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Beyond today's CEO.

In 1997, your company had a record year:

* Ongoing revenues rose to $89.3 billion; up 13 percent,

* Earnings increased to more than $8.2 billion; up 13 percent,

* Earnings per share increased 14 percent to a record $2.50.

This "excerpt" from the 1997 General Electric annual report is typical of a vision that many U.S. CEOs have set for their companies. CEOs have convinced themselves that a combination of 10 percent to 15 percent earnings growth domestically, combined with global expansion, acquisitions, and stock buy-back programs will get them to their objective - continuing to grow stock values at more than 20 percent a year.

Strategy has moved from earnings growth driven by cost-oriented financial engineering to growth sustained by revenue increases and reinvestment that Wall Street tracks quarterly and share-owners value at a premium.

U.S. CEOs are so Committed to growth that AlliedSignal's CEO, Larry Bossidy, could express displeasure that during 1997 the "16 percent increase in our company's stock price did not keep pace with the broader market averages." And Lew Platt, chairman of the board, president, and CEO of Hewlett-Packard, characterized 1997 as a year that "fell short of being a great one" because it was the first year since 1992 that revenues rose less than 20 percent.

Sustaining 15-percent-a-year domestic earnings growth calls for revenue expansion of 7 percent to 10 percent annually to allow for reinvestment that funds further business advances - meaning that an enterprise will double in size within seven to 10 years.

However, such rapid, sustained growth assumes that managers, workers, and organizational systems can deal with the increased complexity that growth produces. But this, by no means, is a given. In the same 1997 GE annual report, Jack Welch writes of the effort to change the way people think. "This learning environment came from decade-long, soul-transforming cultural initiative called 'Work-Out.' Work-Out is a continuing effort to achieve what we call 'boundaryless behavior' - a business behavior that tramples and demolishes all barriers of rank, function, geography, and bureaucracy in an endless pursuit of the best idea . . ."

What boards of directors are starting to recognize is that firms growing at 10 percent to 15 percent a year quickly enter different dimensions of size and complexity that may make the skill sets that brought the current CEO to the job obsolete - and require leadership from executives who might not be in the normal chain of succession.

In three well-publicized succession failures at AT&T, Waste Management, and Apple - where the new CEO, or CEO-elect, lasted three years or less - shareowner value declined by billions between the CEO's arrival and departure. These are not isolated cases. Any review of market laggards will reveal cases where CEOs appear to be staying too long despite below-par shareowner value creation. Consider the recent histories of Digital Equipment, Eastman Kodak, Polaroid, and IT&T.

'Succession' - A Limiting Mindset

Part of what boards confront when dealing with the issue of the next CEO is succession itself. "Succession" suggests that the successor "fill the shoes" of today's CEO, who handpicks and mentors him. But today's CEO should not necessarily set the standards for his or her successor - or manage the selection process.

At a minimum, the next generation of management will have to handle twice the complexity of today's generation. However, when a company doubles in size, its management capacity actually needs to triple. The reason is that complexity drives organizational capacity.

For example, Nucor Corp., the $4.1 billion company that revolutionized U.S. steelmaking, has nine domestic mills in several states and a 10th under construction. Nucor makes steel products in nine businesses and is devoted to a decentralized structure with four management layers between the top of the company and the bottom. Nucor has just 25 employees in its executive offices, out of 6,900 employees nationwide. The number of technical, marketing, and accounting processes Nucor must control expands with each mill and each business. The CEO, John D. Correnti, cannot possibly know all the local variations among processes and market conditions, whereas when the company was half its present size, it was easier to get a sense of the whole.

By contrast, IBM in 1997 had global sales of $78.5 billion in five major businesses. Its earnings of $6.1 billion were some $2 billion larger than Nucor's. One IBM division alone had revenues of $19.3 billion, nearly quintuple that of Nucor, making the management task of Louis Gerstner, Jr., chairman and CEO of IBM, of vastly greater complexity than that of Correnti's.

Complexity means the number of variables, their ambiguity, and their rate of change that managers must control. A business with two products, two customer segments, and two geographic regions has a complexity factor of eight. Double the capacity of that business to four products, four customer segments and four geographic regions and the complexity factor soars to 64.

