Micron Technology (MU) suffered the sudden death of its CEO, Steve Appleton, on Friday in a small plane accident in Boise, Idaho. Beyond the obvious human tragedy, this event is a sad but important reminder about the need for effective CEO succession planning.
It's hardly the first time a large company has suffered the abrupt death of a CEO:
- Biochemical distributor and manufacturer Sigma-Aldrich (SIAL) lost CEO Jai Nagarkatti to a heart attack in 2010.
- Fast-food cult favorite In-N-Out Burger faced a crisis after President Richard Snyder and Executive Vice President Philip West were killed in a chartered jet crash in 1993.
- Fast-food giant McDonald's (MCD) saw lightning strike twice in the past decade: CEO Jim Cantalupo was felled by a fatal heart attack in 2004, and his successor Charlie Bell died of cancer less than a year later.
Micron named an in-house executive as its new CEO within days, as did Sigma-Aldrich, McDonalds and In-N-Out. But in some of these cases those decisions weren't born out of a pre-established CEO succession plan. In fact, in corporate America, the lack of a plan for such situations is more common than not.
Numbers to Make an Investor's Mind Numb
According to a 2010 survey of North American CEOs and board members, only 54% are grooming an executive as a CEO successor. And 39% of survey respondents had no internal CEO candidate in mind, according to the survey by Stanford University's Rock Center for Corporate Governance and Heidrick & Struggles.
The survey also found that only 50% of survey respondents said their boards had developed a written document detailing the required skills for the next CEO and that, on average, corporate boards only spent two hours a year discussing CEO succession planning. A board's nominating and governance committee, which are usually charged with finding a new CEO, spend on average only four hours, the survey found.
And while 71% of internal candidates know they are part of a formal talent development pool, half of them don't receive regular annual or semiannual talks to let them know where they stand or whether they're in the running for the CEO slot, according to the survey. As a result, some of those in the company's talent pool may defect to another employer.
"I don't think things have changed much since we've done that report," says David Larcker, a professor with Stanford's Graduate School of Business who specializes in corporate governance and is co-author of the report. "It's one thing to say you have a document, but is it carefully crafted with all the right steps and is it operational?"
Larcker says that while most companies can name an interim CEO immediately, a well-crafted plan will allow a company to name a permanent replacement within four to six weeks.
How Fast Is Fast?
In Micron's case, it immediately named then-President and Chief Operating Officer Mark Durcan as its interim CEO. Durcan clearly was not part of a Micron CEO succession plan, given that just weeks earlier, the company had announced that he planned to retire in August. Micron has since removed the "interim" from Durcan's title and says he no longer plans to retire in August.
In Sigma-Aldrich's case, it simultaneously announced the sudden death of Nagarkatti and the appointment of Chief Financial Officer Rakesh Sachdev as his replacement. McDonald's took a similar tack, pulling a new CEO from its deep executive bench, noted Patrick McGurn, executive director of proxy advisory service Institutional Shareholder Services. He pointed to McDonald's rapid appointment of a new CEO, not once but twice, when tragedy struck.
In a CNN Money interview with McDonald's director Andrew McKenna, the director noted McDonald's faced three choices: make no CEO appointment, name an interim CEO, or promote the heir apparent prematurely.
The board found the first two options unacceptable, characterizing the title of interim CEO as "like buying something on trial," noted the CNN Money report. And while Bell was slated to undergo several more years of CEO grooming, a decision was made to hit the go button early. That strategy was followed again when Bell died of cancer less than a year after taking the helm, leaving the fast-food chain to name Jim Skinner, its former vice chairman and president of McDonald's Restaurant Group, as CEO in 2005.
What'll It Take for Change?
"It'll take pressure from ISS, companies stumbling in their CEO selection, bad press and more votes against a company board's nominating committee to lead to change," Larcker says.
ISS' McGurn notes the irony of how insurance companies demand that sports figures and entertainers sign clauses in their contracts to refrain from high-risk activities, such as skydiving and the like, but that the same demands have not been made of CEOs.
Appleton was known to engage in high-risk sports such as stunt flying, and he was injured in 2004 when his stunt plane crashed. He also raced cars in the desert, including in 2006 when he took a Baja Challenge Class win in the SCORE Tecate Baja 1000.
"For the board of directors, it's a tough issue," McGurn says. "You have so much invested in this CEO and yet it's hard to ask that they don't do anything that puts them a risk."
Motley Fool contributor Dawn Kawamoto does not own stocks in any of the stocks listed. Motley Fool newsletter services have recommended buying shares of McDonald's.