In November, 2007, the online business journal of the University of Pennsylvania’s prestigious Wharton School looked into the subject of succession planning (CEO Succession: Has Grooming Talent on the Inside Gone by the Wayside?) This is a delicate subject that pops into the corporate consciousness and onto business mag covers whenever a corporate giant goes outside for its CEO.

In the Knowledge@Wharton case, the stimuli for discussion were executive hires at financial megalosaurs Merrill Lynch and Citigroup. Stanley O’Neal (Merrill) and Charles Prince (Citi) were asked to leave their respective companies subsequent to the mortgage securities fiasco. In December, John Thain, CEO of NYSE Euronext and a former president of Goldman Sachs became Merrill’s chairman and CEO. Citi, however, went inside, tapping Vikram Pandit. Then again, Pandit was hired by Prince just a few months earlier so he barely qualifies as an insider; he was Citigroup’s investment banking head before his new appointment.

(Subsequently, Merrill was acquired by Bank of America. Pandit, meanwhile, faces major restructuring challenges at Citi; check out Gary Weiss’ article in the September issue of Portfolio magazine.)

The Wharton discussion takes place at two levels: the issue of going inside or outside in key executive searches and the importance of succession planning in general.

CEO Selection

The selection of CEOs is as much a politically-motivated, risk-mitigating, investor-sensitive decision as anything. Boards, like those at Merril and Citigroup, go outside to let the investment community know that they recognize there are internal problems and that a change in direction – and a changing of the guard – is merited. It would be impossible to advance anyone associated with the old regime.

It is risky (Wharton’s words) to bring in someone at the height of a crisis. There’s a huge learning curve to understanding a company’s strategy and culture. A CEO who comes in from the outside is very dependent for information from and vulnerable to the perspective of those left …an irony in itself.

But what about lower level executive positions? The consensus seems to be that this is the most appropriate level for leadership training and succession planning because this is where the likelihood of selecting internal candidates is highest.

Indeed, Peter Cappelli, management professor and director of Wharton’s Center for Human Resources feels it is better to focus on skills improvement in general than to groom people for specific positions. “I don’t think the idea ought to be to develop people for a particular job,” Cappelli says, “because the odds of using them in that way are pretty small. Both the person and the job have to be lined up too exactly for that to happen.”

Unfortunately, despite the supposed emergence of workforce planning, most firms seem to have abandoned the systematic management of talent, not only as a priority but as a core human resources activity.

Planning Pros and Cons

They argue that businesses operate in fast-paced, highly-competitive, increasingly-global environments; it, therefore, only makes sense to access the broadest base of talent available when seeking specialized skills and technical knowledge. The internet makes tapping into this base easier and faster than ever. To boot, the needed skills and knowledge can be acquired on a contractual basis, reducing long-term overhead cost commitments. Finally, bringing in new talent at all levels on an ongoing basis maintains freshness and brings to the organization new perspectives needed in an ever-changing world.

On the other hand, I would argue that a company should be diligent in maintaining and leveraging the intellectual capital of its organization. I have always been a big believer in the value of experience, codified process knowledge, and intellectual property (brands, trademarks, patents and licences). These are all best home-grown.

I also believe that self-fulfilment, not self-gratification, is the prime motivator of success. There is no better motivator of people – especially in the upper levels of a company – than the opportunity for advancement. It is, of course, an opportunity that must be earned, not given. But developing talent coincident with the strategic mid- and long-term needs of the company, enhancing leadership and management skills, and substantively encouraging upgrades in education to ensure employees are fully-conversant with the latest technologies are all cost-beneficial.

Finally, rather importantly, stuff happens. People resign, retire, become ill. Some fail to adapt to changing circumstances, management, or technology. Assuming their responsibilities cannot be reassigned – a big assumption – they must be replaced. Without diminishing the value of and need for new blood, there is also value in and need for continuity, connectivity (relationships with stakeholders) and chemistry.

Whatever their approach, companies should take as much of the drama out of the succession process as possible. Employees – especially senior ones – should understand their respective company’s policies going in and their own potential for growth on an ongoing basis. That their company goes inside or outside to fill the CEO position - or any management position, for that matter - should never come as a surprise.