Handing over the reins of power

pharmafile | September 14, 2005 | Feature | Sales and Marketing |   

From poetry to patronage, finding a new chief executive for any pharma or biotech company can be a complicated business, as Pharmafocus discovers.

Planning for a change of chief executive occupies a prominent position in the corporate mind and the pharma industry is no different. Indeed, with the recent announcement of a change at the top at AstraZeneca due to take place next year the issue of succession planning has once again come to the fore.

At 62, Sir Tom McKillop will step down as chief executive of AstraZeneca next January allowing Europe's third-biggest pharma company to finally lay to rest speculation about its management succession plans. Not so at GlaxoSmithKline, which is presided over by the 57-year-old Jean-Pierre Garnier whose thoughts must surely soon turn to who will fill his place.

The bottom line and succession planning

The reason succession planning turns heads is simple. Given their usual remuneration deals, prominent chief executives high-profile successes and failures always grab the headlines, spotlighting their companies leadership selection processes, creating a positive buzz and enhancing their stock market performance for the winners and, in some cases, spelling disaster for the losers.

Despite the obvious importance of having the right person at the helm, a survey by the US National Association of Corporate Directors found 45% of boards at companies with more than $500 million in sales had no meaningful chief executive succession planning process. This works out at a staggering 24% of Fortune 500 companies who do not consider planning for their next chief executive a top priority.

The economic arguments in favour of succession planning seems irresistible: the best-selling book Built to Last: Successful habits of visionary companies showed that only 3.5% of 'visionary' companies' chief executives came from outside the organization, compared to 22.1% of comparison companies. The same visionary companies outperformed the others by more than 15 times.

A report by consultants CuttingEdge, Succession Planning for Results, suggests that succession planning is not just employee development, ranking or choosing the candidate from within company ranks – development plays a key role and successful companies have developed excellent ranking systems. It adds that many companies with highly regarded succession planning systems, such as IBM and Hewlett-Packard, have gone outside their organisations for their next chief executive.

Planning for the change

CuttingEdge suggests each organization build its own system, which it takes care to align with its own individual strategy and culture. They believe that objective assessments and gaining a number of different inputs are key to ensuring buy-in at all levels. "Succession planning must be aligned with where a company is going, not just where it is," it advises.

Line management takes its cue from top management. Both these groups – not HR – must take ownership of succession planning and when Pfizer addressed the issue at the end of the 1990s input came from the top with the company's board of directors playing an important role in the decision.

Pfizer's proactive approach

Pfizer's search for a successor to chief executive William Steere came at a crucial time, just after the 2000 merger with Warner-Lambert had made it both the largest and fastest-growing pharma company in the world.

Following the $80 billion transaction, Pfizer's board examined all areas of the combined company, including human resources, organizational and cultural factors, taking a lead in the new company's succession planning effort. For the top post, Pfizer chose to go with Hank McKinnell, a long-time company man.

McKinnell had joined the company way back in 1971 and had ascended to such positions as president, chief operating officer, executive vice president, chief financial officer and president of Pfizer's global pharmaceuticals group – quite a CV for the top job.

Steere explained the approach he and Pfizer took: "I believe that succession planning is one of the most important duties of the Board and its chairman. Pfizer has always been fortunate to possess abundant executive talent. We have never had to look outside our company for excellent leaders, and that remains true today. I have no doubt that Pfizer's executive succession will proceed smoothly and that our company will continue to grow and prosper under Hank McKinnell's leadership."

This quote is illustrative of the critical nature of benchmarking your own strengths. Pfizer has a reputation for developing talent internally and could be confident of its selection of an internal candidate. Other pharma companies also work to build similar reputations, such as SmithKline Beecham (now GlaxoSmithKline). Chairman Jan Leschly was already working with corporate HR to pave the way for Jean-Pierre Garnier as his replacement as chief executive when he met with the company's Board for the first time in 1994.

Communication is also key to ensuring a successful chief executive transition and Pfizer again stands out as an example of good practice, as does General Electric's Jack Welch. Both Steere and Welch gave their successors head starts by clearly explaining why they had been selected to head up their respective companies.

Succession planning in biotechs

When a company, responding to business climate changes or to needs within its own operations, decides to transform its business, the current leadership must be examined to see if it can cope with the change. When leaders lack the skills or the temperament for the new business model, the succession planning system must respond by elevating leaders who will thrive under the new requirements – this can be a particular requirement within biotech companies.

