Growing CEOs from the Inside

Author: Sean Silverthorne

There is no more important decision a board can make than naming a CEO. Yet most companies pay scant attention to the issue of succession other than a few whispered names in the hallways. The result? The hiring of an outsider who quickly gets mired in legacy and obstinacy, or an insider who knows the business but can't lead.

"The best leaders are people from inside the company who somehow have maintained enough detachment from the local traditions, ideologies, and shibboleths that they have retained the objectivity of an outsider," Bower writes.

Think Anne Mulcahy, CEO of Xerox, who started out as a sales rep for the company in 1976 and took the top job in 2001. In an HBS case study mentioned in Bower's book, Mulcahy drew counsel from a wide constituency of friends and acquaintances at the company to help set its future direction based on color printers and office services. Xerox has since rebounded from near death to be a $16 billion player in the document industry.

Promoting from within is no promise of success, of course. Former Merrill Lynch CEO Stan O'Neal was with the company 21 years before his forced resignation on October 30. But strong leadership and effective succession programs are a hallmark of top-performing companies in general, says Bower.

Succession planning is hard work: It must be embraced by the organization and driven by the CEO. In the book, Bower identifies best practices companies can follow to identify, groom, and train internal candidates for the C-suite.

We asked Bower, an expert on corporate strategy, organization, and leadership, to draw on his 40 years of research and teaching experience at Harvard Business School to discuss the issues surrounding CEO succession.

Sean Silverthorne: What's wrong with the way most companies today pick CEOs?

Joseph Bower: For most companies, succession is an event to be managed with an ad hoc process. CEOs and their boards seem to believe they have done their job if there is a "name in the envelope." That means if the CEO is hit by a truck, they know who to appoint.

But this is nothing like a well-managed succession process that takes many years and is part and parcel of the way the company is managed..

Q: Why haven't organizations thought more about succession?

A: Succession is awkward for most boards and CEOs. It is associated with failure or a kind of death. Giving up power is not pleasant. So many CEOs don't want to talk about it. At best they think it makes them a lame duck. At worst, they may want to avoid leaving. So a board member might ask, "Don't you think we should discuss succession? You might get hit by a truck." And the CEO will say, "I have a successor in mind, and I've told John [the chair of the Compensation Committee] who it is."

Some variant of that conversation can go on for years. If that is all that has happened about succession, then when the time comes, the board may have to go outside.

Q: You argue that the best candidate for the top job is an internal candidate who has developed an outsider's perspective. What do you mean by that?

A: Well, internal is pretty clear. The great advantage of an internal candidate is that he or she knows the people, systems, and culture of the company. That means the candidate knows the company's strengths and weaknesses, who can be relied upon to help change things, where world-class competence does or does not reside, and how things can best be transformed.

But with all that understanding often comes a tacit or explicit belief in the appropriateness of "what we are trying to do and how we are doing it." You need an outside perspective to have a true, even brutal, understanding of what needs to change if the company is to succeed in the competitive environment that lies ahead. The inside-outsider knows that if his or her vision of the way the world is headed is remotely right, then real change is needed and he or she has the understanding of the company and confidence of its people to drive that transformation.

Q: At an organizational level, how should companies build a succession program?

A: Companies don't build succession programs, their CEOs do. The CEO has to want to manage the company so that potential leaders can develop.

That means having a chief talent officer to drive a many-faceted program that finds and builds great leaders. It means recruiting and training so that leaders can grow, but also managing compensation and promotion with development in mind. It means organizing the company so that up-and-coming talent can run the whole business early in their career. It means managing budgeting and planning so that it is a learning experience, not a cynical game of "gotcha." It means the CEO investing his or her time, and that of the board, so that everyone gets to know and appreciate the qualities of the potential leaders.

Q: What happens when your firm has not done proper succession planning, and needs to find a new CEO quickly?

A: Well, inevitably you bring in a search firm to help with the process. There will tend to be a bias in the search against insiders. Sometimes, the board will turn to a past CEO to serve in the interim, but sometimes that period provides time for a quick look at a younger insider. Usually the insiders will look incomplete, while the outsiders will look like an imperfect match. But given the record of outsiders, one might want to work with an insider rather than turning to an outsider riding in on a white horse. I'd rather have an Anne Mulcahy than a Bob Nardelli (CEO of Chrysler) or even a Jim Kilts (former CEO of Gillette).

Q: In a company that does manage succession well, what role should a CEO play in choosing his or her successor?

A: Developing the cohort of potential successors is one of the principal jobs of the CEO. It can't be done unless the CEO is driving that process—remember, the process is a critical part of how the company is managed over a period of years. It's not an event. The board needs to help with discussion, independent assessment, informed suggestions, and eventually a choice. But the board can't do the job.

Q: Are there times when an insider is not the best choice for CEO?

A: Absolutely. It may be essential to go outside when there are ethical lapses that seem embedded in the culture of the company. That seems to have happened at Siemens, maybe Boeing—I'm not close enough to know. But those boards went outside to demonstrate the seriousness of the problem and their intent to resolve it. It may also be essential when there has been a real breakdown in competence at the top.

Q: What advice would you give the board of Merrill Lynch as it searches for a replacement for CEO Stan O'Neal?

A: Look inside to see who might be able to do the job. But the choice will have to reassure the Street. In finance, credit depends on reputation, so the insider will have to be credible. It will really help Merrill if there is a well-liked and well-respected member of the team who can be brought forward to lead. But the board will have to help that person succeed—through close involvement of 2 or 3 key directors—coaching, advising, listening, and supporting. These are difficult markets.

Executive Summery

Who is the best CEO candidate? An insider with intimate knowledge of your company, or an outsider who is ready to put sacred cows out to pasture? The answer, says HBS professor Joseph L. Bower, is both. In this Q&A, he discusses his new book, The CEO Within, and why inside-outsiders are the key to succession planning. Key concepts include:

Effective succession planning is hallmark of many top-performing companies, but most firms pay little attention to the process.

In many cases an ideal candidate for CEO will come from inside but carry an outsider's perspective.

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