The delicate matterof the'Nurnber T\,vo'As a board member, do you fear the loss of top talent? Here are ways to maintain thenumber two's sense of loyalty arul purpose within a board driyen succession process.BY DENNIS C. CAREY AND DAYTON OODEN

HE RELATioNsHIP betweenrhe CEo and the board is a

tdclv one to manage. Equal-]y delicate and critical to thesuccess of succession plan-

structive relationship with the "winner"i

- clarity around the issue oftiming,including when succession will takeplace, andwhat assurances (verbal, titular, and financial) the number two expects to receive and (hen.

These are significant issues that, ifhandled improperly, may have a nega-tive effect on the company's well-being.They shouid not be left to the CEO andthe number two to sort out; boardawareness and involvement are crucial.It is important for directors to examinehow they can effectiveiy manage thenumber two's part in the successionprocess. The board must determinewhether it is being given sufficient opportunity to get to know potential suc

consequences of various approaches tosuccessionr whether there will be a cleardesignated successor well before the topslot opens; a horse race among a few topcontenders; or a wide-open 6eld wherea broad range ofcandidates are considered, including prospects from outsidethe company.

What makes fora great'marriage ?

while he was number two at GE,Lawrence Bossidy is reputedto have de-scribed his relationship with CEO lackWelch in the following way: "lack gets todo whatever he wants and I get to dowhatever is left." This story, related byKevin Sharer, president and COO of

ning efforts is the relationship betweenthe CEO and potential successors as wellas the relationship between potentialsuccessors and the board. Companiesthat tread carefully when it comes tonumber twos send strong messages totheir organizations about how executivesare valued and are consequently muchmore likely to hold on to talent.

A company's ability to retain aralent,ed and erperienced number two dependson dealingwith several factors that seemto have an impact on an effective CEO-number two relationship, including:

- the satisfaction ofthe number twoin his or her position;

- the ability of a number two whohad been passed over to come to tetmswith the improbability of becomingCEO, as well as the ability to forge a con

them in action in

informed decision

Directors mustalso consider the

Dennis C. Carey (pictured at left) and Dayton 0gden (at riqht) havedssined n-Te'ous l-ortule 500 conpan.es aswell ds ere.qing conpanies in findinq new CE0s, pr€sidents, senlor management andboard members, Both serve on a rurnber of boards of corporate, aca-demic and charitable instit{rtiors. Carey isvice chairman ofSpe.cerStua( U.S. and 0qden is co-chaiman olthe fm. This article isexcerpted from their new book, CEo Sucressir4 copyriqht02000 byoxford Universily Press, New York.

Amgen lnc., who will ascend to CEO inMay 2000, illustrates how not to keeP theCoo happy. Though they were closefriends and colleagues - described bySharer, who knew both of them while atGE himself, as "the best managementteam on the planet" - Bossidy did ultimately leave for the top spot at Al-liedsignal (now Honefa,ell).

While Bossidy clearly had a major op-erating and strategic role at GE, hisIighthearted comment may have beena more accurate reflection ofhis innerfeeiinSs than people imngined. His re-mark also highiights an important chal-

'There has to be some lightat the enil of the tunnel

indicating when they're

going to be the next CEO,'Kevin ShareL Amgefl 1 c.

Ienge: how to ensure that the numbertwo has a satis&ing job - satisfl,ingenough so that he or she won t be Iuredaway by competitors.

Many number twos would agree thata key element in maintaining their satis-faction is how their territory is defined,if it is deined at all. As with the vice pres-ideni of t}le United States - the ultimatenumber-twojob - some may wonder ifthere is a real job or whether the positionis purely and simply a CEo-in-waiting.An il-de6ned job that is viewed as merely pi&ing up after the CEO, or treadingwater until the CEO is ready to stepdown, is a surelire recipe for corporatediscontent and larger succession prob-lems down the road.

lf they are not satislied with the scoPeof their responsibilities, talented and am-bitious number twos will likely leavewhen the dght opportunity is dangled inliont ofthem, especially iftheyare notgetting clear and positive siSnals fromthe CEO about the timing of a futuretransition, Sharer says. "COOs have toview their current position as one ofpro-fessional growth, and there has to be

some light at the end ofthe tunnel in-dicating when they're going to be thenext CEO, otherwise the bodies will flyoff the bridge at a pretty Sood rate."

