How to Pick a CEO

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Headless PSUs can learn lesson from former P&G CEO

By TT Ram Mohan

Professor, IIM Ahmadabad

Infosys Technologies initiated a much-publicised search for a chairman and CEO, which ended a few months ago. Deutsche Bank’s recent search for a CEO too was widely publicised. In both these cases, the process began long before the incumbent was due to step down and the boards were said to be involved.

Selecting a CEO is one of the most important functions of a board: some believe it is the second most important function after monitoring CEO performance. And yet it is among the most neglected.  A 2009 survey by the National Association of Corporate Directors in the US revealed that 43% of US public companies had no formal succession plan and 61% had no emergency plan. Boards tend to ignore succession planning until close to the retirement of the incumbent .

This is because, all too often, the incumbent’s idea of succession planning is to prevent any succession in the first place. When the CEO finally decides to move on, the board lamely accepts his recommendation on a successor. These days, CEO departures can be both abrupt and frequent . In these situations, boards turn to a headhunter.

The headhunter’s list mostly comprises outsiders, as it lacks knowledge of the inner workings of the company. Research shows that the selection of outsiders generally leads to inferior performance compared to the selection of insiders. In other words, there is little to beat a planned succession from amongst a set of inside executives whom the board has had the opportunity to watch over a long period of time. A recent article in Harvard Business Review (October 2011) by A G Lafley, a former CEO of Procter & Gamble, shows what succession planning at its best can be. Lafley decided that the search for a successor would begin at the beginning of his term. He also decided that one out of six meetings of the board would be devoted to CEO succession and leadership development. Lafley helped the process along in two ways.

First, he ensured that the company’s directors had first-hand exposure to a range of future leaders. Every director was encouraged to meet at least twice a year with business or functional leaders without any corporate P&G managers present. In addition, before and after every board meeting, the board was given an opportunity to meet P&G’s senior executives on any subject of their choosing. Once a year, the directors and the management team would go to an international business location to meet directly with regional and local leaders. Secondly, in collaboration with the directors, Lafley developed criteria for the CEO’s job, scenarios for the company in the future and a list of experiences that would prepare candidates for the job.

He measured candidates against these criteria and scenarios and provided his inputs to the board from time to time. Lafley took upon himself the task of identifying and training the top 500 executives in the company. In addition , every month, he had oneto-one conversations with 15-20 high potential leaders. These leaders were put through several tests. The person who finally succeeded Lafley had been on every single list from 2001 to 2010. It is possible to be sceptical about some of the things that Lafley talks about. For instance , he mentions 10 criteria that his successor was expected to meet. It was not enough for him to have character and demonstrate business performance. He would have to be compassionate, inspiring , courageous, visionary , etc. It would appear that P&G was looking not for another CEO, but the Lord Almighty himself !

Still , one must grant that P&G’s succession planning process is as thorough as can be. The most striking feature is the board’s involvement in the process. The advantage of involving the board so deeply is that the board gets to know the company and its senior executives a lot better. This has the potential to transform corporate governance . Most boards tend to be cut off from the companies they are supposed to manage. The only information they have is whatever the CEO chooses to make available. By getting the board to interact with several levels of management in a structured way, succession planning can become a means for improving the effectiveness of the board itself. Indian companies would do well to emulate the process followed by P&G . The larger industrial groups do need CEOs for their various businesses.

In the listed companies in a group, it is possible to involve boards in a rigorous search. Ditto for the few professionally-managed businesses we have. It is in the public sector that succession planning is most lacking: witness the vacuum at the top today at LIC and UTI. This is a pity because a couple of factors make it possible for the public sector to score on this account. There is a healthy turnover at the top, thanks to a fixed retirement age for the CEO. Secondly, the boards have directors who are truly independent of management as they do not owe their jobs to management.

It is legitimate for the government to want a say in the selection of public sector CEOs. There is a way in which it can both have its say and improve outcomes. The government must constitute a permanent search committee for PSUs — along the lines of the Public Enterprises Selection Board — in which its nominees are in majority but which co-opts independent directors from the companies whose CEOs are to be selected. PSU boards are among the most ineffective boards. Getting them involved in succession planning could be a way to put some life into them.

(Economic Times)

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