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Big Shoes to Fill
How CEO Transitions Benefit from Internal-External Candidatesby Brent Applegate
Stroll down the halls of the San Diego headquarters of Gen-Probe, a developer of medical diagnostic tests, and you’ll find huge photo collages, handmade and framed, lining its walls. They chronicle the company's history through scenes of company parties and events. Hairstyles and fashions change over time, but one constant through it all is the tall and distinguished long-time CEO, Hank Nordhoff. But in 2006 when Mr. Nordhoff began to discuss retiring, Gen-Probe's board of directors faced the challenge of selecting his successor.
Gen-Probe’s dilemma is becoming a fixture among corporate boards. The impending wave of baby boomer retirements creates more frequent executive transitions, especially among CEOs. With the U.S. economy in turmoil and worker confidence in executive leadership waning, corporate boards have never been more challenged to ensure effective CEO successions.
The successful CEO often defines the company’s vision, culture and character; yet with his or her departure, employees can lose motivation and focus. Often, no existing staff member is immediately qualified to step up, but employees may balk at bringing in an outsider.
To address these concerns, corporate boards are turning to internal-external candidates. This means that the CEO’s successor is recruited from outside the company, but is brought into the organization to serve temporarily in another executive role, such as CFO or COO. Drawing from experiences gained externally and credibility earned internally, internal-external candidates can make the complex CEO transition process less traumatic and more effective.
TRENDS IN EXECUTIVE TRANSITIONS
As the baby boom generation enters retirement, demographic trends mean more executives will leave or be asked to leave their jobs. RHR International, an executive development consulting group, found in their 2004 multi-industry survey that half of the companies questioned expected to lose at least half of their senior management by 2010. With fewer employees following the baby boom generation, finding a capable and qualified replacement becomes more difficult.
Despite the quickening pace of executive transitions, many business leaders distrust how their successors are identified and recruited. Research conducted in 2003 by the Corporate Leadership Council showed that nearly three-fourths of surveyed senior executive members rated their succession systems as “less than moderately successful.”
The office of CEO is especially affected by the trends in executive transitions. Annual turnover of CEOs across the globe increased 59 percent between 1995 and 2006, according to Lucier, Wheeler and Habbel in the 2007 paper “The Era of the Inclusive Leader.” Although there are some recent indications that the CEO turnover rate has decreased slightly from its high point in 2005, it remains significantly higher than the levels of the late 1990s and early 2000s.
Worse is the fact that many new CEOs, once hired, fall short of expectations. A 2005 study in the Harvard Business Review reported that 40 percent of new CEOs fail in the first 18 months, which leads to reduced focus, lowered morale and diminished worker performance. A revolving door to the CEO's office is a sign that traditional approaches to CEO succession must change.
CHALLENGES IN MAKING SUCCESSFUL CEO TRANSITIONS
The highly-respected CEO often seems to be a natural for the job, with strong presence, unflappable calm, a witty sense of humor and larger-than-life persona and charisma. Yet most agree that these traits can't be taught and may even intimidate many talented subordinates.
Herb Kelleher, president and CEO of Southwest Airlines from 1981 to 2001, was one such natural. Under his leadership, Southwest grew from a small intrastate carrier to a national leader, largely by outmaneuvering the older, bigger carriers with lower costs and managerial agility. Yet Kelleher is also credited with fostering Southwest’s unique culture through his antics, which included dressing up as Elvis for magazine covers, jumping out of overhead bins and riding a motorcycle given to him by his pilots.
Who can follow such a naturally gifted CEO? The challenge is especially great in small- to medium-sized companies in which few employees have previously managed a business unit or held profit-loss responsibility. When no obvious internal successor exists, companies must hire externally. What is needed is a way to allow the external successor to ease into the new company and to develop a unique leadership personality.
For the smoothest transition, boards must also avoid allowing the company to slip into a time of excessive competition and petty in-fighting. When multiple candidates vie for the top spot, employees align themselves with the candidate they expect to win and play politics by withholding crucial information from one another.
Competition for the selection of a new CEO can also signal uncertainty in the company’s direction. When Jerry Yang announced in November 2008 that he would step down as Yahoo’s CEO, the board’s informal search panel considered both internal and external candidates. Susan Decker, Yahoo’s former CFO and current president, was the initial front-runner. But after a two-month search, Carol Bartz, former CEO of software company Autodesk, was named the successor. Ms. Decker immediately resigned from her post as president. Overlooking an internal candidate can imply a lack of confidence in the company’s current strategy and leadership.
For strong companies, internal-external transitions have emerged as an excellent way to make seamless CEO successions.
GEN-PROBE PROVIDES AN OUTSTANDING EXAMPLE OF INTERNAL-EXTERNAL CEO SUCCESSION PLANNING
Gen-Probe Genetic Center. Photo courtesy of Gen-Probe.
Hank Nordhoff joined Gen-Probe in 1994 as the president and CEO. Under his leadership, Gen-Probe surpassed larger competitors to become the market leader in certain molecular diagnostic fields. Gen-Probe’s technology now tests more than 80 percent of the U.S. blood supply and 60 percent of the STD market.
But when Mr. Nordhoff first contemplated retirement, no obvious internal successor existed. John Brown, a Gen-Probe director and former CEO of medical technology developer Stryker, suggested an internal-external transition process. Mr. Brown knew this process well — this was how he had brought on his own successor at Stryker.
The board identified Carl Hull, previously a vice president of Applied Biosystems (now Life Technologies), as the COO and heir apparent. “We wanted Carl to adjust to the culture here, rather than forcing the culture to immediately adjust to Carl,” Mr. Nordhoff said.
Mr. Hull joined Gen-Probe in February 2007. He and Mr. Nordhoff agreed on a three-year transition timeline. “The first year was for the incumbent. The second year was shared. And the third year, the new guy took over,” Mr. Nordhoff described.
True to their agreement, Mr. Nordhoff retired on May 17, 2009, after 15 years in the job, and Mr. Hull officially took the reins of Gen-Probe. Both agreed that the transition went very smoothly.
“You get the best of both worlds,” Mr. Hull said. “You first had the clear leadership of the existing CEO, then you had a transition phase where people were getting ready for the change, and finally at the end of it all you had me, hopefully prepared for the job,” he laughed.
After successfully completing an internal-external CEO transition, Gen-Probe’s Hank Nordhoff and Carl Hull offer the following suggestions:
FIND A PERSONAL FIT
EXPECT SMALL TENSIONS TO FLARE
SEND A CLEAR SIGNA
DON’T COMMIT TOO EARLY
SEEK BOARD INVOLVEMENT
SPEAK WITH ONE VOICE
AVOID ROCKING THE BOAT
HAVE CLEAR EXPECTATIONS
MAKE A CLEAN BREAK ONCE COMPLETE
Brent Applegate (’09) is a Rady School MBA student. At Rady, Applegate served as president of the Life Tech club and completed a summer internship in marketing at Gen-Probe. Prior to business school, he worked for six years in the computer industry and is transitioning into healthcare to pursue the growing trend of personalized medicine.