December 15, 2007

An Embarrassment of Succession Fiascoes

The main cause of the messes at Citigroup and Merrill Lynch is their boards’ failures to develop authentic leaders and succession plans.

What were the boards of Citigroup and Merrill Lynch doing all this time? How often did they take a hard look at the leadership below Chuck Prince and Stan O’Neal to develop successors? Did they monitor the CEOs’ performances closely enough to know what was going on and understand the risks of not having succession plans?

It is astounding that a huge multinational such as Citigroup (C), which has 350,000 employees, has not been able to find a leader to succeed Prince. While fortunate to have former Treasury Secretary Robert Rubin as temporary chairman, the board still seems to be searching for that new superhero. (Insider Sir Win Bischoff is interim CEO while the search continues for a permanent successor to Prince.)

The board of Merrill Lynch (MER), meanwhile, moved rapidly to snag John Thain. With his deep understanding of markets and risk gained at Goldman Sachs (GS), Thain is the right leader to bring Merrill’s organization under control.

But why weren’t these boards grooming internal candidates for the jobs? Many observers have this odd notion that no one can lead these mammoth enterprises. Nonsense. They don’t need a Beowulf to slay the dragons but authentic leaders to unify the team at the top and rebuild trust throughout the organization. If the boards of Citigroup and Merrill Lynch insisted on this in the first place, they wouldn’t be facing their damaged state.

Unfortunately, these are just the latest examples of boards that failed to build solid leadership succession plans. Look at past problems at Morgan Stanley (MS), Coca-Cola (KO), Home Depot (HD), Hewlett-Packard (HPQ), and Procter & Gamble (PG):

These recurring examples raise the obvious question: Why do so many boards wind up looking outside the company for new leadership? My view is that they spend far too little time building sound succession systems. Lacking well-tested candidates, they presume an outsider can quickly transform the company and its culture.

The evidence clearly disproves their assumptions. In his new book, The CEO Within, my Harvard colleague Joseph Bower makes an irrefutable case that the best CEOs come from within the organization. Outsiders have clear disadvantages: They don’t know the company’s culture, the key players, and the subtleties of the business. Beyond that, they have to spend valuable time building trust. Or, like Nardelli, they bring in an entirely new team, which causes morale problems.

Contrast these fiascoes with the smooth internal leadership successions at General Electric, ExxonMobil (XOM), Goldman Sachs, Johnson & Johnson (JNJ), General Mills (GIS), and Pepsico (PEP). These companies have benefited enormously from building strong teams of authentic leaders, which resulted in seamless transitions to new leadership.

If you are working in an organization that doesn’t do sound succession planning and reward leaders, you might want to jump ship to one that appreciates authentic leadership-and provides you with the opportunity to make it to the top.