At Loose Ends, Boards Turn to Recruiters

High CEO turnover coupled with boards' poor succession planning is increasing the demand for the services of executive recruiters. Companies including Payless ShoeSource, Radio Shack, Liz Clairborne and Big Lots all tapped executive recruiters last year to hunt for a new CEO.
Although there are legitimate reasons to look outside the company to fill a CEO vacancy, governance groups bemoan boards' bringing in new CEOs from the outside because companies are more likely to end up paying more for that candidate than they would for someone in-house.
Executive recruiters are caught up in this vortex of criticism, and are being pegged as part of the problem of escalating executive compensation. But experts say that recruiters can serve as vital consultants to compensation committees in fulfilling their succession planning duties, and help to bring executive compensation levels lower.
Experts say boards should engage advisors long before their CEOs retire to help assess in-house talent and, when necessary, to bring in professionals to keep the executive bench loaded with talent. Then, it's the duty of the comp committee to structure pay packages that keep these top-flight employees around as boards develop CEO succession plans.
"Boards have to increase the number of choices they have [in-house]," says Roger Kenny, co-founder of executive search and board consulting firm Boardroom Consultants. "They have to add to their bench strength and make sure there's more than one choice."
With CEO turnover rates climbing every year, succession planning has become an increasingly vital chore for boards. Globally, 15.3% of CEOs departed in 2005, according to Booz Allen Hamilton's research of the world's 2,500 largest publicly traded companies. That's up 4.1% from 2004 and 70% from a decade ago.
This turnover is highlighting a failure of many boards. Recent research on boards and succession planning has revealed disturbing results. A survey of directors conducted by Corporate Board Member magazine and Towers Perrin revealed that 40% of boards would not be able to promote someone from within the company to CEO, even if they had a year to prepare.
Developing a succession plan may require boards to stock up on talent further down the ranks. Some companies balk at paying top dollar for a strong bench, but experts say that doing so will save a company money in the long run. "Companies may claim that they can't afford the bench strength," but in reality, "they can't afford not to have it," says Kenny.
Melvin Yellin, a comp committee member with Symbol Technologies, adds that the real risk lies in "not paying people fairly” because, among other reasons, “headhunters check to see if someone's underpaid."
Despite the emphasis on succession planning, many companies are facing a CEO succession without a viable internal candidate. In these cases, executive recruiters become a board's best friend. Of course, some companies’ search committees, which often have comp members on them, work with an executive recruiter simply because they want to keep their options open between internal and external candidates.
In 2006, a slew of major companies worked with executive recruiters to locate candidates to fill  CEO vacancies. Liz Clairborne announced in its 2006 proxy statement that CEO Paul Charron would be retiring. In response, the board formed a search committee and "engaged an outside executive search firm" to help identify a new candidate.
In a Form 8-K in June, Wendy's International revealed its choice of search firm Russell Reynolds Associates to work with the search committee in identifying a new CEO. Cooper Tire & Rubber Co., in a Form 8-K filed in August, disclosed that its search committee would be working with Spencer Stuart to identify CEO candidates "with proven track records in the automotive or other durable goods industries and sound operating experience in managing growth and cost in a global corporation."
Clorox Co., like McDonald's Corp. and other companies before it, discovered last year just how important an ongoing succession planning process is. According to its October proxy statement, former CEO Gerald Johnston was forced to retire for "health-related" reasons. This unfortunate event forced the company to tap Spencer Stuart to find a new CEO, which ended with the hiring of Donald Knauss, a former executive of The Coca-Cola Co. When companies are forced to go after outside candidates, executive compensation can get out of hand. Robert Stucker, chairman of the law firm of Vedder Price, who represents both board search committees and CEO candidates, explains that executives won’t leave what they’ve got unless the new company makes them whole on what they’re already getting.
Of course, the search committee doesn’t have to take the recommendation of the search firm, says Paul Dorf, managing director of Compensation Resources. They can say the candidate is too expensive.
But that still leaves boards empty-handed if they haven’t done their succession planning properly. Working with executive recruiters to keep the executive bench strong is an obvious way to avoid being forced into hiring an external candidate. But even this route is fraught with potential problems.
“I believe that hiring from outside into senior line management positions is an act of desperation that rarely works out well for anyone,” says Norm Augustine, chair of the compensation committee at ConocoPhillips. By contrast, he adds, hiring into a senior staff position and then moving that person into a line position after a few years works well.