After having considered what doesn'twork, what does make for a good"mar-riage" between a CEO and a numbertwo? One ofthe most important factors,according to many number twos we havespoken ith, is whether there is a clear-ly definedjob that entails a significantrang€ of responsibilities that he or shecan"own," manage, and develoP, ratherthan merely being viewed as asubordi-nate to the CEO on a daily basis. Suc-cessfullymanaging a sizable portion ofaIarge companybrings f ith it the oppor-tunity for wide recognition. Someonewith the ddve, ambition, and talent to beCEO needs not only the work but alsothe visibility and credit that go withdoing a big job and doing it weI

Sharer sa)$ that in his current positionat Amgen "the cEo lvas smart enouShto carve out something day to day \ 'herewe don't talk and don't have to. He isalso secure enougl to publicly allow thenumber two to be seen as an impo antplayer."

Establishing a positive relationship be-tween a CEO and a number two can bechalenging enough. lt is especially dif6-cult when the two individuals hadbeenin competition for the CEO position.Iohn A. "Frcd" Brothers, executive vicepresident of Ashland Inc., is familiar withthe experience, havingbeen through aCEO transition in 1996 when a competitorwas awarded the toP sPot.

Despite his initial disappointment ofhaving come so close only to lose out onbecoming CEO, Brothers \,ras able tobounce back and successfully work aspart of a close team with his formercompetitor, the new CEO. Without thissort of resiliency by the unsuccessii can-didate in such a contest (ifhe or she re_mains with the company), the ongoingrelationship can never be productive. InBrothers'own words, "Ifyoure going tostay around, the first thing you have todo is get over the fact that you re going tobe number tleo and not number one. Ifnol, there will ne!'er be a good marriagei'

|oining forces fora common goal can

also forge a strong relationship betweencompetitors, especially ifthe CEO andthe number two successfully manage toshare responsibilities. Brothers experienced that shortly after lhe successionwhen dissident directors at Ashl:ndlaunched a proryfight."ln late '96 andinto'97 we had our hands full," Brol\erssays. CEO Paut Chellgren dealt with thegovernance issues while Brothers managed several major deals the companywas trying to complete. In this case, apositive working relationship wasstrengthened by the fact that the CEOand ihe COO were united in fending offa threat, helped by a clear division oflabor with enough substantive responsi-bilities to create demanding iobs for eachofthem.

Visibility before the boardone obstacle to boards being able toproperly discharge rheir duties with regard to succession pianning is that directors often have insufficient exposure tonumber twos. with little knowledge ofthe skills, erperience, ar, d personal chem-istry ofpotential successors, it is difficult for directors to realistically assess acandidaie's readiness and suitability forthe CEO job. When all information onpotenti.l successors is nltered through theCEO, theboard cannot gei a real feei forthe people it may want to consider for thetop job when the time comes.

How can a board expect to assess Po-tential CEOS without an oppo unity toget a clear sense ofhow they think andoperate, both in a high-pressure businesscontext as well as in more low-keysocialsituations?

"It's critical forboards to demand vis-ibility ofthe top three, four, or 6ve peo-ple," says Alex Mandl, CEO ofTeligentCorp. and former COO of AT&T. "Se-cure CEOS do this on a regular basis.They're proud oftheir teams and wantthe board to see them. Unfortunately,there are CEOS who aie not secure anddo just the opposite. They dominate theirboards, they read a1l the reports. This isa board responsibility, though, and directors have to lay it on the table. Theyhave to come right out and say,'We wantto see more ofyour toP_management

team. We want exposure to the key peo-ple who make decisions around the com-pany.' The board can make it happen,and they have the right and the respon-sibility to do so-" The opportunity for di-rectors to interact with potential cEos isan important part of the selectionprocess. At Rohm & Haas Co., a sPecial-ty chemicals company, the original can-didate pool of four was eventually whit-tled down to two. Raj Gupta, CEO sinceSeptember 1999, says that he and his6nal competitor for CEo were involvedin every board meeting, except for dis-cussions regarding compensation. "Theboard had every opportunity to get toknow us both socially and professionaliy, and the CEO did not stand in the way.Hewas illing to take a backeat:'

Ifthe CEO erects a barrier betlveen di'rectors and potential CEO successors,however, it may not be easy for the boardro surmount it."There's a board I sit onand the other dircctors include a Iot ofCEOS. I was new to the board and felr weweren\ seeing enough of the CEO'Steami' sar Sharer "Finally, one day I saidto the CEO,'We need to get to know lourguys better.' He didn't get itl We only

'When the CEO starteildown the path with this one

candidqte..,w e ilidn't b eliete

he w&s the right choice, and

we felt we hail to step in.'

