Heir Apparent Designation Process

As described in the CEO succession literature, relay succession involves identifying a CEO successor, whom Vancil (1987) referred to as the heir apparent, a few

years before the actual succession event takes place. Given that heir apparent is not an official title in any organization, researchers studying relay succession based on archival datasets identified heirs apparent as officers who were named COOs and/or presidents of their organization before receiving a promotion to the role of CEO (Cannella & Shen, 2001). Prior literature widely accepted Vancil (1987)’s classification of CEO succession practices as either, relay, horse race, or outside successions. Finkelstein, Hambrick, and Cannella (2009) expected the designation of heirs apparent following a horse race. However, they still accepted the prevailing assumption these heirs apparent were designated several years before the actual transition event. Data from the interviews showed the boundaries between the two inside succession practices, namely relay and horse race, were blurred. Most of the CEOs I interviewed were designated the CEO-to-be following a competition with other executives from inside the organization and in rare cases the competition also involved candidates from outside the organization.

All of the interviewees including: current and previous CEOs, board members, senior executives in the firm, and consultants agreed the CEO succession process and namely the selection of the CEO is the responsibility of the board of directors. The incumbent CEO was always involved in nominating and providing evaluations on possible candidates. The board of directors in some cases also sought help from executive search firms or consultants to nominate candidates. None of the CEOs I interviewed were designated the heir apparent and/or were designated years before the actual succession event. Executives were designated for a period ranging from three weeks to a maximum of one year before assuming the CEO position. Competition for the CEO role was the most common experience the participants shared. Only three of the 22 executives were

not part of a competition before being designated by the board as the CEO-to-be. One of them was asked if he wanted to be the CEO only a few months before he assumed the role. In the two other cases, the executives were appointed COOs and the incumbent CEO told them covertly they were the designated heirs apparent. The transition lasted longer than expected and the executives lost confidence in the process and needed a stronger affirmation for the job. One of these executives asked the board to take action to ensure his ascension or he would leave the organization. In one of the 19 cases, the executive was explicitly promised by the incumbent CEO to be the only possible successor for the position very early on. He found two years before the passing of the baton that the board of directors was considering another internal candidate for the position. The board would also conduct an evaluation at the end of the selection process to announce the next CEO.

While heir apparent is not an official title, the way it is identified in previous research on heir apparent or relay succession studies is when an executive is the only one appointed as the COO and/or president of the organization (Cannella & Shen, 2001; Giambatista et al., 2005). In anticipation that this definition had been adopted in the previous research due to the dominant quantitative nature of the research, I broadened the definition to include any executive who was in a senior position before assuming the CEO position. The fieldwork confirmed the appropriateness of the use of the adjusted definition rather than the one in the literature and required the addition of a necessary condition: the explicit designation by the board. The common story among all the respondents was that they knew they would be the next CEO when they were explicitly told so by the board. Some of the respondents were already COOs or presidents and the board still required them to compete to be designated the CEO-to-be. Those who were

COOs felt the title did not accurately reflect to the organization or the industry that they were the designated heirs apparent. They felt the title of president would have sent a better signal that they were the future leader of the organization. On the other hand, executives who had the title of president felt the title of COO would send a clearer signal to the industry they were the next CEO. The executives felt they were the “heirs apparent” upon the board’s explicit announcement of their designation as the CEOs-to-be. For example, Martin explained1 how he felt about being secretly told he was the future leader:

I think he (incumbent CEO) sort of made a call; well he did make a call that he was going to elevate one person as a sort of a potential successor. I am not sure that is necessarily the best idea because he elevated somebody (referring to himself) but he only elevated them half way. I am not sure I would do that again. My gut feel is when you elevate somebody and you really want to be clear that they are the second in the command; you should be pretty clear on that. And Ron (incumbent CEO), he was clear with me but he was not very clear with the organization. The situation started to improve overtime but I think providing clarity would be helpful. The current CEO of our competitor had a clear path to the top job. He became instead of Chief

Operating Officer, an EVP then even the president and so it was very clear he was going to be the guy. For us we never made that choice. We never went to that next level of Martin is the president and the president, in most people’s nomenclature is: ‘oh, there you go, you have been named’.