The difference in complexity between IBM and Nucor is vast and the challenges of maintaining IBM's growth curve versus Nucor's are similarly mismatched. However, in each case, Gerstner's and Correnti's successors will have to surpass them in order to handle the greater complexity of continued high growth.

The next generation of management must handle:

* Proliferating products and technologies.

* Greater segmentation across industries.

* Larger numbers of customer groups.

* More channels across and within industries.

* More finely tuned industry decisions.

* Global expansion.

Today's standards of management and succession planning are inadequate in light of current objectives. Boards of directors and CEOs do not yet clearly understand that they must advance management development and succession practices by an order of magnitude.

Surpassing the Successful CEO

There are at least seven ways that a company can prepare for the increased complexity of sustained growth. Each must be adapted to a firm's unique culture and marketplace presence. All require clear understanding that what worked the past is insufficient for what the company will become as it doubles in size triples in organizational complexity.

1. Choose a CEO and managers for the company you want to become. Design management training and succession for what will be necessary in 10 years. This is an enormously difficult task because few boards or CEOs are comfortable looking that far ahead. So much can happen in one year that planning for 10 seems wildly speculative. However, if the expectation is that a company will grow at a sustained rate of 15 percent a year, the board and CEO already have committed themselves to a company doubling in size in seven to 10 years. Training the managers of tomorrow to handle increased complexity is a job that must be confronted today.

The CEO and board should answer the following questions about the company:

* How big, diverse, and technologically intensive will it be?

* How integrated, global, or political will it be?

Companies that devote close and careful attention to management development can fail when they look at a candidate's track record, rather than his or her vision of the future. For example, both Roger Smith and Robert Stempel had enviable track records at GM before leading the company, but they did not handle the more complex world of the '80s and early '90s when GM stumbled badly. John F. "Jack" Smith was prepared to accept the new reality and to restructure a lagging company, a task that continues to consume him. Similarly, the chairman and CEO of Ford Motor Co., Alex Trotman, was prepared and ready to launch a new vision of merged engineering and manufacturing operations in the Ford 2000 program that he carried through in the face of criticism. Ford's 1997 profits of $6.9 billion are testimony to his understanding that the Detroit way of running an auto company was no longer valid.

When it comes to understanding the complexity of long-term growth, the board must look further ahead than the CEO. Understandably, the CEO cannot be drawn too deeply into the future when the full weight of running a firm successfully is on his or her shoulders today.

2. Choose a CEO and managers who can do the job they take over and can surpass the record of their predecessors. Executives ready to surpass current management will have strong views on the firm's future and its strategic priorities - and may therefore clash with the current CEO. They may be the "black sheep" of the management cadre, despite successful track records.

Such surpassers may feel constrained or under-appreciated by present management and there is a danger of conflict that might cause a potential surpasser to go elsewhere. It takes a brave CEO and his board-level advisors to recognize that it is not the dutiful, patient candidate, but the frustrated, challenging candidate who has a "surpasser's" capacity. With CEO succession, the board must accept the responsibility of managing a difficult transition and be prepared to accelerate the timetable.

3. Track and project internal candidates' capacities to master complexity and growth. Its not unusual for today's CEO to have earned the top spot after successfully running one or more of a firm's businesses. Internally developed CEOs derive leadership authority and respect from intimate knowledge and great experience of the company and its core competencies. However, growth and change in markets, technologies, and economic structures may radically change the business equation.

Surpassers show an ability to master increasing complexity throughout their careers. For example, candidate A's achievements might read: "Built market share in our core business to its highest level before or since and five points greater than when the present CEO ran it. Broke performance records in every other business he's run. A perfectionist, proud and respected."

Candidate B's efforts might be summarized: "Took a business we didn't understand and were about to sell, reconfigured it, and made it a star. The youngest corporate vice president ever. Gets a different business 'humming' every two years, then gets bored and is ready for a new challenge. Went from running a $100 million industrial component division to being president of the consumer group with $3 billion sales in five years. Succeeded in more diverse business situations (growth, decline, turnaround, domestic, global) than anyone his age. Always bugging the CEO that the company's quality stinks. Aggressive - people either love him or hate him."

In this scenario, candidate A can replay his successful game plan but not surpass it, while candidate B can raise his game to a new level.

