eng

Surviving Caesar, Strategic Clarity When the CEO Departs

The evil that men do lives after them; The good is oft interred with their bones….      – William Shakespeare, Julius Caesar III,ii

The life of the CEO is getting shorter – and this raises serious questions about the role of the board. Depending upon whom you listen to, the average lifespan of a CEO in their role is between three and four years – and going down.

Moreover, incumbent CEOs usually take six months or so to get their feet under the desk before making strategic changes. And the unfortunate ones spend the last six months of their reign concentrating on operations to shore up the numbers, in vain attempts to save their jobs. So the average time that a CEO spends at the strategic tiller is shorter still than their ‘lifespan’ would suggest – maybe two-three years.

But when was the last time you saw a corporate strategy with this short a timeframe? Corporate strategies are envisioned to take longer. The received wisdom is that anything less than three years isn’t a strategy, it’s just long-term planning. At one extreme, in the transport, heavy engineering and natural resources industries, the strategic timeframe can be of the order of ten or fifteen years. For most other businesses, in our experience, five years appears to be the norm. In other words, when the CEO jumps (or is pushed), the company will be some way down a journey to a strategic destination in the future – and the pilot has just bailed out.

Tactically, at this point the direction of the company reverts to the board. They have two pressing priorities. The first is how to the handle the interregnum – the time between the departure of the first CEO and the arrival of the second.

When CEO departure is planned, this can work well – Jeffrey Immelt’s succession to Jack Welch at GE in September 2002 is an example where the transition went fairly well. But when the departure is not planned well, life can become very messy indeed.

In 1999, for example, Barclays Bank burned through three CEOs in a year. The impact of such uncertainty is profound. The stock price inevitably takes a hit, the newcomer immediately begins on the defensive, and it can take a long time before the business can recover its equilibrium. It took several years before Barclay’s ultimately successful candidate, Matthew Barrett (now Chair), was able to return them to an even keel.

But this pales in comparison with the second priority facing the board when the new chief arrives: what should be done with the current strategy?

The New Broom

The new CEO’s natural inclination will be to bin it. He or she has been employed, after all, to make a strategic difference to the company. And, if the previous incumbent left under a cloud, then the temptation to start again will be strong indeed.

But this is often a mistake. If the predecessor had been fired (and assuming that it was not because he or she has been found with their hand in the till), it is as likely to be for failing to execute a sound strategy as for the strategy itself. PeopleSoft, for example, let CEO Craig Conway go for his failure to see off Oracle’s hostile takeover, and not because the PeopleSoft board thought that fighting off Oracle was the wrong strategic decision.

The failure of the CEO is not necessarily a failure of strategy, and it can be a mistake to equate the two.

And don’t forget that a shift in strategy takes time, disrupts the stock price, entails considerable investment, throws your best people off track, and has no guarantee that it will work. You need a very good reason to accept that level of pain – and the CEO’s desire to make a splash may not qualify. Simply because you have a new broom does not mean that the room needs sweeping.

At a time of transition, any board worth its salt needs to understand its strategic role. The corporate strategy is not the CEO’s strategy – it is the company’s. And when the CEO goes, the role of strategy custodian falls to the board.

Any capable board will already be on top of their normal strategic responsibilities, regardless of the status of the CEO. The board, for example, should be responsible for setting the financial parameters and expectations the strategy should deliver, and to monitor performance against these on behalf of the shareholders.

They also act as custodians of the company values, being able to call anyone – including the CEO – to account for their adherence to the ethical and aspirational values that govern the company. Failures by their boards to hold executives accountable against corporate values were, in part, direct contributors to the corporate governance scandals of recent years like Enron, Worldcom, Parmalat, Maxwell and Polly Peck.

But in CEO transition, the board’s responsibilities increase. Obviously, they have a communication job to do – to the company, to shareholders, to regulators and the media. This communication should be planned in advance – the key message: strategic continuity.

The board’s second task is to ensure the strategic continuity they are communicating actually happens in fact – and is not just to keep the markets happy.

It’s worth remembering that the degree of company politics within an organisation is directly proportionate to the anxiety people feel – if people are insecure, they will resort to political means to secure their jobs or gain promotion. A CEO interregnum is just such a time, when those in the executive suite jockey for position or fight to ensure they are not tainted by the previous administration. Politics is caused by anxiety; anxiety by insecurity; insecurity by uncertainty. The board must use their role as strategic custodians to minimise this uncertainty. To do so, they have to be clear about what aspects of the strategy they need to support. It’s useful here to separate out the idea of a company’s strategy from its strategic plans. As far as we are concerned, the strategy is concerned with the destination: it sets the compass. The plans are how to get there – the map.