- lohn A.'Frcd' Btothers, AshhnA Inc.

were getting to see them in scripted presentations for maybe 20 minutes, sixtimes ayear.lt's the boardt job to get adialogue going, but itt really hard to do."

Directors have to prod the CEO toprovide access to the top executive team,and they must be prepared to be persis-tent about it. Otherwise, they may findthemselves in a situation in which theCEO recommends a successor whomthey have no basis to assessand no alter-natives for comparison.

Clarity of message is keyAlex Mandl was widely acknowledged tobe Bob Allent successor at AI&T, but theunderstanding was more imPljcit thaner.?licit. Mandl had received no.lear signals about a transition, and timingwasnot discussed. one day he picked up Thewall Street Journal andlearned that Alienhad decided to postponehis retirement,originally scheduled for his early 60s,untilage 55. Four years seemed a Iongtime to wait, espe.iallywhen there wasno certainty that Mandl would eventually become CEO. Mandl decided toleave, accepting a position as CEO ofTeligent, a wireless communicationscompany that was so new it was stillnameless when he was hired.

Mandl's departure from AT&T Pro-vides an important lesson for any com_pany that fears the ]oss of toP talent. Anotherwise successful CEO COO teammaybegin to fall apart as the time for theactual succession nears ifthe COO doesnot receive some clear signals that he orshe is the chosen successor and understand precisely what the timing will be

"Timing and the lack ofa clear mes-sage about sr.rccesion played a major rolein my decision to leave AT&T," Mandlsays. "There were no promises that Iwould be CEO, but I was clearly on thepath to the next job. Then, much toeveryone's surprise, certainly mine, theCEO announced that he was going tostay another four years. The notion ofworking in that situation was not aP_pealing."

Maldng it clear to a number two whena transition is likety to take place andwhether he or she is likely to get the nodis not only a matter ofcourtesy and respect for the number two, it is also themost logical way to safeguard a Preciousresource: a capable executive in whomthe company has invested and who willprovide valuable continuitr It is amaz-ing to us how many executives with tensofmiilions ofdollars at stake in a com-pany will talk to us when we are con'ducting a search on behalf of a client. Financial handcuffs, while they may givesomeone Pause, are not a foolproofwayto hold on to top talent. People who are

Ieft hanging in tie balance and given noclear signals about the succession pathand their role in their companyt tuture,Je particularly vulnerable to being hired

Altlrough the issue of when a CEO wilactually step down is a sensitive one -often difficult to discuss and more oftenavoided entirely - communication be_tw€en the CEO and potential successorsis possible. Before Rohm & Haas an'

'l realizeil that the timing is

tricl<y in announcing a tran-

sition. lt's either too soon or

too late.'

- Raj G,Pta, Roht bHaasCa.

nounced that Raj Gupta would succeedJ. l,arrence Wilson, there was a great dealof anxiety between the toP two con-

According to Gdpla, the'not knowing" was the most dif6cult thing to dealwith."l realized that the timingis trickyin announcing a transition. It\ either toosoon or too Iate. But we (GuPta and I.Michael Fitzpatdck, the oiher contenderfor CEO) told tarry a couple ofyears be-fore his retirement that we had to knowif we were in the running. we decidedthat we uould rather deal with the in-dividualdisappointmentthancontinu€duncertainty."

Communication was facilitated withthe help ofthe top human resources ex-ecutive, who served as an intermediary,allowing the pimary parties to maintainsome distance but still remain informed-"We had an understanding and a systemworked out with her that Proved veryusetul," Gr.rpta says. "lf we had a questionrelated to the transition, we would askher and she would plant it with theCEO." The CEO in turn would close theloop by gertinS back in touch directlywith either ofthe two potential succes_sors who had posed the question.

Sometimes a CEO may feel rhere is avalid business reason for not providing

clarity as to when a successor will be .ho-sen. As CEO ofAmgen, Gordon Binderfelt he couldn't give a date too far in ad'vance.'The day I announce my retirement and successor, I'm a lame duck," hehad said. That could leave the numbertwo wondering, says Sharer: "Should Italk to the board about it and try to getsome clarity from them? I've got an incomplete message here."

