How Companies Evolve Through CEO Transitions

In this excerpt from their new book Jumping the S-Curve, authors Paul Nunes and Tim Breene use Adobe and Intel to examine the right way for a company to transition from one CEO to another.

Jumping the S-CurveCEO transitions occur for a variety of reasons. Some happen because of planned retirements. Others occur more suddenly as the result of illness, accident, and, on occasion, improprieties. Many companies believe that this is what succession planning is all about--being able to respond quickly to the loss of a key individual. That's why many management gurus like Noel Tichy and Warren Bennis have long emphasized the importance of maintaining a leadership pipeline that never stops flowing with talent.

But simply having a string of viable replacements for top executives is not enough. Of course, the capability to replace important employees is crucial, but it is just one of the many responsibilities of succession planning. Indeed, our research showed that high performance businesses tend to use succession planning in a fundamentally different way than other firms do. Specifically, they use it to continually renew their top management as a precursor to renewing the company. In this way, they tend to change their CEOs and other senior executives according to a timetable that implicitly or explicitly recognizes the need for company transitions along the capabilities S-curve. In other words, they don't wait for a crisis or another event that forces action. Instead, they follow a pattern that proactively seeks to bring about changes in their top teams to drive organizational transformations ahead of the curve.

Seek to Evolve Continually, Not Just to Replace

Consider Adobe Systems. When Bruce Chizen became CEO in 2000, the company was in the midst of a major transformation from being a niche player of digital artist tools to becoming a major force in the world of digital media content creation. The transformation was capped by the acquisition of Macromedia, maker of the all-important Flash technology, which enables online animation and video. That move, which Chizen spearheaded, helped position the company to compete against the established software titans in the Web-based application business. Yet, just seven years into his successful tenure at the top (at the relatively young age of fifty-two), Chizen decided to hand over the reins to Shantanu Narayen, his longtime deputy. Initially, the timing might have seemed odd, but it made good sense for Adobe, as the company anticipated a new set of challenges going head-to-head against larger competitors like Microsoft. Actually, Narayen's ascension wasn't entirely unexpected, given that the board had reportedly had him in mind for years. But the move nevertheless shocked Wall Street analysts, investors, and others, which only highlighted how uncharacteristic it is for a CEO to relinquish the reins early in the business cycle, in time for a successor and a new top team to get a jump start on the company's next set of challenges.

But that's just standard operating procedure at many high performers. Take, for instance, Intel. Throughout its history, the semiconductor manufacturer has seen its CEO mantle pass through five executives--Robert Noyce (1968 to 1975), Gordon Moore (1975 to 1987), Andy Grove (1987 to 1998), Craig Barrett (1998 to 2004), and Paul Otellini (2004 to present). Not once has the company had to turn to the outside to find this talent, and the transitions have typically been orderly and well orchestrated. "We discuss executive changes 10 years out to identify gaps," explains David Yoffie, who has served on the Intel board since 1989. Indeed, just months after Otellini, the current CEO, was installed in November 2004, the board had already begun planning for his successor. Moreover, a past mandatory retirement age of sixty-five has helped ensure that CEOs did not overstay their welcome, and so far, Barrett has been the only one to hit that limit. Noyce and Moore both retired when they were just fifty-eight, and Grove stepped down as CEO when he was sixty-two.

One of the many lessons from Intel and other high performers is that they are not just looking for continuity when they replace their top management. Instead, their primary goal is to evolve the organization by evolving the top team first. In this way, succession planning is done for very different reasons than at other organizations.

When Grove stepped down from the top spot at Intel in 1998, he did so while he was arguably at the top of his game. If continuity had been Intel's overwhelming concern, Grove might have stayed for another three years, until he reached the mandatory retirement age of sixty-five. But instead, he handed the baton to Barrett, who then implemented a strategy for growing Intel's business through product extensions. That strategy ultimately had mixed results, but the point is that Barrett was trying to evolve Intel's business in ways that Grove hadn't. Indeed, each of Intel's CEOs has left his mark in different ways. Grove, for example, made the bold decision to move Intel away from memory chips in order to focus on microprocessors, a transition that established the company as a global high-tech leader. The current CEO, Otellini, has been focusing on the Atom mobile chip, which could be used in just about any device that might need to connect to the Web, including cell phones, navigation systems, and even sewing machines (for downloading patterns). In summary, Intel does not look at CEO succession as a means to maintain the status quo but as a mechanism to evolve the company by regularly renewing and refreshing its leadership.

