Getting your bench right: succession planning tends to focus on the CEO, but getting the right C-suite rotation can be just as important.

One Wednesday afternoon about 18 months ago, Timothy H. Ling took a break from work to join friends for a game of ice hockey at a sports complex in El Segundo, not too far from the Unocal offices where he served as president and chief operating officer. He never returned to work--he died of a heart attack at the sports complex. "The entire Unocal family is shocked and saddened by Tim's sudden passing," CEO Charles R. Williamson said in a January 29, 2004, press release issued the day after the 46-year-old's death. Everyone was distraught, and perhaps even a bit dumbfounded. During a 47-minute fourth-quarter earnings conference call with analysts five days later--and a couple of days after the funeral--Williamson, who temporarily assumed Ling's duties, said, "Needless to say, it's been a difficult week."

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Williamson was no doubt putting that mildly. As stewards of whole pieces of the business, COOs, CFOs, CMOs, CIOs and other C-level executives are keepers of critical knowledge, and their unexpected departures can be crippling, at least temporarily, for any company. Yet much of the debate over formal succession planning remains focused on grooming a successor for the CEO's position, and far less so on planning for the exit of his or her direct reports, let alone deeper into the organization. In fact, 34 percent of Fortune 1000 companies don't have a C-level succession plan in place, according to Drake Beam Morin, a global human capital management firm. And 60 percent of those cite a lack of time and budget as reasons for delaying leadership development.

But that delay could cost you. When your chief technology officer or HR chief announce they are moving on and you don't have a succession plan in place, you're left scrambling to fill that gap instead of smoothly transitioning. During this interim period, employees can start to lose confidence in management, which can result in a lack of productivity, bad morale and higher turnover, say human capital management experts. In contrast, companies with a succession plan that results in a hire from within "are less likely to experience this negative effect on employee morale," according to "Making Transitions Work," a report by Jeff Heynen, an analyst at the Canadian Centre for Management Development.

Letting seats sit empty or be occupied by interim directors because you're not prepared to hire from within is a flawed strategy because employees will interpret that as 'I don't have a shot at being in the top spot', says Tom Fuller of executive search firm Epsen Fuller. "Succession planning is a retention policy. If you are only engaging in it from the CEO level, you run the risk of losing some really great rock star employees who are not content to just stagnate."

And don't be in denial. Chances are one of the top executives you put into place last year will be gone before first quarter next year comes to a close. A 2005 study by recruiting firm Russell Reynolds Associates reveals that turnover of chief financial officers at Fortune 500 companies increased by 23 percent from 2003 to 2004. Just two examples: With the July announcement of Frank Mergenthaler's succession of Robert Thompson, Inter-public Group of Companies is on its fourth CFO in less than three years; and Michael Kramer, an Apple veteran who just took Susan Riley's spot at Abercrombie & Fitch, means the high-end retailer has seen three CFOs come and go since June 2003, not including two interim CFOs.

Over the past three years, 225 CFOs of the Fortune 500 have left their jobs, a similar study by executive search firm Spencer Stuart reveals. "C-suite managers move in and out of jobs regularly," says Tom Neff, chairman of Spencer Stuart U.S. and co-author with Jim Citrin of the January-released book, You're in Charge--Now What? The CEO taking office today can expect during an average tenure to replace the company's CFO twice, the CIO twice and the CMO three times, Neff says. The Top 100 branded companies actually see a new chief marketer in place every 23 months on average, according to the Spencer Stuart study.

"Boards are starting to look at how good are people at the C-level. But I think more boards than not are still relatively naive about the whole process when you go beyond the CEO," says Joe Griesedieck, vice chair of executive search firm Korn/Ferry International. "They assume the CEO has it under control. But when you look deep into the organization, you will find that talent is just not there."

CEOs who fail to develop succession plans for their senior level executives are risking more than temporary chaos; they are jeopardizing shareholder value, according to several research studies. Work-force management specialist DBM looked at companies whose stock fell between 40 and 100 percent in a 12-month period and found that about 15 percent of them experienced the departure of a C-level executive.

Another global study conducted by university researchers in Britain found that naming a successor immediately can stem the damage from an unexpected executive departure. A look at company examples showed the stock price dipped when no successor was announced, while it held steady or increased slightly for those companies that announced an immediate replacement.