In the 6nal analysis, the board has tohelp manage the CEO-number two rela-tionship and ensure that the right messages are being conveyed to a potentialsuccessor at the right time.

The board should take the leadOne ofthe things we have learned fromconducting high-level executive search-es is that potential successors who feelthey have not gotten a clear messagefrom the CEo or the board regardingtheir own tuture are much more likely tolisten to outside offers and much more atrnk of being recruited away.

Ifthe CEO seems prepared to stall in-definitely on naming a successor and establishing the timing of a transition, thenthe boardmuststep in and more direct-ly manage the process."The board hastwo ways that it can go," says Sharer. "ltcan either say,'We'll keep our optionsopen to the last second'and delay making a decision on the successot or it cansay,'Good CEOS are hard to find; lefsmal(e sure he (or she) doesn't get away."'

How and when specific successionplans will becommunicated isa criticalissue for a board to discuss and resolve."The board needs to have a serious dis-cussion," says Mandl, who advises givingthe nod to the chosen successor ratherthan keeping him or her dangling andrisk Iosing the talent. "Do we agree thathet the p€rson?"he says, putting himselfin lhe role of a director. "lf so, why are wenot telling him? It's essential that theboard agree on this point.Ifthe personsits there and doesn't hear from iheboard, it couldbe awkward. One phonecall and he could be gone."

WIat ifa CEO is reluctant to establisha timelable fbr transition or orchestratesa succession plan that leads to a poten-tial successor leaving the company? At

D RECTORS & BOARDS

some point, preferably sooner ratherthan later it is the boardt responsibility to take on the unpleasant task ofcon-fronting a CEO.

"Someonewho is vierved by others asa lead director," says Sharer,"and there!one on every board, and everyone knowswho that person is, has to talk to theCEO and make it clear how important itis to the board that the companynot losea valued number twol'

Ashland's lred Brothers relates a storyabout a board on which he serves, wheredirectors had to have just such a con-frontation wirh the CEO.'About twoyears before his schedded retirement, theCEO toid us that he had selectedhissuc-cessor from the two candidates who werein the running.In the CEOt absence, theboard took an informalvote on the twocandidates. and it was unanimous thatthe board wanted the other candidate.We spoke directlywith the CEO,helpedhim to change his mind, and began toput the process in place with the titlechange."

To avoid a confrontation with theCEO it is important for the board to

think about the issue in advance andmake its views known in a timelyfashion."When the CEO started down thepath with this one candidate," sqs Brothers, "the directors were too timid to chal-Ienge the CEO and we let him continue. Finally, as the signals to this candidate(that he was the chosen successor) gotstronger and we didn't believe he was iheright choice, we felt we had to step in- Butwe should never have let it get that far."

Keeping a good number twowho loses the raceA smooth transition requires not only a"great marriage" between the CEO andthe number two but also a cooperativeworking relationship among the con-tenders for t}le top spot- Raj Gupta useshis own recent experience to illustratethis point.

Culture runs deep at Rohm & Haas,where managers tend to come, build ca-reers, and stay. Gupta describes the tran-sition from one CEO to the next as a suc-cession that had been "very competitivei'but mellowed to "collaborative andfriendly" in the final stage. The civiliT-ed

Board ChecklistThe followin! list hiqh ights some of theboard's major succession responsibilities widrrega.d to numberntros:

l.Fromlhe very$artoia CE0Srenure, bo;rdsmusreslabish a pattern where up-and-com-ing eaders, especially potentia successors,havefrequent exp0suretothe board in a varietv of business and social settinqs so thatdirectors can assess their progress.

2. Directors' knowledge ofthe managemerttearn sh0uld belrom directcontact noif ilteredliroughrhe cE0.

3. Dn€crols should ascertain. intheirinteraction with both the CEo and potentia successors, whether those next in lire are derivingenough perc0nal satisf acti0n and recognLtionfrom iheir lob. Have areas of respons bilitybeen cleany carved out, and isthe CEo willin! to share both impo(ant responsibilitiesand glory?

