Week 7: Leader Assessment & Succession

1. Week 7: Leader Assessment & Succession

2. Succession Planning— It’s the right thing to do… Getting the right number of people, with the right skills, experiences, and competencies, in the right jobs, at the right time

3. What steps

6. Business Leader Confidence Index (2007)

8. Changes in Small Businesses

9. CEO Turnover by any other name

10. Trends • In the past five years nearly 2/3 of all major companies worldwide replaced their CEOs • 35% of all new executives entering a new position will fail (Center for Creative Leadership) • 40 percent of all executives entering into new positions will either leave voluntarily, be terminated or receive an unsatisfactory review within 18 months (Manchester Partners International) • 70% of CEO have considered quitting, and 35% of top executives would say no to CEO position (Burson-Marsteller CEO reputation study) • The typical Fortune 500 company has had 2.3 CEOs in the last decade (Center for Executive Options) • the failure rate of corporate executives in the US  from the 1980's-90's was about 50% (DeVries, 1992). • The CEO "Revolving Door": The frequency of CEO "succession events," (e.g., the departure of one CEO and the accession of another) nearly doubled, from 6% of the largest 2,500 global companies per year in 1995 to 11.2% in 2000.

11. CEOs are entering and departing office at younger ages. In North America in 1995, the average starting age of CEOs was 50.4; in 2001 it was 48.8. • European and North American CEOs performed better for their shareholders in the first half of their tenures than in the second half. • 62% of CEOs have a successor lined up (Fortune, 11/18/2002) • CEO succession has increased by 53 percent in the last six years, according to a study of the world's 2,500 largest companies. (The Globe and Mail, 10/16/2002) • Business influencers believe that companies are better off hiring insider CEOs than outsider CEOs for long-term business success (47 percent versus 33 percent) (though externals are paid 30% higher salary) • Smart CEO succession planning takes a split route: the normal, gradual development process and a backup emergency plan • Succession planning should be initiated at least five years before an incumbent CEO plans to step down

12. National Study of Non-Profit Leaders (CompassPoint & Meyer Foundation, 2006) http://www.compasspoint.org/assets/194_daringtolead06final.pdf

15. Example: Survey of Natural Resource Leaders (Canada)

18. Situation Major Job Thrust Ideal Candidate Characteristics

19. Situation Major Job Thrust Ideal Candidate Characteristics

21. Passing the Torch • 72% of companies reported that they will have increasing vacancies over the next 3-5 years, and 76% are “less than confident” they can fill them • 20 years ago only 7% of CEO’s were hired from outside; now its closer to 50% • A Booz-Allen Hamilton study of CEO succession at the largest 2500 companies showed that internal CEO’s delivered about 2% higher returns than did externals • The most successful companies are those having a culture of succession • Visionary companies are six times more likely to promote from within • Succession planning should be top to bottom of mission critical roles, not just single events at the top

24. Succession & shareholder wealth • Investors react in a negative manner when selection process results in the heir apparent leaving the company • Investors react positively when the heir apparent is promoted to CEO • Investors respond more favorably to an external CEO (when there is no favored internal heir) • Investors react negatively when someone who is external and a non-heir is promoted to the position

26. Example of promotional/succession criteria for PepBoys

30. What are your next steps in developing your leadership potential? • Team feedback from each member– what is a specific leadership trait or behavior that you observe in each other? • What are three personal characteristics you want to develop further? • What are three technical/managerial skills you want to develop further?

32. It's worth observing that power at the top can be deceptive, particularly at Coca-Cola. In 1980, when CEO Paul Austin was supposedly running the company, his judgment was impaired by the early stages of Alzheimer's, and former chairman Robert Woodruff was the one actually making the big calls. Seventeen years later, Austin's successor, Roberto Goizueta, was ill with cancer; few people knew that Ivester was essentially running Coke for at least a year before Goizueta died. And then, when Ivester moved up, he thought he had the power--but he failed to cultivate the board and Keough, and learned the hard way that he didn't have the power after all. All of that is a message to Daft and Heyer and anyone else with a stake in Coca-Cola: Power at this company can be as mysterious as the secret formula itself.

