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Part ThreeContributions That Count The tools and habits of Progressive boards help boards transcendtheir legal mandate and get to the fundamentals of the business.Identifying the critica

Part Three

Contributions That Count

The tools and habits of Progressive boards help boards transcendtheir legal mandate and get to the fundamentals of the business.Identifying the critical issues and carving out time for them, com-bined with good board dynamics and the efficient use of informa-tion, allows boards to add value to the company This is the joy ofwork for committed directors and a huge benefit to all the corpo-ration’s stakeholders

The board’s proper participation can make a huge, positive ference in five areas The following chapters present best practices

dif-in each of these areas:

• The right CEO and succession

• CEO compensation

• The right strategy

• The leadership gene pool

• Monitoring health, performance, and risk

These areas are listed in order of importance Many directorswill concur that Liberated boards tend to invest their precious time

in reverse order—more time on compliance and monitoring to-day or quarterly operating performance, and less time on therest Progressive boards allocate time according to priority

The director was convinced that the board, not the CEO, mustown the decision and the process for choosing a company’s chiefexecutive Indeed, his own company had an exemplary successionprocess with full involvement of the board So he took a stand on abasic principle: It is the board’s job—its most important job—toselect the company’s CEO The board’s greatest opportunity to addvalue is to ensure that the company has the right CEO at all times.Nothing else compares.

Liberated boards would agree, in concept Paradoxically, ever, directors on Liberated boards don’t spend the requisite timeand energy on the process They often don’t bring the rigor to theprocess or the personal judgments to the table that you would ex-pect for their most important task When the time for successionarrives, the whole board is not involved Directors delegate toomuch to the outgoing CEO and rely heavily on executive searchfirms That is an error of omission bordering on negligence on thepart of the board

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Consequently, some boards have inadvertently destroyed value

at their companies by choosing the wrong person to lead the ness Think Al Dunlap When the new chief executive lacks thenecessary skills and experience, the business suffers, sometimes se-verely But it takes one to three years for a board to sense the mis-match and come to a consensus on that conclusion Thus a failure

busi-to select the right CEO can put a company at a distinct tive disadvantage for a long period of time

competi-Just look at Kmart, which had three consecutive CEO failuresover eight years while Wal-Mart left it in the dust Or Apple Com-puter, which struggled to maintain its competitive position as threeconsecutive CEOs failed from 1993 to 1997

Conversely, choosing the right CEO is a tremendous adder In contrast to Apple Computer’s trials and tribulations withCEO selection, think of the IBM board’s decision to hire LouGerstner in 1993, when everyone was expecting a technology wiz-ard to replace outgoing CEO John Akers Given IBM’s successsince then, it’s hard to imagine that it was at one time at risk of fol-lowing Prime Computer, Digital Equipment Corporation, andWang Computer into obscurity Who wouldn’t agree that the IBMboard made a huge contribution to shareholders, employees, andother stakeholders? By naming the right CEO, that board earned itsspurs as one that creates value for investors Since successful CEOstend to beget successful successors—witness Sam Palmisano—the IBM board set the company on a terrific path for decadesthrough its selection of Gerstner

value-Success is never guaranteed, however Mistakes will be made.But a Progressive board is conscientious about having the rightCEO and keeping its succession process continuous That way, theboard is in position to rectify a wrong hiring decision Procter &Gamble’s board shifted course to name A.G Lafley CEO in 2000,following a short tenure by his predecessor His subsequent successdemonstrates the value of a board’s diligence in ensuring the rightmanagement and correcting a wrong decision promptly

The problem is that many boards lack for robust processes to

do the job well The recommendations in this chapter will helpboards translate a full engagement with CEO succession into de-cisions and actions that greatly improve the outcome:

• Defining the selection criteria used to select a leader

• Getting to know insider candidates over time

• Assessing both inside and outside candidates thoroughly

• Supporting a new CEO through the transition period

• Providing ongoing feedback and formal CEO reviews

• Recognizing a faltering CEO and exiting from the situationwhile minimizing disruption

Defining the Selection Criteria

Selecting the right CEO boils down to finding a true match tween the skills required and a candidate’s strengths To do thatwell, boards must begin by identifying, with great specificity andgranularity, the skills required Many CEO searches are doomedfrom the start by search criteria that are too broad, too general, orotherwise not very helpful in zeroing in on the candidates that bestfit the company’s central current and future needs The usualsearch starts with a long list of qualifications—a strategist, a toughnegotiator, a change agent, decisive, smart, high energy, inspira-tional, visionary, high integrity—much of which applies to leaders

be-in all walks of life and situations The boilerplate may serve a pose, but it doesn’t provide a definitive filter

pur-Every company faces a unique set of challenges at a given point

in time It is up to the board to bring those challenges to the face, debate them, and sharply define the criteria needed to ad-dress them before the CEO search begins A company that faces adeep cash crunch and has to restructure its balance sheet, for ex-ample, might require a CEO who has credibility with providers ofcapital and the ability to build a superb operating team A com-pany that has grown rapidly through acquisitions and needs to take

sur-a bresur-ather to leversur-age them for competitive purposes might quire a CEO who has specific capabilities in assimilating acquisi-tions and turning them into an organic growth engine

re-These specific mission-critical criteria are not always obvious.Defining them requires that the board has a good grasp of thebusiness and its current external and internal realities It’s likelythat different directors will have different views But ultimately, theboard must agree on three or four specific skills and abilities that

are of utmost importance These are the ones the board cannotcompromise on; they are nonnegotiable.