4. fsuccession is onthe horizon.has a cleartimetabLe been established and communicai-ed io the successor, including the timin! oititle changesandthe harding overolrespon-sibilities? The board hEsto bewllling to holdthe CEotfeettoth€ fire or riskloslng va !ab e

5.The board should implement appr0piatefinancia handcutf affangements io encouraqe potenlia successorsto remain with the

Becausesuccession can be such a hit 0r missproposition litis lelt entirely uptothe ind vid-ual CE0,itis critlca lyimpodantthatthe boardestablish and adhereto awel -thou€hi-outandpr€dictable process li all pa.ticipanis ii th€process know what to expect and when,resuits are lar less likelyto depend on thewhlms or persona prelerences of any on€individual.

- Dennis Carey and DaWn Agden

tone for the final transition was set byIongtime CEO Wilson, according toGupta. "He had been through a horserace himselt The number two had stayedin spite of the intense .ompetition thathad persLted throughout the succession.Larry was cognizant ofthe fact that hedidn\ want the next g€neration to gothrough what theyhad been through."

How did Gupta and his number twocompetitor avoid falling into the trap ofdivisiveness and jealousy that so oftenresults from this sort of competition?"There is a mutual respect between Mike(Fitzpatrick, president and COO) andmyself," says Gupta. "I've been with thecompany for 26 years, he for 22. We'reboth highly competitive, we both want-ed to be CEO, but we discussed how wecould have a fair contest. Are there twojobs going forward in the company, wewondered. We also agreed that if weboth stayed, we wouldn't stand in eachother\ way. There would have to be botha place and suf6cient challenge for bothof us."

As things lurned out, Fitzpatrickwillrun the core business of Rohm & Haas,which makes up two-thirds of the com-pany, and the technology function.Gupta will run the remaining third of rhecompany and the governance function."we have distin€t, wel-de6ned roles, andeach plays to our strength. In addirion,the board allows for two insiders - theCEO and the COO so we'll both selae

"We haven't lost an outstanding ex-ecutive fiom the company," Gupta says.'A strong internal culture like ours prob-ably self-selects against people who aredriven only by compensation."

Not all horse races end so amicably.For those that dont, how effective are fi-

nancial handcuffs in stemming the flowoftop lalent from a company, especial-ly during the final stage ofa CEO suc-cession when companies are particular-ly vulnerable?

Given the growing mobility ofexec'utives in general and the wealth ofopportunities for them, corporations areincreasingly inclined to use options andresticted stock to attempt to keep a tiglthold on experienced leaders.

Brothers says that his handcuffpack-age, made up ofrestricted stock to vest

' To ev eryone's surpri se,

certainly mine, the CEO

announced that he wes

going to stay another fouryears. The notion of workingin that situation was notappealing,'

-Alex Ma AL Teligent Cotp.

after seven years, was "certainly a factor"in keeping him atAshland. "I wouldn'tsay it was decisive. I'm financially inde-pendent, but the arrangement did giveme a sense of comfort. I've been approached for CEO positions elsewhere.Ifthere were no financial payout,I mayhave walked away''

Most number twos would probablyagree that these financial handcuffs donot provide any guarantees that valuedexecutives vill remain with the compa-ny iftheylose out in the race for CEO.

Bu1 if such measures give executivespause and make it harder for them towalk away, these arrangements are probably well worth having.

Ongoing dialogue andassessment with the boardIf a board gets to the point \^/here it isconcerned about having "the successiondiscussion"with the CEO, things havegotten out of hand. Su.cession is farmore than the CEO merely steppingdown and his or her successor takingover.It is an issue that goes straight to th€core of a companls values on the devel-opment ofleadership.

Some CEOS begin their term with anunderstanding with the board that oneoftheir key responsibilities will be de-veloping leaders throughout the orga-nization and successors at every level.They relish the leadership developmentrole and the opportunity to showcase be-fore the board the talent they have hada hand in developing. Others refus.. toshare the Iimeiightwith anyone and resist viewing the Ieadership ofthe company as anrhing that extends beyond orbelow them. These are obviously not theorganizations that become hothouses for

As we have noted, the composirion ofthe board helps to determine how directit is in dealingwith and reassuring suc-cessors. Boards with operating execu-tives, perhaps because they better appre-ciate hov, diffrcult it is to secure a capabl€CEO, are more likelyto try to preservestability than financial executives, whoare more removed from day-to-day op-erations. But experienced number twoscontinually emphasize how important itis for the board to manage the successionprocess. E

I SPENCER STUART ! GOVERNANCE LETTER I