33. Hard to leave What happens when a CEO is charismatic, founded or identifies him/herself with the company, has been instrumental for much of its development, and is viewed as synonymous with the company/brand? • They may have a difficult time letting go the reins of power • They may have a investment in their own choice of successors • Retirement implies their own mortality • Hard to share power with others • Have to face that their vision may change Armand Hammer Occidental Petroleum

34. Succession Pitfalls • Don’t let the CEO play kingmaker– this may remind them of their own dispensibility or replace them with an unneeded clone. Boards should develop a succession culture six years in advance to monitor development • Headhunter boilerplates are usually too general– identify specific criteria and examples to search for in a CEO • Don’t let headhunters run the show; let them do the recruitment, then have the board conduct the questioning and debate • Be careful of fads– internal vs external recruits, and belief that someone can “save” the organization • Don’t keep Elvis in the building– when the new CEO arrives, the old one leaves and does not further influence the CEO, board or others.

35. Have a terrific Summer!!!

37. Supplement Stages of succession planning Ip, B., & Jacobs, G. (2006). Journal of Small Business & Enterprise Development, 13(3), 326-350.Business succession planning: A review of the evidence.

38. Supplement Groves, K. S. (2007). Integrating leadership development and succession planning best practices. Journal of Management Development, 26(3), 239-260.

39. Uses of Assessment Centers • Evaluation of people for promotion or succession • Formulation of training plan for strengths & weaknesses • Evaluation for selection of final candidates

40. Leadership Assessment Centers • Over 3,000 organizations have used assessment centers • Evaluate for promotion, succession, strengths/weaknesses training, final selection • Predictive validity for leadership talent; may lack job relatedness • 3-5 evaluators for 10-15 candidates over 1-5 days • 1-5 days for cost of $2,000-$30,000 each candidate (average $3,500) • Expensive-- only .5 – 2% of internal employees can do it • May be assessed only once in career while market opportunities change constantly

41. What are the kinds of behaviors that should be assessed & what do you think they would indicate? How can they best be leasured?

42. Predictors of Leadership Performance • High Predictors • Biodata (high fiscal, 7%) • Personality (5-factor) • Critical incidents (immediate job) • Moderate Predictors • IQ, cognitive ability • Career Path Appreciation (conceptual skills & promotability) • Low Predictors • Graphology (85%) • Interviews (81%) • References (67%)

43. Leadership Assessment Centers • Behaviors evaluated • Decision making • Leadership style • Interpersonal skills • Management control • Delegation • Planning & prioritizing • Risk taking • Creativity • Oral & written communication • Assertiveness • Stress tolerance • Typical Evaluation Methods • Biographical inventories • Vocational, aptitude, personality tests • In-basket exercises • Leaderless group discussion • Role-play • Case analyses

44. Orientation & group formation Business game Interviews & psychological testing Leaderless group discussions Day 1 In-basket exercise Individual role playing Group role playing Day 2 Individual case analysis Peer ratings Day 3 Feedback Counseling Further development discussions Day 4 Sample Assessment Center Agenda

47. Sources of Rater Bias • Halo effect– rate high or low due to irrelevant feature or global impression • Leniency error– tendency to give everyone higher ratings • Severity error– tendency to give everyone lower ratings • Central tendency– avoid extreme ratings for specific or on all dimensions • Contrast effect– rating of one person is affected by rating of another • Hawthorne effect– rating distortion (usually high) due to being attended to in a study • Self-fulfilling prophecy (experimenter effect)– selective attention given to what is expected or desired • Misplaced precision error– faults in the rating, design, or treatment may invalidate the precision of the other • Law of the instrument– a favorite instrument will probably find only what it’s designed to find • Number magic– the use of numbers carries the impression of greater precision than may be present

48. Team Discussion • If you were on a task force to select a person for a leadership position in your company, how would you go about it? (be specific) • How would you defend/explain your rationale for each step/procedure in the process?