Succession plans help corporations thrive when the chief executive dies or leaves

Tuesday, May 23rd 2000, 12:00 am
By: News On 6

For corporations, a comprehensive CEO succession plan is as important as an updated will. Sometimes, it even serves the same purpose.

When Texas Instruments Inc. chief executive Jerry Junkins died of a heart attack in May 1996, the company named vice chairman William P. Weber acting president and chief executive within days. Just a month later, executive vice president Thomas Engibous permanently took those titles, bypassing Mr. Weber and William B. Mitchell, another vice chairman.

Mr. Engibous' promotion wasn't unexpected. And TI executives say the transition wouldn't have been nearly as smooth without that formal succession plan.

"But while you have an emergency succession plan, it's still pretty shocking when you have to use it," said Steve Leven, the Dallas firm's senior vice president of human relations.

Although corporate succession is rarely as unexpected as when TI made its last change, a formal plan is crucial for every corporation that wants to thrive when a CEO dies or leaves, experts say.

"I don't think that boards sit around saying, 'As soon as we hire this one, we should start planning for the next one,'" said Dr. Paula Ann Hughes, dean of the graduate school of management at the University of Dallas, in Irving. "When you think about it, there shouldn't be much guessing, but there is."

Guessing games are dangerous in these days of shrinking CEO tenures and increased competition for high-level candidates.

At the same time, a fickle stock market is forcing corporate boards and prominent shareholders to demand more say in personnel changes that once were left to the departing chief.

"There is no question that the role of the board has changed dramatically over the last three to five years," said Paul R. Ray Jr., chairman and chief executive of the Fort Worth-based search firm Ray & Berndtson Inc. "CEO succession is probably close to the top of the list of responsibilities for boards these days."

TI illustrates the success a company can have when a formal CEO replacement plan is in place.

Here's how three other area companies plan to handle or are dealing with the corporate succession question:

At Southwest Airlines, the board has had a formal plan in place since 1986, although the carrier's chief, Herbert D. Kelleher, controls if and when it will be put in place.

J.C. Penney Co.'s board didn't put together a plan after its chief, James E. Oesterreicher, said he would step down as soon as a replacement was named.

And Inspire Insurance Solutions Inc. of Fort Worth is an example of what happens when a powerful shareholder - in this case, oilman Sid Bass - demands a change. Mr. Bass' demands led Inspire CEO F. George Dunham III to step down early this month.

In the Penney's case, "it was Oesterreicher and the board working together to determine this was the right time," Mr. Ray said. "But it's pretty clear the board had a pretty big role in the outcome."

That's because Penney's stock has lost $15 billion in market value - about 80 percent - in the last two years, prompting investors to call for a change in the top echelons of the Plano-based retailer.

"They want somebody with a new vision, and that's probably driven by a drop in shareholder value," said Dr. Hughes, who has served as a management consultant at companies such as Texas Instruments and IBM Corp. "Most of the time, that's going to kick you into doing something different."

One potential successor is Vanessa Castagna, hired away from Wal-Mart Stores Inc. last year to be Penney's chief operating officer. Ms. Castagna has put together a team of executives from inside and outside the company to lead a turnaround at the department stores.

A Penney's spokeswoman, when asked about the CEO selection process, would say only that Mr. Oesterreicher - who at 59 is a year away from Penney's retirement age - is currently assisting the board in the search for his replacement.

Key say

In contrast, profitability and persistence has earned Southwest Airlines Co. chief executive Herb Kelleher more than just a supporting role in the succession process.

Mr. Kelleher has held the titles of chairman, chief executive and president for 18 years at the airline he helped create. Southwest has posted profits in each of those years and has the highest market value of any U.S. airline.

Mr. Kelleher, 69, hasn't mentioned retirement, saying only that he will give up one or two of his titles in the next decade. His performance virtually assures that he will be able to handpick his successor once he does, analysts say.

"I think successful CEOs have a lot of say in that because they want the legacy of their success to continue," said Jim Boone, president of the Americas for the executive search firm Korn-Ferry International. "They want to bring in the right person to lead the ranks."

At Southwest, which prides itself as much for its corporate flair as its financial success, that person will almost surely come from inside.

"It would be fair to say that any of our officers would be considered," said company spokesman Ed Stewart. "Because the culture is so important, I don't know many outsiders that would qualify. But it's a big world."

Mr. Stewart said Southwest's board of directors formalized a succession plan in 1986 and updates it annually. But the chain of succession is a closely guarded secret at the company where Mr. Kelleher still appears all-powerful.

"At some point, they should publicly name the person," said Mr. Ray, the Fort Worth search consultant. "As long as Kelleher stays in relatively good health and wants to stay in the role, they will support him."

No input

The newly departed CEO of financially troubled Inspire Insurance Solutions Inc. didn't get the same opportunity.

Mr. Dunham resigned as chairman and chief executive and gave up his seat on the company's board May 3. Two days earlier, a holding company affiliated with Mr. Bass said it planned to demand Mr. Dunham's resignation and wage a proxy fight to get some of its own people on the board.

Mr. Bass' company, Buena Ventures Associates, also filed suit against Inspire, accusing the company of using a recent bylaw change to stifle shareholders.

"So our board decided, in order to avoid that situation for the company, we would have the makeup of the board ... [changed]," said Inspire president and chief operating officer Jeffrey Robinson.

Inspire Insurance, which has seen its shares lose 80 percent of their value in the last year, said it will ask shareholders to elect two Buena Ventures representatives to the board at the company's next annual meeting.

Buena Ventures, which holds an 11.2 percent stake in Inspire, has dropped the suit now that it's assured a significant say over succession.

In the meantime, Mr. Robinson said, the company named board member R. Earl Cox III chairman and interim chief executive and plans to take up the succession question at its June 23 annual meeting - with zero input from Mr. Dunham.

"It's a good lesson to remember who do we work for: the shareholders and the board," Dr. Hughes said. "Money talks."