Strategic Compass

The strategic vision – the destination – serves primarily to guide the decisions the company makes today: it provides a framework – a compass – for informed decision-making. Strategic plans, on the other hand, are driven by the strategy. Plans change frequently; the strategy much less so.

You know your strategy is having an operational impact when your people explicitly use it to shape today’s management decisions. And it is the strategy, not the plans, that is key.

Tesco’s growth in recent years, for example, has been fuelled by just such strategic clarity. All their visible strategic decisions appear to share a goal of creating a network to distribute household goods to consumers as conveniently as possible. Once that network is in place, they put as much down that channel as they can.

As a result, Tesco was one of the first to use the Internet, serviced by their existing network of shops. They continue to buy local stores to get as close to consumers as possible. They are colonising petrol forecourts to get the motorist’s pound. They pioneered selling consumer insurance in the supermarket. Everything they do is about extending the network and increasing the range of products and services they push down that pipeline. Because they have this clarity, they are not primarily competing on price (leaving that to Kwik-Save or Aldi), nor on premium quality (like Waitrose or Marks & Spencer). If Tesco lost Terry Leahy, their CEO, or even misplaced the latest version of their ‘three-year strategic plan,’ everyone in Tesco would know what to do, day-to-day, to keep the business moving forward until a new CEO came in place. It is their strategic vision, not their plans, that shapes their day-to-day decision-making.

Most organisations lack such clarity – and most are not as successful as Tesco. The CEO is often identified with the strategy – indeed, the media and many analysts positively encourage this belief. When the CEO goes, therefore, the company behaves as if the strategy has gone too. This is a dangerous path to go down.

Witness, for example, the turmoil surrounding the enforced departure of Paul Tellier, CEO of Canadian aerospace company Bombardier, in December 2004. He was replaced by Pierre Beaudoin, a member of the main family of shareholders. The board, instead of signalling strategic continuity, made explicit that his departure marked an abrupt change of strategic direction. Result? The stock tanked 17 per cent in a day and analysts put the company on negative credit watch.

No doubt that the CEO’s departure was the result of strategic differences; no doubt also that the change was rational and well founded, but by running together the news of the change of leadership with the news that a fresh strategic direction was needed, the board, in effect, almost certainly damaged the business.

Would it not have been better for the board to change the leadership while signalling that – for the time being – strategic continuity would be maintained? Then the new CEO would have a breathing space to conduct a strategic review before announcing a planned and controlled shift in direction, developing a fresh strategic plan. Instead, he has had to begin immediately on the back foot, defending the company’s position to the analysts from the start, and under immediate pressure to demonstrate action to restore the stock price. Not the most propitious start to a strategic role.

I am not advocating here that companies needing to change should not do so; nor am I claiming that CEOs should not be seen to drive, lead and own the company strategy. I am suggesting instead that for the board to abdicate ownership of the strategy solely to the CEO is a mistake – and given the lifespan of the CEO relative to the typical corporate strategy, it is a mistake that will fall to the board to mop up.

Between Clarity And Turbulence

Most companies fall between these two extremes – they have less strategic clarity than Tesco, but face less turbulence than Bombardier. Even so, the board’s job managing the change in strategic leadership is critical.

Today, boards are more concerned about risk than they have ever been. Recent events and regulatory trends mean that boards have not only to be cognisant of risk, but have to demonstrate that they have taken all reasonable actions to manage them.

The premature departure of a CEO is a predictable strategic risk that many boards will face in the next few years. If so, is it not reasonable that the board – maybe in the form of the Audit Committee – should have in place an action plan to manage the situation?

What should this plan contain? First, the board should lay the groundwork in advance. The board members need to share and understand the core elements of the strategic framework driving the organisation. In particular, they should own the company’s basic ethical beliefs and the vision that the company is striving to achieve. Board members should, as a matter of normal working, communicate that they hold to this vision and these beliefs, thus reducing the tendency of the markets to identify the CEO with the strategy.

Second, they should plan the key elements that will be contained in any communication on the departure of the CEO. These elements should include a restatement of the core beliefs and strategic parameters of the company, with the goal of ensuring appropriate strategic continuity. Such communication, of course, should always be mindful of market disclosure rules.

Third, they should design this plan with the CEO, as part of normal planning for risk.

Then they should put the plan away, until they need it.

When a CEO goes, it is often at the behest of the board. If you wield the knife on behalf of your shareholders, you need also to take responsibility for minimising the damage to their interests afterwards. Know, in advance, how you will deal with it when it happens: the risk is too predictable – and too important – to be managed in hot blood.

Related

How to close the gap between strategy formulation and execution

Managing Involvement in a Changing Environment

Contact Us

For inquiries, details, or a proposal!