As small to mid-sized startup biotech firms increase their focus on R&D in an attempt to pursue growth, the strategy can be at odds with the original intents of the company founders, who often started out by supplying technologies or services to other companies. In several high profile cases these changes have coincided with the departure of the company's original leaders, illustrating the need for a succession planning process to be flexible enough to accommodate and support change.

For example, Celera Genomics' president resigned as the company changed its focus to drug development. The former president voluntarily made way for an officer who could steer the company in its new direction. Similarly, chief executives at CAT and Abgenix voluntarily stepped aside to bring in new leadership that could focus on short-term revenue as well as the long-term plan.

Many smaller life sciences companies have found their successors by looking outside, to big pharma or investment banks. For example, US biotechs Incyte Pharmaceuticals and Large Scale Biology hired a former DuPont Pharmaceuticals executive and investment banker, respectively, as their new presidents.

This strategy requires a flexible and short-cycle-time-oriented succession planning process. It also poses risks, as the new executive may have a personality at odds with the existing corporate culture. This potential problem requires a response that combines change management, succession planning and recruitment.

Implementing succession plans

In any research on succession planning, certain companies' names come up as excellent developers of leadership and those searching for instructive examples in this respect could certainly do worse than investigate how General Electric, Pepsico, Motorola, and Emerson Electric have fared. One of the primary ways these companies' reputations shine through is in how aggressively other companies target their rising stars. Organizations less skilled in leadership development will always pay a top price for good leaders, and they know which companies to look to for managers and executives.

Successful succession planning programmes don't just build up excellent leadership candidates, they must also reflect corporate culture. Ice-cream maker Ben & Jerry's, known for its unorthodox, socially aware business strategies, kicked off its chief executive succession process with an essay contest titled: 'Yo, I wanna be your CEO', in 1995. The company received more than 22,000 100-word applications. An executive search firm found the eventual choice, but he honoured the company's culture, and its succession process, by submitting a poem.

At the same time as seeking to do this companies should also identify the key competencies they desire from the successful candidate as these form the backbone of any succession planning initiative.

They serve as a roadmap for building successful individuals for each job, which in turn helps build the organization as a whole. No one group can identify all traits for a company, department or individual so successful companies rely on a mixture of opinions from past and current position holders, divisional and corporate human resources personnel, and management.

A study of 300 organizations from all major business sectors by Arthur Andersen and Schoonover Associates showed that approximately 67% of organizations do not actively use competency-based HR initiatives. Only about 11% of those companies consider themselves very experienced or sophisticated users. However, of those companies with sophisticated applications, 80% to 90% have seen measurable results.

It should be noted that most small-to-midsize companies do not perform succession planning, and very few larger firms have formal systems at the level described here. The reasons for this range from a focus on short-term measures (impact on revenues and costs) to simple procrastination. Some pitfalls to avoid include:

• No formal, written plan
• Rigid, inflexible plans
• Superficial, poorly communicated plan
• Incorporating low quality individuals
• Too much delay between promotions
• Each key person or position must have a formal written plan and set of competencies

To successfully implement a succession plan, once one is in place, CuttingEdge suggests rolling out the succession plan at all levels and executing with discipline; identifying succession planning deployment communication needs and key transitions to be made during succession plan rollout; developing support systems to guide rollout; and reviewing corporate benchmark strength.

Appointing the right person

There are some steps that can be taken that will make the difference between finding the right chief executive the first time and avoiding suffering through an embarrassing string of replacements:

1)Full involvement and ownership must come from the board of directors

2)Criteria, specific enough to distinguish one candidate from another, need to be developed for the new chief executive

3)Get the involvement of experienced, well-trained HR staff

4)Build a candidate list from both outsiders and insiders, if only to benchmark your internal strengths

5)Review both outside and inside candidates from multiple sources – good chief operating officers, for example, do not always make good chief executives

6)Remove technology as far as possible to interact directly with candidates

7)Rather than encouraging the top two or three candidates within the company to fight for the position, a fully functioning board of directors makes the process truly open

8)Design an ongoing succession planning process – boards should always have a plan in place and should begin their work years ahead of an expected chief executive transition