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.

It shouldn’t be this tough.

There is no company that has too many good people. So, if you interview someone bright, ethical and enthusiastic, someone with a good work ethic, someone whose training matches the position you are seeking to fill and whose attitude is a perfect fit with the group he or she would be hired to join, go for it.

Hiring While De-Hiring

Companies take hiring especially seriously when they are in re-engineering mode. The ingress and egress of people come and go in turns; they must, therefore, be handled carefully so as not to get in each other’s way. But serious and cautious do not necessarily mean wise. Re-engineering sometimes gets in the way of intelligent thought and intelligent hiring. If a critical position needs to be filled, fill it. Quickly! I have seen companies stall hiring, saving salary and losing invaluable momentum in the process.

Inside Hiring Outside

I have been privy to numerous debates about hiring from within as being a virtue or a vice. One CEO said to me, “If a company cannot find anyone from within to fill a senior position, then management, starting at the very top, has failed”. I know of several Fortune 500 companies that move people up in spiral fashion, alternating between staff and operating positions. Others, however, see things differently. Companies, they say, need to refresh themselves, need to add new blood, new ideas, new energy. They see recycling employees as slowly grinding companies into mediocrity. I have even witnessed debates about what constitutes inside and outside. For example, how would you qualify a long-term temp being made permanent? Or the rehire of a former employee who has gained valuable experience elsewhere? Trust me, those competing for the position have very different – and not altogether generous - views of the issue.

Family Matters

Then there is the matter of hiring family. Generally, the more paternalistic the company, the more likely it is to hire employees’ relatives. Not surprisingly, this maximizes loyalty and minimizes turnover. Not surprisingly, those who prefer hiring from the outside see reasonable turnover as healthy and the lack of turnover ossifying. What is healthy? Between 5 and 10% annually. I am of two minds on the family issue. It should not prevent a hire, all things being equal. But, things are never quite equal. When family members are involved in anything negative (a layoff, for example), emotions will run somewhat higher than usual. Conversely, when family members do well, there is always a suspicion (even if there is not a hint) of patronage. Many companies would rather not take the chance. It’s a shame.

When Too Much is Not Enough

It is easy to understand why you wouldn’t risk hiring someone you believe is too junior for a position and likely not up to the job. It is more difficult to accept not hiring someone because they are too senior and likely to quit within six months because the job would not be enough of a challenge or provide enough opportunities for growth. Surprisingly, I have seen the second case occur more often than the first. The problem is clearly bigger than the people involved. If any job situation does not provide enough scope or latitude for growth, then the company is not worth the time applying to in the first place. Jobs must be clearly defined. Job situations, however, should never have boundaries set so tight that we cannot foresee growth, laterally or vertically, for quality people who are placed in them.

Running the Gauntlet

In some companies, even lower level hires are expected to meet a variety of difficult thresholds, to say nothing of a host of senior managers, before getting the nod. I find it strange bordering on the scary to force entry-level prospects to run a gauntlet of managers, with gusts up to vice-presidents, to get a job. They are repeatedly put on the spot, a spot that I imagine seems to them somewhere close to the guillotine. I can understand – and, in fact, always insisted on - the process for senior hires. I personally have interviewed over a dozen candidates for senior positions. But I can also recall the process once being used in a way that completely intimidated a wonderful candidate for a relatively low-paying clerical job. I must confess, though, I kinda sorta didn’t follow the process. In truth, I counseled the candidate on how to navigate the gauntlet, how to handle the pressure and the people involved. Perhaps I helped, perhaps my help wasn’t needed, but the candidate did just fine. And two years later is still doing fine, thank you very much.

My thoughts on loyalty (as stated in my last post, Whose Bread I Eat, His Song I Sing) run counter to conventional wisdom which currently holds that loyalty between supplier and customer and between employer and employee are tentative at best, subject to change without notice and likely with little regard. Loyalty, it seems to most, is a quaint notion that has neither place nor purpose in a globalized, commoditized world. Perhaps Thomas Jefferson was right: The merchant has no country. Even I do admit that there are circumstances where my confidence in loyalty is put to the test.

Acquired Rights – and Wrongs

Being acquired or merged usually has its down-side or, more precisely, down-size for the acquired or merged company and the people therein. The rationale given invariably revolves around synergy. In the new math, one head is better than two. Redundancy is good only in IT and nuclear deterrence. For example, there is no need for two finance departments, especially since there can be only one treasury into which all cash flows and one set of books into which all the numbers flow. The problem with most rationalizing is that expediency and incumbency trump quality. You go with what and who you know; both are highly prejudiced by proximity, that is, you go with those close to home. The take-away of an acquisition is that something has to give.

It is the same at the commercial level. Looking for synergies will almost always mean the rationalization of suppliers, large and small. This reflects not on the greed of the purchaser but on that of his suppliers, for acquisitions often provide the once-in-a-lifetime opportunity to have it all.

A Changing of the Guard

A change in leadership will likely create a measure of vulnerability for direct reports. As in the case of the acquired company, loyalty can work in reverse, accruing to the original stakeholders or based on prior knowledge. The new CEO will assess the staff he inherits using both objective and subjective measures. At the end of the day – usually by the end of the first 100 days – he will go (or stay) with whom he is comfortable, from whom he knows he can command loyalty through thick and thin, and to whom he can confidently delegate difficult but necessary tasks. Not surprisingly, this may mean bringing along old staffers with whom a rapport has already been built and a necessary level of confidence already established. To the discomfort (though not the discredit) of incumbents, ‘may mean’ very often does mean.

Once again, a new buying team at a key customer could well entail the end of an enduring relationship, contractual obligations notwithstanding. A change may reflect not just pre-existing loyalties, personal and organizational, but also policy shifts. The new buyer may, for example, decide to move from split accounts to sole vendorships or vice-versa. Uncertainty is to be expected and you’d better have a good story to tell.

When the Going Gets Tough

When the numbers don’t add up to where they ought, odds are good that budgets will be cut. Management will, at one point, begin to talk about productivity, i.e., output divided by headcount. To enhance productivity, you can either increase the numerator (always desirable) or decrease the denominator (almost always the default) or, of course, do both. Any of these options becomes a driver for reengineering which, for most, does not mean refocusing the organization but shrinking it. There is a widespread belief that, in any restructuring, less is more. True or not, for those who are victimized, it is certainly less.

So, yes, there are circumstances that will shift loyalty into reverse (as in our first two situations) or move it to a back seat position (our third). Those circumstances invariably arise from a significant change – of leadership or of fortune. Even in explaining loyalty, more of the one would likely mean less impact from the other.