Designate CEO Charles explained the doubt surrounding the secret processes with some humour:

I’ll give you a little insight here, under the leadership of Thomas (the ex-CEO) they had a room, and for that room there were only three people who had a key, the CEO, the president, and the head of HR. And you go in that room and there’s nothing but chalkboards with positions and who the likely people would be. And they were the only ones that had access and the joke was, it was always chalk, because that could be erased.

1

All quotes used in this research are verbatim, as said by the participants. Very minimal editing was performed on these quotes.

From the meetings with the executives it became clear none of them had really experienced an “heir apparent” designation the way it was presented in the literature. Most of them were designated as heirs apparent few months before the transition event. Figure 5.1 shows the frequency distribution of the designation tenure per month for all 22 interviewed participants. The two who were given the title of COO, along with the promise of the CEO title, lost their confidence in the promise along the way and had to secure an overt designation a few months before the transition.

I believe referring to the respondents as heirs apparent does not accurately reflect their experience. Hence, from this point forward in the dissertation I will refer to the executives as designate CEOs or CEO-Ds from the time the board selected them and informed them they would be the next CEO. Incumbent CEOs would be referred to as CEO-Is thereafter. I will only use the terminology of “heir apparent” from here onward if referring to the existing CEO succession literature. I will also present the premises developed in the theoretical model at the beginning of each section using the CEO-D terminology instead of heir apparent. I have also broadened the definition of “heir apparent” I started with to identify my participants to become the CEO-D definition as such: any manager in the company who was a senior executive, including being the COO and/or president, and officially designated by the board as the future leader of the organization, before assuming the CEO role.

In addition to avoiding the heir apparent terminology, I will also avoid using the “horse race” terminology. Though most of the respondents went through a competition for the CEO title before being designated, I cannot refer to the competition as a horse race. The literature defines a horse race as a competition among senior executives in the organization for the CEO role (Giambatista et al., 2005; Rowe, 1996; Vancil, 1987). This competition is usually public and leads to the exit of the losing horses in the race from the organization (Lehmberg et al., 2009). However, in most of the succession events I studied the competition was not public and the other candidates stayed in the organization. Therefore, I will refer to the race for the CEO position as the competition and not as a

“horse race”. I will only use the terminology of horse race when referring to the CEO succession literature.

Nineteen of the 22 respondents were designated after a competition for the title of CEO. The number of candidates competing for the CEO position was different between companies. In most cases there were three, in fewer cases two, and in one case the competition started with 12 candidates and ended up with three finalists before the board chose a candidate. None of candidates experienced adversarial relationships with the other candidates but they all felt the process was time consuming and psychologically demanding.

In some companies, the candidates were known to each other and to the staff members in the organization as described by CEO-D Philip:

The process was very open. There was me, there was the CFO, and there was the woman who was made head of operations so we didn’t call it Chief Operating Officer for her but it was. So what happened the three were identified, two were identified before me. … We knew each other. We knew who we were competing against and I honestly say and I think if you ask the other two, they would say we never competed against each other. We just competed for the role and there was a huge difference-huge. And the only testimonial I can give you about the difference is they are still here today. So this wasn’t a blood in the streets, violent competition. It was competing on your own merits in your portfolio but not against each other, just for the role.

