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GOVERNANCE - Meet the (New) Boss?

The weakness of succession planning at Citi and Merrill is far from anomalous in corporate America, though boards are getting better at effecting seamless transitions.

THE UNEXPECTEDLY BIG, credit-market-related earnings hits taken recently by Citigroup and Merrill Lynch & Co. left those firms’ directors little choice but to oust CEOs Charles Prince and E. Stanley O’Neal, respectively, last month. Most glaring perhaps was the lack of adequate succession planning at both institutions. Merrill spent nearly three weeks under interim co-CEOs before plucking John Thain from NYSE Euronext; Citi remains without a permanent replacement for Prince.

Few duties are more important for public company directors than ensuring a proper succession plan is in place, but an October survey by the National Association of Corporate Directors shows that the Citi and Merrill boards were far from alone in their unpreparedness. More than half of the directors who responded to the poll said their boards lacked a formal plan. And of the three most important director priorities that the group identified in the survey — succession planning, strategic planning and corporate performance — respondents judged themselves least effective in dealing with succession.

A particularly difficult challenge: When CEOs get forced out because of unsatisfactory performance, it’s hard for directors to turn to internal candidates, who may be tainted by association with their former bosses.

“When there’s a crisis that involves the current state of the underlying business, it’s tougher for boards to consider sticking to the status quo,” says Elise Walton, a New York–based partner at Oliver Wyman, a consulting firm that has studied succession planning issues.

Yet internal candidates, selected through multiyear, deliberative processes, are most likely to effect seamless leadership changes. Walton’s firm recently studied 24 companies that did a very good job of managing succession in the absence of crisis situations, and all but three chose in-house executives as their new CEOs.

One of those companies was McDonald’s Corp., which in 2004 had to replace its chief executive twice. When then-chairman and CEO James Cantalupo died of a heart attack in April 2004, directors took only six hours to promote president Charles Bell, who had long been groomed as Cantalupo’s successor, while handing lead director Andrew McKenna the chairman’s title. Weeks later, Bell was diagnosed with colorectal cancer. In November the board announced that Bell would be succeeded by 33-year McDonald’s veteran James Skinner, who remains the fast-food chain’s CEO. (Bell died in early 2005.)

Of course, many companies go to great lengths to get succession right. In October, the board of Northern Trust Corp. tapped president Frederick Waddell to succeed CEO William Osborn, who will remain as chairman, effective January 1. The company had considered Waddell one of several potential successors to Osborn for many years before naming him president in early 2006, according to human re­sources chief Timothy Moen. Once Wad­dell takes over, he will begin the process of vetting internal candidates to one day succeed him. Identifying and grooming executives to take over for their bosses occurs regularly at all levels of the organization.

“Every manager here, all the way up through the ranks, is responsible for ensuring that he or she has a successor who could step into their shoes at a moment’s notice if it was necessary,” says Moen.

Seamless transitions like these may not dominate headlines, but they are more common than one might think, say governance experts, recruiters and board advisers. “Companies are getting better at this, especially larger multinational businesses,” says Roselinde Torres, a partner at Boston Consulting Group, who adds that a growing number of firms undertake twice-annual or even quarterly reviews of the most promising candidates throughout the business. “And the discussion tends to involve not just who will succeed the CEO, but the whole executive team.”

“Ideally, directors should have an idea of which 26-year-old managers might make a great CEO a few generations from now — and how to get them ready for that job,” says Joseph Griesedieck, head of recruiting firm Korn/Ferry International’s CEO practice. If enough young managers are properly groomed for the executive suite, even crises such as the ones that felled O’Neal and Prince shouldn’t prevent companies from having successors at the ready.