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For some chief executives there is no easy way out

15 May 2018 by Anthony Hilton

For some chief executives there is no easy way out - Read more

Succession planning for a charismatic CEO is a thankless task

Sir Martin Sorrell’s decision to step down from the chief executive role at WPP was nothing if not unusual. He had been in office for more than 30 years, but showed no intention of stopping. His board at the AGMs gave credence to a succession policy, but no one was ever appointed, nor made heir apparent.

In the end he fell foul of governance – although not the kind he wanted or expected. The allegation was of personal misconduct, which he strenuously denies, but he decided to resign anyway – and
keep his bonus shares.

Now the knives are out, not for him but for the company he created. Nobody seems to believe business will go on as usual and even the succession planners do not seem to be sure whether they have got the right people and whether they can keep the company intact.

Instead investment bankers are running their numbers to see what could be auctioned; the heads of the global agencies like Ogilvy and J Walter Thompson will wonder whether they might engineer a buy-out.

Kantar, the data business, is already being rumoured as the target of a £3 billion bid. The public relations division, where Finsbury is highly thought of, is also eyed.

As Citigroup says, the risks to the business in account losses, a leak of talent, a break up or sale of some divisions and a general ‘deep restructuring with a great deal of cost and uncertainty’ do not bode well for the immediate future.

So the board is in a dilemma. Should it have insisted, for example, that Sir Martin step down years ago? If they had, one would imagine the next in line would have had troubles of their own, given the aspirations of Facebook and Google in the advertising space, and might well have made a hash of it.

Alternatively they might well have wanted a demerger, or at least significant disposals, and thereby put a kibosh on the designs of their predecessor, who never disposed of anything.

“Ultimately WPP's board found that the succession was in the lap of the gods”

Maybe a new chief executive would not be able to muster the same devotion to numbers or the former boss’s astonishing work ethic. Meanwhile Sir Martin would be out in the world, doing his own thing.

Or should a board, as this one did, allow the chief executive free rein, in spite of his years, in the hope that an orderly hand over would be agreed some time before too long? Ultimately they found that the succession was in the lap of the gods.

They are damned if they do and damned if they don’t. A robust succession would have angered Sir Martin and probably also the shareholders – or some of them at any rate – given the row that ensued at the London Stock Exchange with the defenestration of the CEO Xavier Rolet last year.

So they did nothing. For a while the board was without its chief executive – which, to say, the least is a misfortune.

The question is whether anything can be done about it. Anthony Fitzsimmons of Reputability argues something can be, in some instances, though only with considerable effort – and skill. In an article for Financial World he looked at Independent Insurance and Royal Bank of Scotland at the time when Michael Bright and Sir Fred Goodwin were active.

In the 1990s, Bright created Independent Insurance and in eight years it raised its value eightfold. The Financial Times made him Business Entrepreneur of the Year in 1996 and he was president of the Chartered Insurance Institute in 2000.

But he was failing to keep pace with his liabilities and gradually he used fraud where the accounts should have been, hiding £100 million, undervaluing claims, and concealing documentation from the auditors.

But his board did not know – and in spite of back-handed jibes about the company from other insurers, they continued not to know until it was wound up. Bright subsequently was prosecuted and locked up, but the shareholders got nothing.

Sir Fred Goodwin of Royal Bank of Scotland, Fitzsimmons’ other example, has been well documented and it suffices to say conduct, overbearing nature and racy accounting all came in the purview of the board. Again the alarm bells were silent.

Fitzsimmons’ view was that while competences determine what a chief executive can do, character and environment distinguish what they will do, so that traits such as charisma, self-confidence, drive and enthusiasm are double edged.

To combat this, boards need better skills. Fitzsimmons found that of all the NEDs in the FTSE 100 only 3% professed a background in education, social sciences, psychology or human resources. Instead boards had ‘relevant’ attributes such as management discipline.

But the need for self-awareness and effort to overcome cognitive biases like over-confidence are actually what boards should be about.

Anthony Hilton is financial editor of the London Evening Standard

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