Jul 31, 2008

Business - In Sickness & In Wealth

Steve Jobs and the case for succession planning

IS HE sick, or isn’t he? And if he is sick, just how serious is his condition? Ever since an emaciated Steve Jobs appeared on stage at a conference in June to introduce Apple’s new generation of iPhone, rumours have been flying about the state of his health. Various non-committal statements from Apple executives have thickened the fog surrounding the issue.
Between July 21st and July 28th Apple’s stock slipped from $166.29 to $154.40. That partly reflects the firm’s prediction that sales will grow slower than it initially expected in the next quarter, as the global economy slows. But it also shows that investors are worried about both the health of Mr Jobs, who underwent successful surgery to tackle pancreatic cancer in 2004, and about Apple’s lack of an explicit plan to replace him should he become incapacitated. Apple’s experience is a wake-up call to board directors everywhere, who need to sharpen their thinking on executive succession, especially given the febrile state of today’s financial markets.

As companies’ profits fall, demands for a firm (and possibly new) hand on the leadership tiller will grow. Confusion at the top may be exploited by short-sellers, who will dump a firm’s shares and buy them back on the cheap after bad news has driven down the share price. Regulators have recently crimped the shorts' activity in financial stocks; they are looking for new targets.
All this raises two important questions: first, how much should a company divulge about its CEO’s health? And second, how explicit should it be to the outside world about its succession plans?
The by-the-corporate-governance-book answer to the first question is that so long as directors are kept informed of a CEO’s health and the boss is still capable of performing his or her duties, there is no obligation to make any public statement. This seems to be Apple’s approach: it considers Mr Jobs’s health a private matter.
But when investors believe that a company’s fortunes are intimately tied to a visionary leader—as is the case with Apple—speculation about that leader’s longevity can have a direct impact on the share price. If, on the other hand, a firm convinces investors it has strong successors-in-waiting, then rumours that the boss has the sniffles (or worse) are less likely to set its stock price aflutter.
So the answers to the two questions posed earlier in this column are linked: a company with a strong succession plan in place is less likely to have to broadcast its leader’s vital signs to the world.
To see how this can be done, consider the case of Berkshire Hathaway, the holding company run by the legendary Warren Buffett. Mr Buffett’s famed investment prowess has helped make Berkshire’s shareholders rich, and, at 77, he shows no signs of flagging.
Still, he stresses regularly that Berkshire is prepared for a post-Buffett future. “I’ve reluctantly discarded the notion of my continuing to manage the portfolio after my death—abandoning my hope to give new meaning to the term ‘thinking outside the box’,” quipped Mr Buffett in Berkshire’s 2007 annual report. The report stated that the firm has identified three outstanding internal candidates who could replace Mr Buffett as CEO if he becomes permanently indisposed.
Mr Buffett is a modest, laid-back and fabulously wealthy guy. Only the last of those adjectives can be applied to Mr Jobs. A driven business-builder, he may be reluctant to countenance the idea of giving up leadership of Apple or of having a publicly announced succession pool below him.
But the latest round of speculation over his health makes the case for such a pool stronger than ever. Perhaps Apple’s next gizmo launch should even be fronted by a potential successor, rather than Mr Jobs, clad in his trademark black garb.
Some boards fret that setting up a formal horserace may be counterproductive. Divisive rival camps may form. But speculation about succession to the corner office will occur anyway, and a formal plan both makes the process more transparent and allows the CEO and directors to manage any internal tensions more easily.

One company that has placed great emphasis on succession planning is General Electric (GE). Several years before standing down as CEO in 2001, Jack Welch and GE’s directors identified three potential successors: James McNerney, Robert Nardelli and Jeffrey Immelt. All three were put through their paces in a high-pressure process that one of the candidates likened to “playing in the last two minutes of the Super Bowl, but for two years.”
In the end, GE chose Mr Immelt. The handover was seamless and for several years GE continued to delight investors with increased sales and profits. But in recent months its fortunes—and Mr Immelt’s star—have faded. On July 25th the company announced a reorganisation, reducing its number of business units from six to four in a bid to simplify its management and boost profits. It is also selling off several activities.
Although the jury remains out on whether GE’s directors made the right choice, their approach to succession planning served them well. Apple’s directors would do well to follow it.

No comments: