Young talent time

COMPANY directors need to be involved in succession planning well beyond the next chief executive.

Succession

IT is commonly said that the most important task of a board of directors is to select the chief executive officer of the company. There is certainly a strong element of truth to this statement. However, the role of the board needs to extend much further than merely selecting a CEO, sitting back and hoping for the best. Directors need to feel confident about executive staffing and development more generally.

This may seem fairly obvious in the case of professional service firms or firms that operate in the services sector –
say, in the finance or insurance industries. But even in companies that “make things” or “dig stuff out of the ground” – to use common parlance – the capacity of executives and staff to devise and implement superior business strategies is a critical success factor for these companies.

Interestingly, the idea of succession planning, certainly in a formal sense, is a relatively new one. Pioneered by US management guru Peter Drucker and formalised by Walter Mahler, who worked as a consultant for General Electric,
a central tenet of succession planning is that the identification of staffing needs should be co-ordinated with the identification of talent and the required executive development.

For different levels of management, there should be feeder groups, providing pipelines of potential managers to slot into positions when needed. Having identified leadership talent, the careers of staff can be managed by offering a range of jobs in different settings. In this way, the executive “bench strength” – a very American term – is built up.

Another name associated with succession planning is Elliott Jaques, whose ideas had such a profound influence on CRA (now Rio Tinto) under the helm of Rod Carnegie. Jaques believed some people have “business intelligence”, which primarily involves managing within considerable complexity. These individuals are the most valuable staff
and their talent and experience must be fostered.

Succession planning can be distinguished from the more limited activity of replacement planning, the latter being mainly about identifying individuals who could slot into key positions in the case of the so-called “truck” scenario – where a key executive is run over by a truck. Needless to say, replacement planning is a valuable exercise. But many larger companies have much broader succession planning programs to identify and develop future executives.

Research suggests that succession planning is no magic bullet – the very activity itself can be weighed down by onerous bureaucratic processes and line managers often come to dread undertaking annual performance reviews of their direct reports. The literature seems to suggest that continuing dialogue is preferable to annual reviews.

In the case of multi-divisional firms and those operating in a number of countries, the process of succession planning is often more difficult, as divisions often cling to the most talented staff and transfer the least competent. So without a clear statement on the overriding interests of the company as a whole, succession planning can be undermined by the selfish behaviour of divisional managers.

Of course, the very idea of succession planning assumes leadership potential can be assessed consistently. In fact, the experiences of many companies indicate an employee’s  interpersonal and political skills can carry more weight than tangible achievements. Jaques also makes the point that past achievements do not always indicate future success if the new job requires much more complex management – a version of the Peter principle. The key is to assess an individual’s potential to deal with more multifaceted and complicated situations than their current job entails.

Another pitfall of succession planning, particularly when it is applied to relatively junior managers, relates to the expectations created in those deemed to have the potential for high office – the so-called “halo effect”. These junior executives often become impatient with whatever progress they make and feel that their real talents are not being truly recognised. High rates of staff turnover can result.

Certainly, it was the experience of one of Australia’s large banks which, for a time, distinguished between new graduate employees with high potential and the others. The lesson of this experiment was salutary. Not surprisingly, the other graduates did not feel especially motivated by virtue of being excluded from the “star” class. However, the potential high-flyers proved a handful and, after several years, very few were still with the bank. A rethink was required and a more subtle and durable process was subsequently instituted.

So what is the role of the board in relation to succession planning? First, all boards need to feel confident that the company’s senior executives are overseeing sensible and effective succession planning, a process that will inevitably involve the buy-in of the chief executive. And, in order to assure directors, a regular presentation – delivered at the annual strategy retreat, for instance – outlining the key features of the planning being undertaken can be very helpful.

In this way, directors can get a feel for the key positions in the company that must be filled at all times, the potential list of candidates (and their state of readiness) and the general approach being taken in relation to succession planning.

Identifying and retaining potential successors to the CEO is a more fraught exercise. But it is quite reasonable for the board to expect a chief executive to be involved in the process of grooming potential replacements. Of course, jealousies and competition can get in the way and it is certainly hard to keep potential CEOs in the wings for too long.

But, depending on the situation of the company, there are several reasons why internal candidates are preferable to external ones, including the familiarity of a successful internal candidate with the company, with the rest of the staff and with the industry or industries in which the company operates.

While most business buzz-phrases in this area have quickly become very annoying – people are our greatest assets, talent factories, war for talent, academy organisations – the truth is that virtually all companies that flourish do so because of their staff and how they are managed.

To be sure, selling to customers at good prices underpins the financial success of a company. But to do so requires people. And therefore the management of those people is something all boards of directors should watch carefully.

Judith Sloan is an economist and company director.