Changing of the Guard

HR is playing a more important role than ever in CEO succession. But the process often requires CHROs to walk a fine line.

Friday, April 1, 2011
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Not so long ago, the issue of CEO succession was a relatively straightforward one for the head of HR.

CEOs mostly owned the succession process, and often felt that if they had one or perhaps two possible successors who could take over at the appropriate time, that was enough.

No longer. As boards are coming under growing pressure to make sure their companies have robust CEO succession strategies, and are passing that expectation on to their CEOs, HR is increasingly being called upon to play a key role.

Much of that entails making sure the company has strong talent-management and leadership-development programs. But an equally important job -- particularly for the head of HR -- is to serve as facilitator and strategic adviser not only to the CEO, but to the board as well.

HR leaders are often expected to provide frank assessments of CEO candidates, which may or may not reflect the views of the CEO. Sometimes, they are even faced with the unenviable task of persuading a recalcitrant CEO that a succession strategy is necessary in the first place.

"The head of HR needs to help his or her boss understand why it is in their best interest to have a robust process," says former Procter & Gamble CHRO Dick Antoine, who helped oversee a CEO succession in 2009. "You say, 'Hey, boss, you need to help the board with this process; otherwise, they're going to feel you're stonewalling.' "

All of this is part of the larger shift of power from the CEO to the board on a variety of issues, spurred largely by the financial crisis, as shareholders, Wall Street, and the U.S. Securities and Exchange Commission have demanded more accountability from corporate leadership.

CEO succession has been a particularly sore point. Stephen Miles, vice chairman of Chicago-based Heidrick & Struggles, notes that CEOs at a number of companies have had to step down amid financial losses and other setbacks, and, though there have often been succession plans in place, "the boards looked around and, most of the time, found they had to go outside."

What's more, many more boards than ever before are insisting that CEOs have not just a successor or two in mind, but a comprehensive plan to identify, assess and develop a wide choice of candidates -- for both the present and the future.

Enter HR.

CEO succession, says Miles, fits in well with HR's increasingly strategic focus. And, now that boards and CEOs are thinking more about succession strategy, heads of HR are often finding they have a chance to make a real impact. "Many HR executives are champing at the bit to play a broader role," says Miles.

But this new level of responsibility does not come without challenges and pitfalls, according to current and former heads of HR. Boards have greater expectations for HR -- not only for performance management and leadership development, but in the unique insights the HR leader can provide about CEO candidates.

That, however, can get HR caught in the middle between the board and the CEO. Heads of HR must also guard against losing their objectivity when favoring a particular candidate. There is also a danger they might hesitate to push a CEO on succession planning because, when the CEO leaves, they may be out the door as well.

HR's Expanded Role

Despite the dangers, many companies handle succession well. One of them is KeyCorp, a 15,000-employee bank-based financial-services company headquartered in Cleveland, where CEO succession planning has long been considered a priority. In the fall of 2009, CEO Henry L. Meyer III advised the board that, as part of his long-range personal planning, he was considering retiring in 2011.

Although no date was specified, the board intensified the ongoing succession process, including working with Meyer and Executive Vice President and Chief Human Resources Officer Thomas Helfrich to identify the competencies and experiences critical for an effective CEO.

"We were fortunate to have a very good and very engaged board," says Helfrich.

One early decision, which Helfrich says led to an open and transparent process among board members, was that the full board -- rather than a committee -- would take part in the succession planning.

Helfrich says one of his roles was to provide the board with his assessments of the various candidates. And he was as open as possible, he says.

"You have to be direct and candid -- whether or not your assessment agrees with the CEO's," says Helfrich. He was able to do that, he says, because he operated with facts -- doing his homework so he could explain how he came to a particular point of view.

Helfrich says he was equally candid with Meyer concerning what he was going to tell the board about the various candidates. "Henry knew where I stood," he says. "You don't want the CEO to think you're going behind his back. The CEO must know that, if asked by the board, 'Here's what I'm going to say.' "

Helfrich also walked another fine line -- not revealing to the candidates that they, in fact, were candidates, even as he provided his usual coaching and feedback to members of the top team.

The board and Meyer did not want to let candidates know where they stood -- to avoid setting up real or perceived competition -- and did not want the candidates to change their behaviors, such as by becoming risk-averse to avoid hurting their chances.

"I was providing coaching without revealing any confidential information," says Helfrich.

Meyer's impending departure was announced in November, a year into the process, the same day his successor, company Vice Chair Beth E. Mooney, was named. Meyer will retire May 1 -- as will Helfrich, after 16 years as CHRO.

A good succession strategy with heavy involvement from HR is also a top priority at Oak Brook, Ill.-based McDonald's Corp., which suffered through two traumatic CEO successions during a seven-month period in 2004, says Global Chief Human Resource Officer Rich Floersch.

About 200 top executives are evaluated to determine who might be "ready now" to be CEO, and "ready future," perhaps five to seven years out, he says.

At McDonald's, as at many other companies, the CEO succession strategy is part of a larger leadership-development process. So, Floersch says, he helps make sure there is strong talent in key jobs, and leadership-development programs are designed around the competencies and characteristics actually needed.

