Features, Strategy & Operations

Who’s Your Successor?

Full disclosure: it is easier to write about succession planning than to execute on it.

Recently two fashion industry firms made headlines with the announcement of new CEOs—Ralph Lauren Corporation and J Crew. Why did both companies have to reach outside? In the case of RLC, it was the second time in about two years. Let’s look a little deeper. Most observers thought that Roger Farah would be the one when Ralph decided to name a CEO to succeed him. In the period from 2000 to 2013 that Roger Farah was COO at Ralph Lauren, the stock went from about $16 to about $165. However it was announced in late 2013 that Farah would become executive vice-chairman and relinquish his COO role. A nebulous title such as executive vice-chairman is often the way a graceful exit is orchestrated for an executive situation that is uncomfortable. Some former insiders say that Lauren was bothered by the accolades Farah received, particularly from Wall Street, for the success of the company. Since Farah’s departure, the stock declined from $165 to about $88 as of September 22, 2017.

Revolving Doors

About two years after Farah left, an unexpected announcement appeared that Stefan Larsson of Old Navy would be the first person to succeed Ralph as CEO. A board member introduced the two men, who both wondered if a leadership marriage would make sense. Apparently, it didn’t make for a long-lasting partnership, as less than two years later Larsson left over creative differences with Ralph. A new CEO, Patrice Louvet, from P&G has been appointed; it could be at least a year or more before we can tell if he is a better choice.

After 14 years as CEO and a significant shareholder of J Crew, it was announced that Mickey Drexler would be succeeded as CEO by James Brett of West Elm. While it is not publicly traded, J. Crew’s financial problems have been well publicized recently. As with Ralph Lauren, Drexler did not have a successor groomed internally. While it appears that he exited sooner than he had planned, it is clear that he and the board had not given much thought to succession planning during the past 14 years. In terms of compensation and visibility, Jenna Lyons had been the second-most prominent executive in the company until her exit after a few seasons of developing product rejected by the consumer. That notwithstanding, she was always an unlikely successor candidate.

Picking Up the Pieces

Both situations fall into a pattern of a bumpy succession plan when the incumbent CEO is a founder or, in Drexler’s case, a founder 2.0 and significant shareholder. It is likely that in both cases the boards were deferential to Lauren and Drexler and didn’t insist on having a clear succession plan.

Louvet at Lauren and Brett at J.Crew each face some different hurdles. While Brett will be dealing with a fragile financial picture, he will not have his predecessor there as the number-one merchant in the company. Louvet shares this challenge as well. However, Louvet may have it somewhat easier than Larsson did as the board is dealing with one high-profile failure on its record and the reality of an active founder who is not getting any younger. So, the board is really invested in Louvet’s success, and shareholders must trust that the board did its due diligence in making the selection.

Succession Bottom Line

There is anecdotal evidence at other companies where the founding family’s name is on the door that succession is an issue that can have a negative impact on the value of the company. One example is Stein Mart. Since Jay Stein stepped down as CEO for the first time in 2002, there have been six successive CEOs, not including Jay stepping back into the role at one point. In the nearly 15 years since he relinquished the position, the stock has declined from $5.43 to $1.28 At TJX, which has enjoyed smooth transitions, the stock has gone from approximately $9 to about $72 in that same period. At Ross stores, which has also had a smooth transition, the stock has gone from approximately $5 to about $53 in that same time.

While some peer companies to Ralph Lauren that have had internal CEO successors have not enjoyed the stock price growth of TJX or Stein Mart, they have done considerably better than RLC. Hanes Brands went from $17 to about $24; Nike from about $38 to about $53; VF from about $54 to $62. Conversely, PVH went from $125 to $126) and recently Coach showed a decline from about $51 to $39.

Lest we forget, PVH had the Phillips family name on the door, but Larry Phillips successfully prepared Bruce Klatsky to succeed him. Subsequently, there was a hiccup with Klatsky’s groomed successor, who apparently did not work well with the board, but Manny Chirico was able to move from CFO to CEO, demonstrating that PVH had developed a strong bench.

Nike also had a hiccup when first successor to co-founder Phil Knight, William Perez, had a falling out with Knight, leaving after only 13 months. It’s not easy being the immediate successor to a founder. However, Nike had company veteran and Knight protege Mark Parker ready to step up. In retrospect, Parker was probably ready 13 months earlier before Perez came on board. However, the board may have felt it needed someone with public company CEO experience, which Perez had. Clearly the board underestimated the importance of fitting into the singular Nike culture, particularly with Knight still reigning as chairman.