One benefit of such a pattern of continual renewal is that it opens opportunities for talented executives to climb the corporate ladder, thus discouraging them from jumping ship. In contrast, when the CEO and other senior executives of an organization remain for extended tenures, their high-potential, ambitious subordinates will be tempted to look for opportunities elsewhere. During Scott McNealy's lengthy twenty-two-year reign at Sun Microsystems, for example, the company reportedly suffered a high rate of defections of its senior executives, which was partly attributed to the long lock that McNealy had on the top spot.

Create the Right Candidate for the Right Moment

Having continual top-team evolution that anticipates the moments when new leadership is needed requires more than just a pipeline of talent; it requires development of CEO successors that are groomed and selected according to the unique circumstances of the company at the time. This means that not every potential successor will be right when the time comes, no matter how good he or she looks today. High performers name and frame the challenges they face, and they make their succession choices on that basis. So succession and leadership development must be designed with an eye to creating a variety of candidates and then selecting the candidate who is not simply the best but the best for the circumstances of the company at the time and where the business is heading.

One big mistake in leadership development or succession is to allow CEOs too much opportunity to mold their successors after themselves. Our research uncovered a number of companies that still get this wrong, allowing the CEO too much control over the succession process, and where the selection mechanism used lacks sufficient transparency. Consider AIG. Just as Intel is known for its smooth transfers of power, the American International Group has become associated with some of the rockiest transitions in recent history. When Maurice R. "Hank" Greenberg was CEO of AIG, he reportedly groomed his two sons to succeed him. But both ended up leaving AIG. Greenberg then focused on his two chief operating officers: Martin J. Sullivan and Donald P. Kanak. According to one account, Greenberg placed the name of his handpicked successor in a sealed letter that the board could open after he departed. In 2005, Greenberg was forced to resign amid charges of securities and business fraud, and Sullivan became the new CEO. Under Sullivan's watch, AIG suffered tremendous financial losses due to its exposure to subprime mortgages, and only a massive government bailout was able to save the company from total collapse.

For a completely different succession process, look no further than Colgate-Palmolive. Everything there begins at the business unit level, where managers first identify talented employees. That list is then reviewed by local general managers, division heads, and other top executives, including the senior vice president of HR, the chief operating officer, the president, and the CEO. During that process, some names might be added while others are dropped, and the employees who make the cut receive challenging assignments throughout their careers, with their progress regularly tracked. For about a thousand of the best of these high-potential employees, Colgate-Palmolive brings in executive coaches from the outside to help smooth any rough edges. Those employees are also brought to the company's headquarters in New York City for a week so that they can meet with every senior executive. In addition, all functional leaders are expected to introduce to the board the top two or three individuals who might one day succeed them, and the leaders supply detailed information on the strengths and weaknesses of each of those candidates. Altogether, the board regularly tracks the top two hundred or so Colgate-Palmolive employees so that it is familiar with all internal candidates for senior positions. Consequently, when someone receives a high-level promotion, such as when Ian Cook replaced CEO Reuben Mark in 2007, the succession is not the result of a solitary decision by any single individual. In fact, it's the culmination of thousands of decisions made by an untold number of people over the course of years.

Excerpted from Jumping the S-Curve: How to Beat the Growth Cycle, Get on Top, and Stay There by Paul Nunes and Tim Breene. Reprinted by permission of Harvard Business Review Press. Copyright 2011 Accenture 2011.

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1 Comments

  • kevincain

    Great article, Paul and Tim. CEO transitions can be very difficult and not every CEO knows when it's time to move on. Still, when done properly, the transition to a new CEO can be one of the best things possible for a company.