In 2001, when Bank of America faced a succession decision, theboard took the time to identify the bank’s specific needs Thesearch pointed to a very different kind of leader from the long-timeincumbent Sitting CEO Hugh McColl was a superb deal-makerwho had used dozens of acquisitions to transform the unknownsmall Charlotte-based bank NCNB into a regional powerhouse,Nationsbank, then orchestrated the merger with California-basedBankAmerica to create Bank of America, the largest consumerbank in the United States

Through the series of mergers and acquisitions, the bank hadestablished a large footprint in the United States Next, the bankhad to become a high-performance organic growth engine As onedirector described it, when discussions about succession got underway, the board began to crystallize its thinking around that oneissue: acquisition integration What they needed, directors con-curred, was someone who could bring everything together into acoherent whole and leverage the bank’s strong U.S consumer fran-chise Deal-making was not a priority; operating experience andability to lead the business on a trajectory of long-term value cre-ation was

The criteria pointed to Ken Lewis, a company veteran and ident of the bank’s Consumer and Commercial Banking division

pres-He was well suited to the company’s needs pres-He suspended the quisition spree and concentrated on organic growth, focusing onmarket segmentation and the cross-selling needed to achieve it.His efforts were successful and the board supported him It wasn’tuntil late in 2003, with the announcement of the bank’s mergerwith FleetBoston, that the firm was again ready to take on majoracquisitions

ac-Kmart’s board might have chosen different CEOs and had ter results if it had more sharply defined the nonnegotiable crite-ria If the CEO could not master the supply chain, recruit the rightmerchandising executives, and differentiate the company againstits archrival Wal-Mart, there would be little chance of success.Those criteria should have taken precedence over others The di-rectors looked for candidates with strong leadership skills, a pastrecord of achievement, and restructuring abilities, and made their

bet-choice accordingly They seem to have missed the essential ating skills that the Kmart position required at the time The toll

oper-on shareholder value, brand image, and employee sentiment hasbeen high

Times change; boards should occasionally revisit the quality ofthe match between what is required and what the current CEO has,even when a succession is not imminent They must remain pre-pared in case of emergency And they must keep these changingcriteria in mind as they track inside leaders as succession candidates

The Inside Track

Once the correct criteria have been identified, selecting the rightCEO requires the board to find a match with a candidate Thechallenge is partly in getting the information needed to properlyassess candidates Thus choosing an inside candidate is usuallypreferable, providing all the criteria match, simply because theboard has the time to get to know internal candidates’ skills, abili-ties to grow, and personalities in depth That knowledge tends tolead to better decisions

By contrast, consider how a board typically assesses an outsidecandidate: a handful of directors will each interview the candidatefor roughly two hours; the board will be informed on the candi-date’s past record and accomplishments; an executive search firmwill offer its own opinion of the candidate’s capabilities; and, in thebest-case scenario, directors will personally check the candidate’sreferences All told, the board will spend four to eight weeks as-sessing an outside candidate It’s easy to see that a board gets muchmore information about an internal candidate

Of course, the internal candidate still has to be a match with thenonnegotiable criteria The board has to ensure that there is a pool

of potential successors who are getting the appropriate ment opportunities well in advance of a CEO’s planned retirement,and they should be using that long lead time to get to know themwell General Electric’s well-documented search for Jack Welch’ssuccessor involved a decade’s worth of work As directors observedthe up-and-coming leaders, the pool of candidates evolved Then asthe time frame shortened, the list of candidates shrank, until finallyJeff Immelt was selected from among three very strong contenders

develop-The sitting CEO must help directors learn about the sion pool During at least two board meetings per year, the CEOshould share personal insights about the top dozen or so man-agers, among whom possible candidates will emerge Some boards

succes-go even deeper: they make it a point to get to know the top twenty

to twenty-five managers (Chapter Nine describes board practices

to assess the leadership gene pool at all levels of the company.) rectors will probe on questions such as these: What are the precisetalents the candidate brings to the table? Under what conditionswould each be most and least likely to flourish and why? How is theCEO continuing to challenge each candidate?

