Editor’s note: David Yost, CEO of the $84 billion company AmerisourceBergen, is stepping down in July after 14 years in the role. NACD Directorship asked him to describe his experiences with CEO succession, both as a transitioning CEO in his own company, and as an outside board member with other companies. What follows is his first-person account from and interview with Brendan Sheehan.
In general, CEO succession is a difficult task for many reasons. The two biggest challenges for CEOs are to keep your ego in check and realise that you are not hiring your clone, but someone with leadership skills for the future.
CEO succession is one of the most important functions of the board. Directors need to start working on it the day the new CEO starts. In our case at AmerisourceBergen, this is literally what the board will do. In the first board meeting after I am gone, the directors will deal with succession planning and ask the questions, “What if the new guy gets hit by a truck? What kinds of job skills do we need to develop in the people who are possible contenders as his replacement?”
That is what we did with Steve Collis. He had founded and run one of our four main operating units. After we identified him as a possible CEO, we moved him from that division to run one of the other units—the largest one, in fact—so that he would get even more operational experience. It was a controversial thing to do because he was doing a great job running the previous division, but it was a matter of looking at the bigger picture and asking, “What is really important here?” We then made him COO so he was in charge of all our units, which meant that [the board] got a great chance to see him perform in increasingly expansive roles.
But it’s not just about what happens inside the company. We deliberately exposed Steve to the Street so that the analysts and investors got to know him and were not surprised when we announced that he would be taking over as CEO. In my opinion, we managed the whole transition without missing a beat. The stock price was solid throughout and continues to perform well.
It is certainly easier to do this when the company has a good story to tell—Amerisource earnings have been up 17.5 per cent over the last nine years on a compounded growth basis—but that can also work against you because people may ask, “Is this level of success going to continue with the new guy?” In our case, the answer is a definite yes.
I say we passed the test. It was made easier by our having a very strong CFO. If you are going to change the CEO, keeping the CFO goes a long way to providing continuity and stopping everyone from getting too jittery.
Achieving a successful transition does not just happen. CEO succession does not start when you know the CEO will be departing shortly. The process starts years before the CEO actually leaves.
Having worked through the alternative of looking to the outside for a potential successor as well, I believe that finding someone from within the company is a lot easier for all constituencies—especially the board, the CEO and the senior management.
Apart from AmerisourceBergen, I have served on six public company boards and have been involved in CEO succession to some degree at nearly all of them. Fortunately, I have never had to deal with a situation where things were really exploding. If things are going really badly, then that might be a case where bringing in an outsider might be preferable to promoting an internal candidate. People may see it as a breath of fresh air and a needed positive change.
For example, I sit on the board of Tyco International. The current CEO, Ed Breen, didn’t come in under the best of circumstances, yet he turned out to be exactly what the company needed. I would put him at the highest end of the scale in terms of CEOs. That is a good example of a situation where a new person was exactly what was needed. I only saw the after-effect of that, however, and was not involved in his appointment, as I came in shortly after he did. (Dennis Carey, now Board and CEO Practice vice chairman at Korn/Ferry International, recruited Breen, shortly before Carey joined KFI.)
Some companies do have significant problems with succession planning. It can be a difficult situation to get on top of, in part because it feels disloyal to the current CEO for the board to bring up identifying a replacement. It can be an awkward conversation. But in my opinion, CEO performance and leadership succession should be a part of every board meeting—even if it is something as simple as making sure the board understands what the CEO’s feelings and intentions are. CEO succession, setting the strategic direction of the company and establishing the correct tone at the top are the three most important things a board does.
So how does the process work and how long does it take? The board should identify three or four candidates and develop them through a process that will likely take a couple years. You have to be careful: You might have a new CEO that wants to spend 10 years in the job and is doing a good job, so you don’t want to create any timing expectations and get everyone nervous. That said, the board should still be talking about it and making sure that everyone is comfortable with the process.
It is the responsibility of the board to make sure they are in a position to be able to identify the three or four possible successors for the short, mid or long term. To do this, they have to be hearing from the CEO about who the up-and-comers are. Directors should also be talking with the chief human resources officer, the CFO and others. They should be seeing top executives on a regular basis—particularly the people who are heading up the key operating units. They need to insist on it.
After the board identifies those candidates, it will probably come to terms with the fact that each of these individuals probably doesn’t have all the job skills required. It is very important for the board to create a development plan. It will have to figure out what the shortcomings of each individual are, and put them in situations that allow them to develop. They may need training or exposure to another part of the company.
At the end of the year, or whatever time frame the board sets up, it needs to reassess the development plan and make sure the people in it are progressing. Don’t be afraid to change your mind either. A coach or a great development plan can’t put in what God left out. If it is clear that someone is not making it, then you need to find someone else. You don’t necessarily have to immediately tell the person they are off the list, because it will de-motivate them, but you do need to mentally cross them off the list.
Another advantage to this ongoing type of structure is that it helps to keep senior people motivated, and it boosts retention. The problem you can have, though, is three or four people all start to think, ‘Maybe I am CEO material.’ Then those who don’t get chosen may conclude, ‘I am a CEO kind of guy, so if they don’t want me, I’ll go be a CEO elsewhere.’ There are those challenges, but I think it is overall a good thing.
For all this to work the board needs to have a high level of trust with the CEO and vice versa. The CEO needs to understand that his legacy is his successor. An interesting thing to do is to have some kind of incentive for the CEO, such that if the company achieves certain targets two years after his retirement he gets some sort of bonus. I have not been involved with this type of program personally, but I have heard about some companies that are doing it. An incentive program like that will motivate the outgoing CEO to make sure the transition is smooth. In my case it’s easy. I have a lot of stock, so I have a natural incentive to make sure AmerisourceBergen is in a good place.
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