What the Merrill Debacle Teaches Us About CEO Succession

Last Updated Nov 6, 2007 2:11 PM EST

The fact that the Merrill Lynch board accepted the so-called retirement of Chief Executive Officer Stanley O'Neal and then designated a board member, Alberto Cribiore, to lead a search committee to replace O'Neal reflects a complete failure of CEO succession planning.

I'll tell you what they did wrong, and then I'll offer the best practices that I've seen elsewhere.

The heart of the problem was that O'Neal did not choose to build a stable team of talented executives around himself. He promoted and then fired, creating a kind of churn. Obviously, he didn't want to allow any executive to blossom to the point that he or she could become positioned to one day lead the company. That was a bad strategy and the board of directors should have called him on it.

The reason the board didn't call him on it was that O'Neal handpicked the board members, another violation of the best practices that have emerged. Merrill's board members were beholden to O'Neal and therefore unable to challenge him, in the right sort of way.

The right way to manage a CEO success process can be seen at companies such as Procter & Gamble, United Parcel Service and Johnson & Johnson. At P&G, for example, CEO A.G. Lafley spends a hefty percentage of his time assessing several tiers of high potential executives beneath him. He does that in cooperation with an empowered Human Resources executive, Dick Antoine. The board goes out on visits to plants and R&D labs and other facilities and meets the "high potentials." So the board knows who is being groomed and has personal contact with them. The exposure to the business also gives the board a certain gravitas in engaging with Lafley.

One key to making this all work is that there is a level of trust between Lafley and his board, and between Lafley and the executives beneath him. He does not worry that a hostile board will suddenly force him out and replace him with a bright lieutenant, or that an ambitious underling will conspire with a favored board member to stage a putsch.

So trust has to be developed among the players and the process of identifying and grooming successors has to be transparent and robust. None of this was in place at Merrill Lynch. As a result, it is a leaderless firm at a moment of tremendous peril. in the credit markets. The firm could remain leaderless for months. My experience suggests that it will muddle through at best and perhaps make a serious mistake. The tragedy of what happened at Merrill may not be over yet.