CEO succession plan essential for reassuring shareholders

Imagine you are given the assignment to walk into Rupert Murdoch's office and tell him that he needs to give some serious thought to a CEO succession plan for News Corp.

Imagine you are given the assignment to walk into Rupert Murdoch's office and tell him that he needs to give some serious thought to a CEO succession plan for News Corp.

Without a doubt, it will be the shortest meeting in your career, if not its end. Instead of Murdoch's name, you could insert Warren Buffett, Sumner Redstone, or Bill Marriott. In each case, these entrepreneurs built something from almost nothing. And that something is not only hugely profitable, but also awe-inspiring.

The hard part is that they are mortal, and there will surely come a time when they can no longer run their companies. Yet CEO succession is one of the most difficult and least-talked-about events in corporate America. It doesn't necessarily matter whether the CEO built the company from little more than an idea and an itch, or whether he or she worked through the ranks and finally reached the highest rung.

But when a company's image becomes so identified with an individual that shareholders and customers can't imagine the company without that person, there is cause for concern. Despite Buffett's spectacular investment track record, shareholders in Berkshire Hathaway must be asking what happens after Buffett, who turns 76 this year, can no longer helm the company. The "Sage of Omaha" says he has an excellent team in place that will fill his shoes. That's some reassurance, but still leaves many questions unanswered.

Some companies partially avoid this situation through a mandatory retirement age. The most successful succession in recent years was when GE's Jack Welch hit 65 years old and handed the keys to Jeff Immelt. To his credit, Welch embraced the succession process, by allowing Immelt a key role in the months leading up to the switch. For instance, Welch encouraged Immelt to meet with security analysts who cover GE, as well as to lead several key internal meetings.

By giving Immelt a running start, Welch made the transition smoother, which diminished any anxiety among stakeholders. This seamlessness also benefited GE's stock price, which hardly budged one way or the other. GE understood that investors struggle to eliminate as much uncertainty as possible.

But many companies don't have a mandatory retirement age, especially those where the founder is still sitting in the corner office. Boards of directors are expected to play a role in determining a succession policy, and usually they do. But the subject matter is viewed as almost unseemly, and too often the matter is left unclear.

There can be several prices to pay for that ambiguity. If the CEO leaves before a decision is made, there can be a scramble to find a successor, and the succession process is short circuited, often with mixed results. Or, investors can show their displeasure by pushing share prices lower, as they did with Disney in 2004.

May Buffett, Murdoch, Marriott, and Redstone rule forever, but don't be surprised if some investors stick to the sidelines until they get a better sense of who'll be in charge when those CEOs' time is up. The more transparent the transition, the easier it is to keep the ship steady.

Fred Bratman is EVP of Hyde Park Communications.

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