was appointed chief financial and strategy officer at Boral, where he would be seen as a potential successor to Todorcevski.
But succession planning is challenging, to say the least.
Conlon and fellow directors Diane Smith Gander, who sits on the boards of Wesfarmers and AGL Energy, and Collins Foods chairman Robert Kaye all point to the complexity of grooming successors for CEOs and senior executives.
“It’s a black art. It is very, very hard,” Smith Gander says.
Adding to the complexity is the fall in the average tenure of a CEO to about four years.
“As the CEO is appointed, boards should start the process immediately for their successor,” says Jason Johnson of search firm Johnson Partners. He says boards need to assess the talent in the senior leadership team and the rung below and develop talent by exposing them to the directors and shareholders and give them experience in leading major strategic projects.
Adelante’s Campbell also advises starting succession planning early in a CEO’s tenure.
“By starting early, the board avoids any suggestion their involvement relates to moving the current CEO on. Boards can simply state that they are ensuring they have a pipeline of successor options internally, as well as continuing development of the senior team,” he says.
But Smith Gander warns that timing may not be that simple. If a board starts the process too early and has a candidate or two capable of moving into the CEO role, they may be offered the top job somewhere else.
“If you have ready-now successors, you will lose them,” she says. Ideally, the board needs a couple of candidates who are between 18 months and three years away from being ready for the CEO job, she says.
Directors say having the CEO on board with the succession planning process is key because it reduces the risk the incumbent will feel threatened and disrupt the exercise.
One of the best ways of grooming future CEOs is giving candidates experience in different parts of the business. Campbell says among offshore companies, rotating senior leaders to different portfolios is “baked into the system”. But, he says: “Australian companies are poor at doing rotation.”
O’Brien concurs. “I don’t think we do enough. There is generally a conservative mindset about the way leaders are developed. We have had two generations of leaders who have not had to face a downturn and volatility. It is so important in Australia to start putting future leaders into an uncertain environment so they can learn new skills and capabilities,” he says.
The problem with rotating senior executives to different roles is that it is rarely in the best interest of the CEO to manage because it is likely to interrupt the smooth running of the business. Conlon says the ability to do this successfully depends on having a strong relationship between the board and the CEO and the preparedness of the board to include succession planning in the CEO’s key performance indicators, so they feel like they won’t suffer financially.
Challenges can also arise when the major divisions of a company are of an equal size, making it difficult to give candidates experience of running a big, broad business. In some cases, divisions may need to be merged to create a bigger role, but this can be disruptive for employees right down the chain of command.
At the same time, there are dangers in making it explicit to potential CEOs that they are candidates for the top job.
Kaye agrees that in practice it is hard to rotate top executives to other roles because of the heavy demands of the business and the level of expertise required to run a division. “It is more about expanding their expertise,” he says. “You add something to their role and give them more responsibility.”
Collins Foods CEO Graham Maxwell is a former chief operating officer of the restaurant operator. He was announced as the next chief executive 12 months before he took up the role, giving him the opportunity to gain the necessary experience.
Article retrieved from https://www.afr.com/work-and-careers/leaders/inside-the-art-of-succession-planning-20201015-p565gx. Article by Sally Patten – Sally Patten edits BOSS, and writes about workplace issues. She was Financial Services of the Financial Review and Personal Finance editor of the AFR, Age and Sydney Morning Herald. She edited business news for The Times of London. Connect with Sally on Twitter. Email Sally at [email protected]