Case in point: When Brian Anderson, the CFO of office supply retailer Office-Max resigned, sans replacement, amid accounting woes in January after two months on the job, shares of OfficeMax stock fell 8 percent on the news. By comparison, when faltering Delta Air Lines announced in July the resignation of 14-months-on-the-job CFO Michael Palumbo at the same time that it announced Edward Bastian's return to that position (along with other executive changes), its stock price rose, albeit only 1 percent, from $3.87 to $3.91. A coincidence? You decide: The slight uptick occurred despite the previous day's announcement of second-quarter net losses of $1.96 billion, not to mention stock price declines every day of the five days prior to the announcement and again in the two days following it.

Next to competitor OfficeMax, Office Depot has fared rather well over the past five years despite a host of executive officer comings and goings. Since July 2000, as the stock climbed 345 percent from a low around $6.50 to a high of $28.95, the supply retailer has entertained four CEOs, including an acting CEO, four CIOs, three CMOs and two CFOs. A search is currently on for the latter following the promotion of Charles Brown to president, international; insiders filled the CMO and CIO positions. CIO Tim Toews, a multiyear veteran who served as the company's European CIO, replaced Patricia Morrison, who left to become Motorola's CIO in July. Chuck Rubin, who worked for several months with Office Depot while a partner at managing consultant Accenture, took his post as chief merchandising/marketing officer in March 2004, after it sat vacant for six months.

Succession by Committee

The C-suite clearly can be an ongoing game of musical chairs and that can make the CEO job a lonely position, particularly if it were left up to the chief executive alone to decide replacements, says Office Depot chairman and CEO Steve Odland, who took office in March 2005 following a five-month interim mode, after the board ousted Bruce Nelson in October 2004.

Odland is working on implementing an executive committee-led succession plan that he perfected while CEO at AutoZone to do away with some of the hemming and hawing that revolved around promotions versus outside placements for open positions. Under Odland's plan, the nine-member executive committee (which will jump to 10 once a new CFO is named) "is a group of people who know the ins and outs of the company and can nominate someone to succeed internally." On the surface, he says, this group, in which "everyone parks their functional hat at the door," is making executive decisions together from the annual operating plan, acquisitions and retail prototypes to IT projects. "When we close the door, the HR person is equal to our legal counsel and the CFO." This level of sharing means that everyone in the executive committee, which meets for four hours every Monday, has a common knowledge about each operation and could potentially move into one of the other positions, if need be. "I view all of the officers as CEOs-in-development," Odland says.

But also, this team sets an example for how much deeper in the organization the succession planning runs. Members of the executive committee meet monthly, in subgroups, with close to 115 vice presidents who could be tapped at any time for a senior position. Built into the system are a mentoring program, performance metrics and a development planning process. "I like to move people every couple of years so that those people are being developed and groomed within the company for bigger positions and there are multiple candidates for each position," Odland says. "We try to make everyone the perfect package."

For smaller companies that fail to take C-suite succession seriously, the results can be even more damaging than for large companies. Take Seattle, Wash.-based FusionWare, which did not start grooming a successor for its chief financial officer despite the early warning it had when its CFO announced he had lymphoma. "He was healthy enough to go with me to Australia in February and by August he was dead," says CEO Alan M. Davis about CFO David Stefanoff's death last year.

Stefanoff, 46, worked from his home the weeks before his death, trying to raise $5 million in venture-capital funding for the $2.5 million middleware integration products company. "Losing a key member of the management team can have a major impact, and you could potentially lose the company over the inability to recover fast enough," says Davis.

The 25-employee company was a tad closer to obtaining the funds it needed back in July 2004 than it was six months after Stefanoff's death. "He handled all of the financial matters and he was arranging a software leasing program. When he died, it all stopped and there was nobody to do it." (An interim CFO was hired as a consultant within three months, but Davis says things didn't progress as well as they could have.)

The bumpy road would have been smoother, he believes, had the company groomed a successor while Stefanoff was still alive and well enough to explain his process. Davis says he will never make that mistake again. Although his pockets are not as deep as larger companies, he will either groom a successor for his various key management positions or keep names of potential hires available in his BlackBerry at all times.

Davis' reluctance to make a change is understandable. Many companies have a hard time asking a sick employee to step down, or step aside. Dr. Maurice Ramirez, an Orlando, Fla., physician practicing disaster medicine who also consults with companies like Federated Department Stores about how management should tackle succession planning for the dying executive, says he has seen the "death watch" situation before. An executive might be in and out of chemotherapy for 16 weeks and yet remains faithful to the job, trying to do what work he can between treatments.

