Should a Retiring Chief Executive Stay on as Chairman?
from May/June 2008
by Lois Gilman
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Arthur D. Collins, 60 |
You bet, say several hundred of them who have done just that—including the dozen shown here. The argument for staying is familiar: It eases the way for their successors (provided they don’t wear out their welcome, of course), demonstrates orderly succession planning, and satisfies reformers who push companies to divide the two top jobs.
But there are a number of downsides, including one in particular for shareholders. The consulting firm Booz Allen Hamilton studied CEO turnover at the world’s 2,500 largest companies between 1995 and 2006 and found that “CEOs who served while the previous CEO was chairman performed significantly worse for investors.” How much worse? Returns were “over 80% lower,” says Steven Wheeler, co-author of the report. Another study suggests that an incoming CEO is less likely to take the company in needed new directions if his predecessor even so much as remains a director, let alone stays on as chairman. “Corporate policies such as capital expenditures, tangible assets, research-and-development expenditures, and acquisition activity are more constant across a turnover when the former CEO continues on the board,” say Rüdiger Fahlenbrach and Bernadette A. Minton of Ohio State University’s Fisher College of Business and Carrie H. Pan of the University of California at Santa Clara. They studied CEO turnover between 1993 and 2005 at 641 U.S. companies.
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Michael L. Eskew, 58 |
For all this, 379 of the 3,219 companies tracked in the Corporate Library research firm’s database have chairmen who used to be their CEOs. Among the S&P 500, the percentage is much lower—4% versus the Corporate Library’s 12%—but the former CEOs are still there. Among them: Robert J. Lawless. He stepped down in January as CEO of McCormick & Co., a spices-and-seasonings maker in Sparks, Maryland, turning over the day-to-day leadership to president and chief operating officer Alan D. Wilson, 50, while remaining chairman. “It won’t be for a long period of time,” says Lawless, 61, about his chairmanship, and he promises not to get in Wilson’s way. “I visit the company at my successor’s invitation.” Lawless, who also serves on the boards of Maryland utility Constellation Energy and insurer Baltimore Life, spent five years planning his exit and has a written agreement with Wilson that clearly spells out their respective roles.
Defining how a chairman and a CEO will divide their labors is critical if the two are to work effectively together, says Beverly A. Behan, managing director of the board-effectiveness practice at the Hay Group, a global management consulting firm. And it’s not something they can do by downloading corporate governance guidelines from the Web—they need to hammer out a list of who does what. “The magic is in the discussion and the negotiations between the partners. It brings a discipline to the process,” Behan says. Dennis Carey, a partner at search firm Korn/Ferry International, agrees: “Roles have to be clarified. Every situation is unique.”
Kenneth W. Freeman, a partner at the Kohlberg Kravis Roberts buyout firm and former chairman and CEO of Quest Diagnostics, a clinical-testing company, knows all this firsthand. He stepped down as Quest’s CEO in May 2004 and stayed on as chairman till December of the same year, when he relinquished that title too in what he calls “a smooth and orderly transition process” and left the board. “As CEOs, we’re in the middle of things, running the business day in and day out,” he says. “As chairman, your job is to run the board of directors.” Adds Carey: “You are now a fiduciary and no longer the operating executive. It’s very difficult for a CEO to make that transition.”
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Richard Kovacevich, 64 |
Setting up the change can be time-consuming. It took Freeman five years. The process got under way in 1999 when he identified a successor in Surya N. Mohapatra, whom he recruited from medical-imaging-technology outfit Picker International to serve as Quest’s senior vice president and chief operating officer. In 2002 Mohapatra, by then president, joined the Quest board. As Freeman’s retirement got closer, the two spent increasing time together. Freeman says they were very comfortable working out what each would be doing: “We defined and agreed upon each of our roles and associated responsibilities, and shared the information with the board and the management team.” After the handover, “if management brought issues to me,” says Freeman, “I referred them to him for discussion and resolution, and I appeared at the headquarters offices only at his request.” During this overlap period, Freeman stresses that it was “crystal-clear to the board that he was running the company and I was running the board.” Freeman yielded the chairmanship to Mohapatra on December 15, 2004, exactly on schedule.
Another tip for retiring CEOs who stay on as chairman: “Get out of the headquarters.” So says Spencer Stuart’s Susan Boren, author of the firm’s Minnesota Board Index, which tracks trends among the 30 largest companies in the state. “Don’t set up your office next to the new CEO, as people will still come to see you [and not him].”
What’s a good length of time for an overlap? Six to 18 months is common, and the company should specify the date when the former CEO will also step down as chairman. William W. George, a professor of management practice at Harvard Business School and a former chairman and CEO of Medtronic, believes that companies should go public with this date at the same time they announce the new CEO’s appointment. “It’s a transition that gives a seamless effect,” he says. Medtronic did just that. It announced at its 2000 annual meeting that Arthur Collins would become CEO the following May and George would stay on as chair until April 30, 2002, when Collins would get that title too. The company followed the same routine last year, announcing that Collins would be succeeded by William Hawkins as CEO and would stay on through August 2008 as chairman.
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Reuben Mark, 69 |
Recruiters say setting firm limits on how long a former CEO can keep the chairman’s job is particularly important if the company is looking outside to find a replacement. Most top talent will be reluctant to sign on as CEO if the deadline for landing the chairmanship too is elastic—and many won’t accept the spot if the previous CEO is sticking around at all.
The most well-intended plans can go wrong, especially if the former CEO finds it harder to let go than perhaps even he expected. “You never need a lead director more than when you’re doing CEO transition, especially if the outgoing CEO is staying on,” says the Hay Group’s Beverly Behan. “A good lead director can rein in the chairman if he or she is getting in the hair of the CEO.”
Perhaps these kinds of CEO-chairman overlaps really don’t make sense for most companies. Besides the two surveys cited above that call them into question, several authorities have challenged their value. “CEOs are not apprentices,” says Dan R. Dalton, director of the Institute for Corporate Governance at Indiana University’s Kelley School of Business. “There should never be any doubt as to whose voice leads the enterprise.” He adds that the past CEO is “always a shadow upon the development” of the new one, and “you can’t compromise the next CEO.” Former CEOs who are reluctant to yield influence can be another problem. Harvard Business School professor Joseph L. Bower, author of The CEO Within: Why Inside Outsiders Are Key to Succession Planning, points out that company employees take what the former chief has to say very seriously. If his successor changes strategies, “it’s hard to imagine the past CEO not arguing for ideas to which he or she had been committed. It has the potential for being a drag on change.”
The best recipe for making overlap transitions work isn’t that surprising or outlandish. The former CEO must fulfill the chairman’s role, setting agendas with the help or under the guidance of the lead director (if there is one), and otherwise must learn to keep his distance and let his successor be the CEO. After all, he did pick somebody he believed could do the job, right? And the board went along with it.