Succession Legacies

Of the companies with strong succession planning, the gold standard belongs to VF Corp. which was formed in 1969 when M.O. “Whitey” Lee, CEO of Vanity Fair Mills, purchased The Lee Company, changing the corporate name to VF Corp. to reflect the newly diversified company. Several years later he recruited Larry Pugh from Samsonite to be his eventual successor, and Pugh moved into the top spot when Lee died in 1983. Pugh built one of the strongest, deepest teams the fashion industry has seen. With a bench including Rob Gregory as president and Fred Rowan, Mackey McDonald and Paul Charron as group VPs, he had four strong potential successors.

Gregory left in 1991 after a falling out with Pugh and had success as a turnaround manager at Gitano and London Fog, among other companies. I recruited Rowan to Carter’s in 1992 where he took a money-losing $300 million company to over $1 billion in profitable sales by the time of his retirement in 2008. Since then, his internal successor has taken it to over $3 billion. Liz Claiborne recruited Charron as COO in 1994, and he became CEO a year later. During his almost 12 years at the helm of Liz Claiborne, the stock went from about $8 to about $43. McDonald joined the Lee division in a middle-management role in 1983, about the time Pugh became CEO. Ten years later, he was president of VF and by 1996, CEO. During his 11 years as CEO, the stock nearly tripled.

Pugh’s recognition of, and commitment to, succession planning, along with his ability to assess, recruit and mentor, not only helped continue the success of VF but also groomed successful leaders to two other public fashion companies. Another strong succession planning lesson from VF is the possibility of losing good people. A company with a strong bench always risks having potential successors recruited. But the real message here is that the fashion and retail industries are dealing with several decades of not attracting enough of the top talent coming out of college. They are not planning for the future of the digital economy and providing a viable option for the next gen for career fulfillment.

A Prescription

What’s the solution? Or more realistically, the antidote to the mess created by laggard succession planners. The following playbook applies to both large public companies as well as smaller family businesses.

  • Don’t be caught unprepared. Start planning early in the CEO’s tenure. When the process is in place a long time it becomes business as usual, with less drama.
  • Be prepared for any emergency succession in the ordinary course of business.
  • The board must make certain the CEO is a willing part of the succession process and hold her or him accountable.
  • Develop a detailed CEO profile.
  • Establish a board committee or subcommittee with responsibility for the succession process.
  • Succession needs to be on the full board agenda at least annually, and more often at the appropriate committee level.
  • Include the chief people officer in the process.
  • The CEO and chief people officer need to work closely together to put a similar process in place for all C-suite positions.
  • The succession plan should reflect the company’s culture, goals and strategies. The latter should be forward-looking as it is critical that the next CEO’s skills match new strategies rather than the current strategy, which is likely to change.
  • Culture fit. Culture fit. Culture fit. Its importance cannot be overemphasized.
  • Grant board members access to senior management through the CEO.
  • Committee members must develop awareness of the talent pool outside the company, whether through news articles, annual reports, discreet meetings or evaluations from executive recruiters.
  • Identify high-potential executives in all functional areas and make certain they have the opportunity to attend some board meetings and to make presentations.
  • Carefully track the performance of these individuals and offer mentoring, regular performance evaluations, internal or outside courses where needed, and cross- functional experience where possible.

For a family business the principles and philosophy are the same as above, although scaled back in some cases.

  • A family business should establish a board of directors or advisors with some members independent of the family.
  • The independent members’ backgrounds and experiences should be such that they can guide the family through the establishment of a succession planning process.
  • Having the current CEO thoroughly involved in the process is all the more important in family businesses, where it is too often the case that the CEO fails to share real knowledge of what he or she does with other executives.
  • When necessary, the board should engage a consultant with experience working with family businesses in succession planning.
  • Family members should understand and agree that proper succession planning is in the best interest of all family shareholders, not just those working at the company.
  • Family executives should undergo a thorough skills assessment to help gauge their potential, so cross functional or other training can be provided.
  • The family should agree to the possibility of an outsider as potential CEO if it is in the best interest of all shareholders.

Planning Ahead

In conclusion, the last thing you want is to be caught, like a deer in the headlights, without a sustainable succession plan. This requires discipline and vision. Consider where your business is going, not just where it has been. Recruit board members that are outside of the family and industry; a cross-disciplinary board is better prepared to anticipate the needs of the future, not catch up to them. And make succession planning the backbone of all your leadership positions. In the Scouts’ enduring leadership motto, “Be Prepared.”

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