Floersch works closely with the CEO and non-executive chairman to determine the kind of CEO the company needs, develops a list of success factors from that, and then assesses the potential candidates against those factors. This information is regularly presented to the full board.

When helping the board and CEO evaluate candidates, Floersch says, it's critical that the head of HR stay focused on what's best for the company.

"If you're guided by that, and you've got a clear point of view about a person's capability -- through firsthand information, not secondhand information -- then you've got credibility when you're in the room," he says. Floersch says he is as objective as possible, using the CEO success factors as his anchors.

He says he makes sure he doesn't overlook people who might not have been considered candidates a few years ago -- but who have shown significant development. Sometimes, he says, he's been "pleasantly surprised when people aspire to take on more responsibility."

Antoine, the former CHRO of P&G, is now president of the New Canaan, Conn.-based National Academy of Human Resources. He says boards are looking more and more to the HR person to provide the kinds of insights they might not get from the CEO.

"People are always on their best behavior around the CEO, " he says. "The CHRO is going to be watching from a group setting, and is going to see more of the interactions and leadership skills. They'll see some of the unvarnished behaviors the CEO isn't going to see."

Antoine recalls that, over a glass of wine one night, one of P&G's directors asked him about the various CEO candidates.

"He said, 'Tell me what you really think. What about this person? What about that person?' I was getting grilled."

Antoine answered the questions honestly, and later told the CEO what he had said to the director.

"But that's what the board is looking for -- they are trying to triangulate, and they're going to the best resources they can," says Antoine. "They talk to the CEO and the HR person. Maybe they talk to the finance person, but that's pretty rare. Other than that, who are you going to talk to?"

Antoine says boards expect the head of HR to talk knowledgeably about the candidates, and candidly, with his or her perspective, rather than that of the CEO. "If you cannot do that," says Antoine, "if you are not knowledgeable or candid, you're not going to be in that job very long."

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At P&G, Antoine worked closely with the CEO and lead director in identifying and developing candidates for succession. They made sure they had three candidates who could step into the CEO position, including one who could take over right away in an emergency.

They also developed a long-term succession strategy, looking at a group of about seven candidates who might one day replace the successor. In addition, they identified about 15 people for the third generation, and another 20 to 25 potential candidates to be the CEO after that.

"For that fourth generation, the main point was getting a couple of stars the experiences they needed," he says.

That long-term view is what Neil Neveras of Deloitte Consulting calls "putting on your future glasses," looking at the kinds of CEOs and other leaders a company will need in the coming years -- and how those leaders might be developed.

Neveras, a Philadelphia-based senior manager who heads the firm's U.S. Human Capital Leadership and Development Practice, says it's HR's role to help make sure the candidates are assessed on a variety of dimensions.

"A lot of folks are looking only at performance and their personal relationships with these candidates," he says. "It tends to get very friends- and family-oriented."

Companies that do it right, he says, perform a deep assessment of a person's leadership capabilities in areas such as cognitive abilities, personality and leadership style, and ask, "Does that fit in with what we need to take us forward? Is this person capable of, and a fit for, a future CEO role?"

It's also the job of HR, he says, to make sure the board and CEO are going beyond CEO succession planning -- grooming the top three or four candidates -- to CEO succession management, which considers the pool underneath.

"HR has a role to know the entire pool of talent," says Neveras. "It's important to generate multiple options, because a) things change, and b) you could be wrong."

Danger Zones

HR's increased role in CEO succession carries certain dangers.

Former Avon CHRO Jill Kanin-Lovers, who now serves on several boards, says it is essential that heads of HR remain objective throughout the CEO-succession process, even when they favor a particular candidate.

"HR needs to bridge the personal and process side -- it's very important that they not back a particular horse," says Kanin-Lovers, who lives in Stamford, Conn. "If they can stay above that fray, that's when they are going to be particularly helpful to boards and CEOs."

Some heads of HR are reluctant to push a CEO on succession planning because, when the CEO leaves, it could mean the end of their own jobs, says Mark Nadler, a Chicago-based partner at Oliver Wyman Delta, a management-consulting firm that specializes in organizational and leadership effectiveness.

"If you have been a trusted adviser to the incumbent," he says, "the more closely you're linked to the incumbent the more likely you'll be replaced by the successor, who wants his own trusted adviser."

But, says Nadler, CHROs must focus on what's best for the company.

HR also runs the risk of getting caught in the middle when the board and CEO have entirely different ideas of what the succession strategy should be, he says.

"Who do you actually work for?" says Nadler. "Who do you really report to? And what do you do when the agendas of the board and CEO are not in sync?"

Because of all the potential for personal and professional conflicts of interest, says Nadler, he believes that, for chief human resource officers, "the issue of CEO succession may be the most difficult thing they have to deal with, with the possible, possible, exception of the downsizing of HR."

Nadler says there are three dynamics of succession that put pressure on CEOs: the internal politics, the emotional aspect -- including friendships -- and the process itself.

But those factors aren't limited to CEOs, he adds. "Sometimes, I think we overlook the centrality of HR. They have exactly the same pressures on them as the CEO."

Despite the many challenges, CEO succession represents an opportunity for HR to do the kinds of things it does best.

"Talent development is one of the key responsibilities of the CHRO," says Antoine. "And the ultimate talent-development outcome is CEO succession."

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