In other companies, the identity of the candidates was known only to the CEO-I and the board of directors as stated by CEO-D Frank:

They came to me; Scott (CEO-I) and the Chair of the board and said we would like you to participate in this process. I didn’t know whether there were lots of candidates or a few candidates. I was told at the very beginning it will be an international, external search as well as internal but would I participate…. in the very last bit of period of time, like, you know, before the announcement, I knew that the process had gone almost all internal. But I would say if the process was 2, 2 and a half years, I knew that it had probably gone internal about 10 months remaining in the process so

there was a good year, year and a quarter that I had no knowledge of whether internal/external what was happening. There were lots of potential candidates running around. So I didn’t know. No idea. I didn’t want to know either because what was going to happen was going to happen. And worrying about who were the other candidates was not going to be helpful to my psyche. It wasn’t going to be helpful to me completing the process …

Most of the CEO-Ds said they underwent psychometric tests as part of their assessment through the succession process. When the number of candidates was limited to two or three, all candidates completed the whole process, however, when the number of candidates was six or more, the board retained three for the final selection. Some of these processes were short, lasting around six months from candidate nomination until the announcement of the next CEO; some were lengthy, lasting two to three years. The board asked all finalists to prepare a presentation explaining their strategic vision for the organization. The CEO-Is were supposedly neutral and acted as a support for all of the candidates in the competition. They did not give advice or participated in the decision making process unless the CEO-D sought their help; however, their evaluations of the candidates were taken seriously by the board. The candidates during this period concentrated on doing their job and completing their assignments as requested and to the best of their abilities, as well as equipping themselves with the tools they thought would improve their chances, as described by CEO-D Carl:

Kathy (CEO-I) made it very clear I was her choice but it wasn’t her choice to make. Clearly, her recommendation would carry a lot of weight but it was never a given that it was me. So I didn’t presume that the job is mine. I knew there were some hurdles and I also knew that there was a lot of time for me to make mistakes and maybe get myself out of the race. I really thought I have to up my game. I needed to be a lot better at certain things that I didn’t do on a daily basis and that is why the MBA was so important to me to try to get a broader perspective on business in general.

CEO-D Carl emphasized that his aim was not to compete with the other candidate but rather to concentrate on equipping himself with all the necessary tools. Had he been officially designated, he stated he would have spent his time focusing on preparing himself to be ready for the CEO role rather than to be selected the CEO-D. He said:

Before I knew about the competition, I was certainly much more tuned to watching Kathy, understanding, listening to her on the investor calls and understanding how she took the questions and how she presented to the board. Watched a lot more keenly around putting myself in that role and then discussing things with her, just trying to tell myself: ‘I may have to do this at some point so pay attention’. So it (the competition) changed that certainly for me, I had to postpone this sort of learning.

Most of the executives felt the immediate change when they were designated the CEO elect. CEO-D Frank described this moment as follows:

When she (the chair of the board) told me, it was on a Friday. It was here in this room. I walked in. She was staring out the window almost philosophically off in another space and she turned to me and said: ‘you know we were supposed to announce this later but the board has reached this decision already. And there is no sense waiting. So we are going to get it going’. So that put into gear, a rollout strategy that followed, everything started happening sooner. It was a bit of a blur. This was a train that was leaving the station. She told me on a Friday and she said we will get started next week Monday. So think about it over the weekend and sign the letter. You know (addressing me) there is an offer letter. And, I was probably floored is the right word, not in a negative way. It actually hit me that it had arrived and I was conscious that this was a new trajectory in my career and in my life that it just happened and I had to digest that over the weekend. And then I think it was the next week or the following week, the rollout started. The rolling out of who you tell and when you tell and the senior management teams and where and how and scripting of it, rolling out to the newspapers, informing the shareholders, the whole bit and I now am the one selected to be the next CEO. That is it. It was just a machine that had started rolling.

CEO-D Frank immediately felt the end of an era and the start of a new situation, a change that impacted his career and life right away. He immediately started thinking of the new social context he had to deal with both internally (i.e., the senior management team) and externally (i.e., the shareholders) given his new identity: “I now am the one …”

Having presented a brief description on what the succession process was like for the participants and identified when and how they received the designation, I will hereafter present my findings with respect to each of the premises formulated in the theoretical model.