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August 31, 2018 at 12:15 PM
Sumner Redstone is a multibillionaire with a legacy of accomplishment in network television, cable, syndication and feature film. Unfortunately, the 95-year-old Redstone’s considerable legacy of success is likely to be overshadowed by the legal battle over his controlling stakes in Viacom and CBS. Headlines such as How Viacom could have avoided its “Game of Thrones” Leadership saga (Fortune) and “A living ghost”: Health questions haunt reclusive mogul Sumner Redstone (The Guardian) are indicative of succession planning failures at both Viacom and CBS.
Most companies are able to avoid the lurid headlines associated with the Redstone situation, but succession can be a “make or break” consideration for companies. A well-managed CEO succession can help a company reach new highs, while a badly managed succession can cause a company to stagnate or decline. Investors should understand some of the common themes associated with “failed” CEO succession plans:
1. The CEO “horse race” becomes destructive: Many companies chose a CEO through a competition between two or more candidates for the job. An effective CEO “horse race” identifies who is best suited to the role and helps prepare the company for the transition. A transparent, time-bounded process guided by merit-based criteria is more likely to be successful. Competitions that are less transparent, that last too long and that are perceived to be driven by idiosyncratic criteria is more likely to fail. Although “Game of Thrones”- type competition creates attention-catching headlines, the negative byproducts include infighting among candidates, political jockeying as employees take sides in the succession battle and the erosion of cooperation between political factions.
2. A new CEO is selected, but the outgoing CEO won’t set a date to leave: Many CEOs are reluctant to leave the party, even after helping select their successor! Goldman Sachs’ Lloyd Blankfein is the latest CEO who tried to be coy about a departure date, finally setting a date under pressure from the Goldman board and major investors. In most cases, clarity is preferable to an uncertain departure date.
3. Misalignment between the CEO and successor: CEO succession planning becomes more complicated when the incoming and departing CEOs have different strategic visions for the company. In some cases, strategy differences are intentional and desirable. For example, “visionary” founders are often succeeded by leaders hired to impose greater business discipline on entrepreneurial organizations. The addition of Eric Schmidt as CEO of Google in 2001 is an example of a successful transition from visionary founders to a process-oriented leader. Evaluating the effectiveness of the CEO transition plan is hard, but critically important. Public appearances can provide important clues. I remember a speech several years ago in which a founding CEO and his successor were in the same room. After observing the negative body language of the founding CEO during his successor’s speech, I became convinced that the successor’s job was in jeopardy. A few weeks later, the successor was fired.
Succession planning is important, but a well-designed succession plan can fail in execution. Investors should be aware of some of the things that can go wrong during the transition to a new CEO:
1. The outgoing CEO remains involved past his or her “sell-by” date: It can be difficult for a new CEO to take charge of the organization if the departing CEO stays actively involved in business strategy and operations after the transition date. The new CEO may struggle establishing an independent “voice” from the former CEO, while employees may be confused about who is running the company. When the CEO transition seems incomplete, employees often return to childhood strategies — going to one CEO “parent” or the other depending on who is more likely to give the desired answer.
