When selecting a new leader, directors need to articulate very specific criteria. The reliance on a classic leadership boilerplate — e.g., strategist, tough negotiator, change agent; decisive, smart, inspirational, visionary, full of integrity — is not enough. Every company also has its own specific needs and faces a unique and continuously changing environment. A company like the energy firm Dynegy Inc., which confronted a deep cash crunch, clearly requires a CEO who brings the credibility with creditors that is needed to restructure the company’s balance sheet.
On the other hand, a company that has grown too rapidly through acquisitions, and needs to take a breather to integrate those mergers, requires very different skills from its CEO, such as the ability to generate organic revenue growth. The boilerplate shouldn’t be ignored, but skills specific to managing merger integrations need to dominate.
Consider the Bank of America Corporation’s promotion of veteran Kenneth Lewis to CEO in 2001. Former CEO Hugh McColl was a superb deal maker who used dozens of acquisitions to transform the unknown small bank NCNB into the regional powerhouse Nationsbank and, following the merger with California-based BankAmerica, into Bank of America, the largest consumer bank in the U.S. But the bank experienced growing pains with the integration of various acquisitions and was underperforming.
As the succession process came to a head, the board began to crystallize its thinking around that one issue, acquisition integration. One director told me at the time that the right person for the job was someone who could bring everything together into a coherent whole, and build a trajectory of long-term value creation based on the corporation’s strong U.S. consumer franchise.
Mr. Lewis, a company veteran who had joined NCNB as a credit analyst in 1969 and led several divisions, was the natural candidate. Since his ascension, the bank has temporarily halted its acquisitions and dramatically shifted its focus to organic growth, market segmentation, and cross-selling, and with great success. Mr. Lewis was named by Fortune in August 2003 as one of the 25 most powerful businesspeople in America, even though he had been in office for only two years.
Recently, we’ve seen a multitude of companies dismiss CEOs after short tenures, as happened at Kmart. In this case, the directors identified strong leadership skills, a past record of achievement, and restructuring abilities, but not the essential operational skills that the Kmart position required at the time. If the CEO could not master the supply chain, recruit the right merchandising executives, and differentiate the company against its archrival Wal-Mart Stores Inc., there would be little chance of success. Those criteria should have taken precedence over others, but the board seemed to repeatedly define the wrong criteria, so it failed to find the right match.
The damage to Kmart in terms of shareholder value, brand image, and employee sentiment has been very high. The board’s failure to find the right CEO allowed management to drive this legendary mass retailer and American brand icon into bankruptcy.
Insider or Outsider?
Another step boards should take is to adopt best practices in leadership development, like those at GE. GE’s approach to succession planning draws on its ability to identify and develop leaders internally. GE’s leadership development processes help to maintain high-quality management throughout the organization. They also ensure that the board is able to select a CEO from among several strong internal candidates — which seems to be the best method, especially given today’s CEO tenure patterns. Booz Allen Hamilton’s CEO turnover research for 2002 reveals that insider CEOs have a tenure that is more than 50 percent longer than those of CEOs hired from the outside. (See “CEO Succession 2002: Deliver or Depart,” by Chuck Lucier, Rob Schuyt, and Eric Spiegel, s+b, Summer 2003.)