Di-And don’t forget: What specifically are the weaknesses of eachindividual? In the mid-1990s, during one in-depth discussion of se-nior executives at GE, Welch heaped praise on a star executive But

a director interjected and questioned whether the individual hadany weaknesses or made any mistakes The discussion then turned

to individuals who had demonstrated their ability to handle versity as well as success The director’s question helped keepthings in balance

ad-As a succession decision nears, the list should be winnoweddown to the top two to four candidates Discussions of senior-levelleaders should include some context about how the business envi-ronment is changing and how the candidates are demonstrating

or developing the requisite capabilities to deal with it Thus theboard can continually update its criteria and track who is likely tomeet the future requirements and who is falling off the list If theboard suddenly needs to make a move, directors will be up tospeed on who the internal candidates are and whether they arefully prepared

The CEO also should solicit directors’ feedback on the viduals Frequent, open exchange of observations and opinionsabout people can open a CEO’s eyes to a candidate’s shortcomingsand exceptional strengths, or to new ways to develop and test a per-son As seasoned leaders with rich and diverse experiences, direc-tors can sometimes pick up nuances of a person’s strengths andabilities that others haven’t noticed

indi-Directors, each and every one of them, must take an active role

in assessing the individuals for themselves By engaging with themduring boardroom presentations, directors can gauge the breadth

of the candidates’ thinking, how they go about solving problems,and the quality of their follow-through But directors should be-ware of sound bites—that is, of giving too much weight to highlypolished communication skills.

Thus directors also should get comfortable with candidates formally One board has two or three directors dine with a promis-ing leader the night before a board meeting for just that purpose.They engage the person on what is happening in their part of thebusiness, and how they view the company’s strengths and weak-nesses Directors might pose hypothetical scenarios involvingchanges in the external environment, to get a flavor for how thecandidate would go about approaching the business These what-ifquestions provoke the individuals to do broader thinking It givesdirectors more of a sense for what makes each individual tick

in-GE directors periodically visit leaders at their workplace Over time,

it gives them a better opportunity to know the leaders of the future.Another best practice is to have candidates schedule visits tomeet with directors individually Whether the meeting takes place

at the director’s office or over dinner, the idea is to create a friendlyambiance In informal one-on-one interactions, questions can beasked that don’t come out when others are present “What wouldyou do if you were CEO?” a director might ask, so as to see the busi-ness through the candidate’s eyes The idea is also to gauge howleadership characteristics got etched into the personality of the per-son, whether through military experience, sports, or personal hard-ships It also gives the candidate opportunities to offer observationsand judgments—about company culture or competitors’ prospects,for example—that might not otherwise come out

The conversation—and these meetings are conversations, notinterrogations—must remain loose and two-way That lets the can-didates learn by hearing what directors have in mind for the busi-ness, and both director and candidate will judge whether goodchemistry could be built between them

With these practices, the board and the CEO will over time velop a good sense for which candidates are a good fit under cur-rent and potential circumstances Realistically, if a board canidentify three truly great candidates, it’s doing well If succession

de-is not imminent, having multiple inside candidates de-is ideal to sure that there is some diversity of skills in the succession pool By

en-the time succession arrives, en-there could be a shift in en-the requiredcriteria, so boards should make sure they have a choice.

If internal candidates are too few or found lacking, the boardmight suggest that the CEO hire senior managers one or two levelsdown with one eye on infusing the pool of potential successors Thiscan also happen through acquisition At Burlington Northern inthe early 1990s, the board pressed CEO Gerald Grinstein for a suc-cession plan Efforts to recruit two candidates from competitorswere unsuccessful Then, in 1994, the opportunity arose to acquireSanta Fe Pacific, a smaller competitor with a young, highly quali-fied CEO who could become CEO of the merged firm Due dili-gence on the acquisition target included a thorough review of itsCEO, Robert Krebs, and his potential to lead the merged business.Similarly, many consider JP Morgan Chase’s acquisition of BankOne in 2004 partly a move to bring in Bank One’s CEO, JamieDimon, as a successor to JP Morgan’s CEO, William Harrison.Burlington Northern’s initial succession problem began whentwo internal candidates were asked to leave because of their de-structive conflict, a common concern among boards Narrowingthe field to two or three succession candidates years ahead of timecan spark competition among them—which can have negativeconsequences

Companies take different tacks to avoid this problem At tronic, for instance, CEO Bill George picked Art Collins as his heirapparent about eight years before George’s planned retirement Itgave Collins time to prepare for the job, while the board got achance to get to know him, and the company could avoid de-structive in-fighting

Med-Will the heir apparent become impatient in the number twoposition and lobby for the top job, or leave the company? Boardshave to think through the timing issues and decide which approachmakes sense for them Because Jack Welch’s three succession can-didates ran separate businesses located in different locations ratherthan at headquarters, they were fully focused on leading their sep-arate business units Internal competition can be more damaging

in a functionally organized company, where the business depends

on collaboration among the competing candidates The underlings(and corporate staff) tend to take sides in the competition