The board should ensure that the appropriate development path, tracking, and planning are in place to identify surpassers and that assessment criteria focus on managing complexity. This in itself is an extraordinarily difficult task, even in firms with sophisticated management development systems. There is a human tendency to promote those who "belong to the club," rather than those who may someday shut the club down because it's out of touch. That's why internal promotions often don't produce the person needed to keep a company on a sustained growth path. Managers and mentors prepared future leaders for a company that existed then and not for one that will exist when one of the candidates takes over the corporation.

4. When searching for a CEO, look for an external candidate who is willing to take a 'step down' in order to be independent. There are numerous success stories of top executives leaving a large, well-managed enterprise - such as GE, Unilever, Pepsico, or Emerson Electric - and becoming CEO of a firm that is smaller than the division they had run. Large-scale businesses provide more development platforms for leaders, and CEOs trained in such businesses learn to manage complexity that smaller firms have not yet faced. Think, for example, of Stan Gault, who went to Rubbermaid; Larry Bossidy, who moved to AlliedSignal; and John Trani, who took over Stanley Works. Because they're proven surpassers, the boards of these companies could select them at low risk.

5. Implant the desire to surpass deeply into the company. The growth of future leaders be faster must be faster than the growth of the corporation. This requires a farsighted executive development program fostered by leaders at each level. However, the CEO and board must overcome tendencies to promote based on track records. Candidates need to "master" assignments faster, typically by spending three to four years at five or six managerial echelons, each representing increasing complexity. This is a 15- to 25-year process, which a candidate should complete by age 45 or 50. The best people must be continually challenged so they won't get frustrated and leave.

However, recent economic history has created barriers to providing challenges on demand. The "delayering" of recent years has shrunk the number of mid-level positions that are management growth platforms. A focus on core businesses has further reduced diversity, thereby limiting management opportunities and providing fewer chances for independent command.

As a result, the board and CEO have to build management stepping stones. These steps will develop what may be the firm's most valuable strategic growth asset - its future leadership talent pool. While there are no clear rules for instituting these development jobs because each company is different, it's clear that firms that have compressed management have removed leadership development opportunities.

6. Surpassing companies should prepare for 'shocking' talent loss with vigilance and reserves. The hunt for capable leaders can cause top talent to go elsewhere. The board and CEO must protect the company's talent pool against raiding during the hunt for a successor. A company like Disney, which has suffered heavy losses of senior management, may have the depth to continue its track record of success, but other firms are not as fortunate.

The board and CEO should ensure that there is sufficient bench strength to weather surprise losses and should lock key executives in with 'extraordinary' handcuffs. As of this writing, the handcuff benchmark may exist at GE, where special restricted stock grants put a potential price tab of $2.5 million to $50 million on luring away a potential successor to Jack Welch.

7. Establish a Committee of the Board that focuses on surpassing a successful CEO. Choosing the next CEO, and grooming candidates who can be "the surpasser's surpasser," are important board activities. This function justifies a dedicated committee that takes an ongoing, multigenerational view of the company's leadership development strategy, process, and effectiveness. The committee head should be chosen on the basis of past success in building a leadership team at a more complex business. Each committee member should have CEO experience that the company wants to emulate. This was John Smale's role at GM when he moved to the chairmanship in order to help GM find its way again. Smale's previous success at P&G had prepared him for the complex challenges that he faced at GM.

The challenge of corporations will be to find directors who can handle such a role. CEOs are increasingly unavailable to serve on outside boards. And it can be difficult to find divisional executives who have run operations that are larger than the company on whose board they are serving.

Present management development and succession systems have frequently failed to develop the talent needed to meet corporate growth objectives and to go beyond today's CEO. Yet these are critical strategic choices that can make a difference of billions of dollars in shareowner value. The seven principles for surpassing the successful CEO call for a new framework of standards, measures, values, expectations, and players in the process of developing and selecting senior managers and CEOs. Such a change in mindset is essential if major U.S. corporations are to continue to raise stock values at rates above 20 percent a year and handle the increased complexity that such growth will produce.

Michael Allen is president of The Michael Allen Company, consultants in strategic growth management and former VP of corporate strategy at GE. Tom Neff is chairman of Spencer Stuart, U.S., consultants in executive search.
COPYRIGHT 1998 Chief Executive Publishing
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1998, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:preparing executives for future complexity
Author:Neff, Tom
Publication:Chief Executive (U.S.)
Date:Nov 1, 1998
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