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Reuters Edge

CEO succession is lacking at many big companies

NEW YORK (Reuters) - U.S. chief executives are being shown the door at a record pace, but recent surveys suggest that many companies remain unprepared to find a new CEO in a hurry.

Former KB Home Chairman Bruce Karatz at the Reuters Building in New York, June 30, 2005. REUTERS/Mike Segar

Planning for CEO succession is considered one of the most important tasks of corporate directors, but surveys of board members suggest that companies often don’t have very good plans in place for tapping a replacement -- especially in emergencies such as when a CEO suddenly resigns or dies.

Boardroom experts say directors are more aware of the issue than before, in part because CEO turnover has been so heavy lately, but that board members still don’t spend enough time on formal planning for succession.

They say succession has always been a tricky boardroom topic because there is no guidebook on how to pick a replacement-in-waiting. Also, experts say many boards traditionally have deferred too much to the current CEO -- who might not be eager to discuss the possibility of his or her sudden death or departure or want to groom a successor ready to move into the corner office at a moment’s notice.

“Most CEOs don’t look forward to this experience, which resembles in a way, some level of mortality for them,” said Gus Vlak, a partner at management consulting firm Katzenbach Partners in New York. “It’s hard to think about a successor who might be better than you are.”

A recent survey by executive search firm Spencer Stuart found that 31 percent of large U.S. company boards do not have an emergency succession plan for the CEO.

A separate survey by The Center for Board Leadership and Mercer Delta Consulting found that about 50 percent of boards, including those of public, private and nonprofit corporations, consider themselves “less than effective” in the area of CEO succession. Only about half of the boards surveyed have a succession plan in place at all.

At the same time, experts say succession planning is more vital than ever because CEO turnover has increased and the average tenure of a corporate chief is getting shorter.

In 2006, there were 1,478 CEO departures, surpassing the 2005 record of 1,322 departures, according to outplacement firm Challenger, Gray and Christmas.

HEADING FOR THE DOOR

The widening stock options backdating scandal has triggered a number of recent departures. Some of the biggest-name chiefs forced out over questionable options practices include William McGuire, long-time head of UnitedHealth Group Inc. UNH.N, and Bruce Karatz, of home builder KB Home KBH.N.

In both cases, the companies quickly announced replacements -- UnitedHealth President and Chief Operating Officer Stephen Hemsley became the insurer’s CEO immediately, while KB Home’s Chief Operating Officer Jeffrey Mezger was promoted to CEO.

Companies do not have to disclose succession plans to investors, although some will send signals that they are thinking about the future when they position up-and-coming talent in senior roles.

And when a CEO plans to retire, a company often will name the successor well in advance of the actual retirement to help the new person transition into the job and to end uncertainty on the part of investors about how the company will handle a potential leadership vacuum.

Money managers say succession issues can be an important factor in assessing a stock.

“We don’t necessarily ask the company directly, but we kind of pay attention to that and review that ourselves,” said investment manager Ted Parrish, who oversees $1.2 billion in assets at Henssler Financial Group.

COKE IS IT

Parrish did say, though, that some companies are better at having these sometimes tricky discussions than others.

For example, he said, Coca-Cola Co. KO.N has done a good job indicating it has someone ready to take over as CEO when the time comes.

He said the company’s promotion of international operations executive Muhtar Kent to COO in December has made Kent a leading candidate to succeed 63-year-old CEO Neville Isdell. On Thursday, Coke marketing president Mary Minnick resigned, a decision some analysts speculated was spurred by the fact she was passed over for the COO job.

Coke has not commented on any possible CEO succession plans, saying it was inappropriate to speculate on anything beyond executives’ current positions.

Vlak, of Katzenbach Partners, said more boards need to be involved in thinking through succession by getting to know more managers below the CEO. He said boards need to work with the CEO in identifying the best internal candidates, but also need to take it upon themselves to mentor talented up-and-comers -- something many boards have not seen as their role.

Paul Danos, dean of the Tuck School of Business at Dartmouth and a board member at General Mills Inc. GIS.N and BJ's Wholesale Club Inc. BJ.N, said directors also need to be constantly talking about who could be next in line to take over, though they don't always need to have one name in mind.

“You don’t have to worry about an emergency if there are a lot of people who can step up,” he said. But “if you never thought about it, then you are pretty vulnerable when it comes time to make a change.”

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