Simultaneously, the rest of the management team remains a paragon of loyalty because "we as a culture love sick people," Ramirez adds. "We coddle the sick. We give them special parking privileges. We have the Family Medical Leave Act. When illness takes someone out of the business, we tend to rally in their name."

So CEOs often feel it would be inappropriate to ask a seriously ill direct report to step down, or even temporarily step aside. An easy solution would be to have a plan in place long before an executive ever becomes ill. Ramirez says those companies that fare better after the executive actually passes away are those that already had a successor in the pipeline who worked closely with the senior executive during his dying days as if it were a mentoring situation. "There would be a feeling that the torch was passed, that the executive approved of his successor," he says.

The talent pipeline is key. Less than three months after HomeBanc Mortgage, the Atlanta real estate investment trust, went public in July 2004, Chief Marketing Officer Stacey Cost announced she was leaving the company and gave two weeks notice. Members of senior management knew she had bought a piece of land in New Mexico with her husband and was building a home, but did not anticipate the early exit. "I was surprised at the timing of her departure but knew it would happen eventually," says CEO Patrick Flood.

Fortunately for the company, Flood was a big proponent of succession and strategic planning and already had several potential successors identified. After the initial shock, he was able to view Cost's departure as an opportunity to build on what his former CMO had accomplished. "I wasn't concerned that anything wouldn't get done or that we wouldn't find a new CMO in short order," he says. In October 2004, Flood appointed as interim CMO Jackie Yeaney, formerly of Delta Air Lines' marketing department. By April, he installed Yeaney in permanently. In fact, Cost, who had spent four years as the CMO, had hired her successor only a short while before her departure. "I didn't know I was going to be leaving, but Pat wanted me to hire a strong person and that planted a seed in me that the person should be a succession candidate," says Cost, who says she accepted the New Mexico-based position a short while after making an offer to Yeaney. Due to early planning, says Flood, "We were able to comfortably shift our business without missing a beat. And if the new CMO doesn't deliver results or needs to have a transition in her own life, we are still in a position to gracefully transition. We have three or four people we could consider for her position," he says.

About two and a half years ago, 18 months before Cost's departure, the company began shifting from informal succession planning to a formal process that helps it identify potential leaders while they are still relatively low in the ranks--and that effort has seen great results. The employee turnover rate, which sat at 22 percent in 2003, fell to 17 percent in 2004 and is at about 14 percent so far this year (the mortgage banking industry generally sees turnover in the range of 35 to 40 percent).

Other than reducing costs associated with replacing and training employees and productivity costs, "when you reduce turnover, you keep people around longer, which helps in identifying and grooming new leaders at all levels," says Flood.

The company has identified 56 potential C-suite leaders based on a series of interviews, a 360-degree multirater, performance evaluations, production quotas and other ongoing examination. "You can't have just a single source candidate. There are health issues, career change issues and a multitude of things that could happen," Flood says. "The CEO of tomorrow frankly will have to spend a lot more time developing the human resources aspect so that [executives] are in position." Words to the wise indeed.

RELATED ARTICLE: C-Suite Planning Dos and Don'ts

* Don't expect to hang on to your C-suite picks for years at a time. The statistics show that at least one of the top executives you hired last year will be gone by first quarter next year.

* Do work hard to groom talent from within. By continuously identifying top performers, you will not only fill your ranks with future successors, but you'll boost employee morale and lower turnover as well.

* Don't be afraid to hire from within. Leaving seats vacant or occupied by interim executives for long stretches sets a bad tone for the ranks. Make it a priority to identify a few top candidates and work on getting them ready to move up.

* Do move people around every few years. By grooming candidates for multiple positions, you ensure that you'll have options should you be faced with an unexpected vacancy.

* Don't assume that your direct reports are grooming successors. Unless it's part of their job description, and a formal program within the company, most executives won't take on leadership development. Make it clear you expect them to identify potential candidates and hold them accountable for results.

Source: Chief Executive

Turnover On the Bench

The average tenure of C-suite executives

     years

CEO  6
CFO  6
CIO  3.5
CMO  2

Source: Spencer Stuart, 2005

Note: Table made from bar graph.