Originally published by smartCEO.com
When Marissa Mayer was named CEO of Yahoo in July 2012, her appointment was major news for the beleaguered company, which was hoping for a turnaround. Fast forward to today, and after a variety of fits and starts, it turns out Yahoo lost 30 percent of its value last year, as reported by Business Insider.
Mayer’s star is falling, and her ousting is being speculated on regularly. There are of course a multitude of reasons why Yahoo is at this point yet again. However, what is interesting to note here is whether Mayer, in all of the enthusiasm to redirect and save Yahoo, ever thought about her eventual successor and planned accordingly. And if she was too busy righting the ship, what about Yahoo’s board? What succession plan did they create?
Succession planning is much debated in senior leadership circles as well as in boardrooms everywhere. The general consensus is that boards do not spend enough time planning for CEO succession. In fact, according to PwC’s most recent directors’ survey, only 48 percent of directors “very much” believe that they are spending sufficient time on this responsibility of theirs.
Yahoo’s succession troubles
To be fair, it helps to look at a bit of recent history at Yahoo. Mayer was Yahoo’s sixth CEO in five years, including two interim CEOs. Mayer’s predecessor, Scott Thompson, left after about four months when it was revealed he included false education details on his resume. Prior to him was interim Tim Morse for a few months, and before that Carol Bartz, who was fired after about 2.5 years when she failed to revive the company.
Given this revolving door, perhaps the first course of action after Mayer settled into her job would have been to think about her bench strength and who could possibly succeed her, just in case!
The unfolding Yahoo story brings up significant considerations for succession planning. Most important perhaps is the question of when to begin. To put it another way, how long after the appointment of a new CEO does the board need to begin thinking about his or her successor?
The answer to this question can be a minefield because no newly appointed CEO wants to think about succession, and to place emphasis on this can not only be demotivating but can backfire and cause more problems than benefits.
“Given the complexity of the [CEO] role, comprehensive preparation of internal candidates should begin at least five years in advance of an anticipated transition,” according to Inside CEO Succession: The Essential Guide to Leadership Succession by Tom Saporito and Paul Winum. The implication here is of course that the company will look for a successor from within the ranks of the organization.
Yahoo has not done this in the past, and there is of course always the option of going outside again for its next leader. The caveat is that this is generally a more costly and risky alternative. To better understand this, let’s look no further than Yahoo for an example. Marissa Mayer’s compensation package has to reflect the magnitude of the role, but also the risk that she had to assume by walking away from her position at Google and taking on this turnaround. Accordingly, she will make $365 million if she stays with Yahoo for five years. If she is fired, she is entitled to a $25.8 million dollar severance package, and if she is terminated without cause due to a change in control at the company, she could earn about $110 million. All significant and all in spite of her languishing results.
Every CEO tenure holds risk
What is the lesson to be learned from all of this, and how can companies and their boards of directors prepare themselves?
The lesson is, of course, that the tenure of every CEO has some risk built into it. Even potential superstars can fall short of expectation. Furthermore, past accomplishment is not an indicator of future success. And in Yahoo’s case, there was an additional unknown because Mayer had never before run a stand-alone business, let alone something the size, complexity and with the challenges of Yahoo.
As such, boards and CEOs themselves need to pay heed to succession planning. It is not something to be put off, and ideally should begin shortly after a new CEO takes over. Doing anything less may be unnecessarily precarious!