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Nov 9, 2012

CEO succession: what Mirvac got right that BHP didn’t

BHP CEO Marius Kloppers is not likely to stay in the role too much longer, but with no succession plan, Kloppers has to stay around while a candidate selection search continues.

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Two companies, two very different succession stories.

The first is BHP. The miner is reportedly looking for a successor to current CEO Marius Kloppers. He’s headed the company for five years — longer than his three immediate predecessors — but a confidential survey of investors and analysts in July found confidence in Kloppers has been declining. Still, Kloppers isn’t being shown the door in a hurry. He’ll spend at least another year with the company, as it looks both internally and externally for his replacement.

The case of Nick Collishaw at listed property trust Mirvac is very different. His sacking and replacement by Susan Llody-Hurwitz, a previously little-known property executive working in the United Kingdom, came as a shock, to shareholders as well as Collishaw.

At next week’s Mirvac AGM, several shareholders are looking to replace chair James MacKenzie over the board’s controversial decision. According to The Australian Financial Review he was bewildered by the decision, saying it was “pretty bizarre of a chairman to dismiss the CEO on the same day he presents the new CEO”.

Collishaw’s departure from Mirvac was certainly unusual, and for many, unexpected. And on the balance, many would prefer to deal with BHP’s slow, planned succession than Mirvac’s, which ruffled at least a few feathers among its shareholders. But in one aspect, Mirvac did right.

Announcing a new CEO at the same time as the outgoing CEO’s departure is what would always happen in an ideal world, says Nick Waterworth, the managing partner of executive recruiter Watermark Search International.

“Uncertainty obviously affects staff, shareholders, and potentially customers,” he said. “Of course, putting in an acting CEO while you look for another, or announcing a retirement without a replacement, well, it happens all the time, so it’s not a complete no-no. But it’s a situation best avoided. It’s better to have a solution, and put a fait accompli with your announcement. But you can’t always do that.”

At BHP, Kloppers will stay on for at least a year while the board searches for a replacement. This suggests little progress has been made so far on succession, which is far from ideal.

It takes time to fill the CEO position, particularly if the search is international. “From the start of the process to a new person commencing, if you did that in three months, it would be lightning fast,” he said. “Much more likely, it’ll be four to six months from the start to the appointment, particularly with an international search. And of course, depending on circumstances, it can take longer. It’s not at all uncommon for your first choice to be offered the role and to say no,” Waterworth explained.

Making the succession process more difficult in recent months is the complexity of short — and long-term challenges facing many Australian corporations. Of Watermark’s current chief executive searches, 70% are for replacement CEOs as opposed to for newly created positions, which is far higher than usual.

“There are real short-term issues in play at the moment, but also long-term issues like the structural change affecting many industries,” Waterworth said. “Many boards are coming to the conclusion that their current CEO isn’t dealing with these appropriately, and so are looking for a replacement.”

Given the time it takes to find a new CEO, boards should be constantly preparing internal candidates for the role as well as keeping an eye on potential successors working outside the company, says Kerryn Newton, the managing director of corporate governance consultancy Directors Australia.

Assessing succession can be seen as undermining the current CEO, Newton says. The solution is to do it every year, as a routine matter.

“I recommend to all the boards I work with that they do it once a year,” she said. “Around October might be a good time to have the discussion — once the CEO’s performance review is completed. It’s not sufficient to just contact an executive recruitment agency when the need comes up. That’s too subject to the vagaries of the market at a particular point in time. You need a pipeline of internal candidates.”

An advantage of having an annual discussion is it allows the board to stay on top of the professional development of executives and mid-level managers who might be potential successors.

“It allows the board to think, ‘Well, this person has potential, but they need experience in this unit, so we’ll move them there for a while’,” she said.

About two-thirds of CEO successions are internal appointments, and these appointments typically come from one of three areas: chief operating officers, sales and marketing directors, and divisional chief executives.

“They tend to be the best-qualified people for the CEO role,” Waterworth said. “Smart boards work with the people they have in these roles to make sure they’re as skilled as they can be. It’s also important boards have access to these people in the company. They shouldn’t rely just on the CEO, but have contact with the next level down of management. That’s good corporate governance, but it also plays into succession.”

Picking a new CEO is a board’s most important duty, and one leading companies put a lot of thought into. But it’s often not prioritised at all times. “I’ve seen so many companies caught short with it. Boards don’t always think it’s a burning issue. But it’s always a burning issue … There’s no reason your brand new CEO wont be gone in six months,” Newton said.

*This article was originally published at LeadingCompany

Myriam Robin — Media Reporter

Myriam Robin

Media Reporter

Myriam has been Crikey’s media reporter since 2014. Before that, she was a business journalist with sister site SmartCompany, covering economics and corporate strategy.

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