Why every company needs a Plan B

Sir Stuart Rose was unable to tell impatient investors who would succeed him as chairman when he announced improved results at Marks & Spencer last week.

Meanwhile, stories emerged that HSBC briefed key shareholders that its chairman will be replaced by a non-executive outsider. That came after leaks that the chairman of rival Lloyds bank had sounded out a former minister to takeover from Eric Daniels as chief executive.

Businesses are damned if they have not lined up a new boss in case a vacancy arises but lambasted if the world learns they are doing it. Successful succession planning is not easy.

David Peters, the managing partner at Heidrick & Struggles, a headhunter whose job is to help companies fill those holes at the top, says: "A badly handled or turbulent transition from one chief executive to another can have a damaging effect on the value of a company. But it's not unusual, even in the biggest companies, to find the attention that needs to be spent on the succession planning at the top is not as thorough as it should be."

Businessmen look enviously at the success of Tesco in preparing its future leaders. In 1959, the supermarket group's founder, Jack Cohen, recruited Ian MacLaurin, who worked his way up from shop floor to boardroom, becoming chief executive, then chairman. MacLaurin spotted the talent of young Liverpudlian Terry Leahy, who joined the group in 1979, and mentored him to be his successor. Lord MacLaurin admits the appointment was his most important piece of management and, after 13 years at the top, Sir Terry is schooling the people to follow him.

This smooth transition has allowed the retailer to report steady growth. It contrasts with Marks & Spencer, where the story for more than a decade has been of boardroom bust-ups and backstabbing.

Faced with criticism for occupying both the chairman's seat and the chief executive's chair, Sir Stuart Rose has had to agree to vacate both – but his speed of departure was too slow for shareholders, who tabled a resolution at the last annual meeting demanding his early exit.

The group paraded three potential inside candidates to replace him as chief executive last autumn, but when the appointment was made the board went outside and poached Marc Bolland from rival retailer William Morrison. The disappointed insiders, noses inevitably put out of joint, have started to depart, but it was six months before Bolland was released by Morrison and the transition is still incomplete because a replacement for Rose as chairman has not yet been found.

Roger Carr, who chaired Cadbury until this year's takeover by Kraft, was ruled out of the running last week and Rose admitted the search continues. "I said we'd appoint a new chairman and we'd hand over the baton without dropping it," he said last week. "The business of finding a chairman is well in hand and we'll announce that as soon as we're ready – and we're not ready yet. Then in due course there will be a transition and I'll disappear."

Clearly Morrisons had no Plan B in case it suddenly lost its head either. It decided it did not have an internal candidate ready to promote so began a long search outside. Peters, the headhunter, thinks the succession process should start long before the vacancy arises. "A good company would not only have an internal bench for the chief executive role of two or three candidates who are prepared and ready to step up, it would also have a programme of potential external chief executives," he explains.

These external candidates might not be approached – especially if they are working for direct competitors – but a headhunting firm should know the strengths of possible recruits and whether they could be available.

Compiling that list is the job of the chairman, who usually also heads the nominations committee. The job of nurturing insiders lies with the chief executive, though his success should be monitored by the chairman.

But who recruits a new chairman? The current chairman may well be involved but the selection is frequently delegated to the senior independent director – though that assumes that director has no plans for moving in to the job himself. And if either the chairman or chief executive face being fired, they can hardly be expected to participate in their own execution.

Even the new UK Corporate Governance Code, finalised last week, remains remarkably vague on the importance of succession planning, never mind the procedures. It is a problem to be faced by Sir John Sunderland, Carr's predecessor at Cadbury who was made chairman of the governance committee last week.

It is also a matter that concerns Marks & Spencer's company secretary, Graham Oakley, who wrote to the committee ahead of Sunderland's appointment to say: "More guidance would be helpful on the role of the nomination committee, and in particular, consistency around leadership development and succession planning within the organisation and on the shareholders' expectations on the level of disclosure required."

It is that question of how much investors should know that catapulted HSBC and Lloyds into the news. Guidance to HSBC's institutional investors on when Stephen Green, 61, might step down from the bank, and the likelihood of former Goldman Sachs banker John Thornton succeeding him, may have been intended to test the reaction and try to avoid sudden shocks, but the news caused surprise anyway.

Lloyds meanwhile has faced shareholder demands for heads to roll since its disastrous takeover of HBOS. Sir Victor Blank bowed to pressure to go last year but no understudy was lined up. Win Bischoff ultimately stepped in but the pressure on the chief executive, Eric Daniels, has continued. With the former Labour Trade minister, Lord Davies, who had previously run Standard Chartered bank, losing his job after the election, Bischoff sounded him out as a successor to Daniels.

The chairman's conversation may have been good succession planning, but the leak could only undermine the position of the incumbent chief executive, whether or not he plans to go.

Peters says: "If you're replacing existing chief executives because they have failed in their roles, there is an obligation to manage that with extreme confidentiality. That's confidentiality from the point of view of the incumbent and the world at large."

Companies not only need good planning for an orderly handover of top jobs, they need contingency plans in case a senior director quits for a better position elsewhere, is forced out by scandal or is even run over by the proverbial bus.

When BP's former chief executive, Lord Browne, suddenly resigned three years ago he was instantly replaced from within the oil company by Tony Hayward. However, it took the group 17 months to find a new chairman before Carl-Henric Svanberg was appointed last summer.

With the company now under intense political pressure because of the oil spill off America, it is hard to imagine that BP does not have replacements ready in case top management has to be sacrificed.

"It's all about risk management," says Peters. "And leadership risk is probably the biggest risk anybody has to manage. If you've not got a contingency plan, you're in trouble."

Philippe Truffert: The men at the top who cling on to power

Carpe Diem Coaching

Why do so many publicly quoted companies reveal themselves to be so poor at planning and managing a smooth succession programme for their next chief executive? Often it's simply because their boards are dominated by chairmen who don't want to give up their power. It's usually because he – and it usually is a he – has succeeded, over time and helped by some clever appointments, in taming his board and delaying the process of hiring the new boy. The dangers for boards of having executive chairmen is that they accumulate the power of supervision as well as the power of execution. This pernicious process is like having a prime minister rule over a subservient parliament, just as monarchs used to do before the separation of powers between the legislative and executive branches of government. But executive chairmen, unlike kings who worried about their blood succession, are often incapable of planning their own succession because they look upon it as a demise, a sort of forced abdication to an outside adversary.

As a coach, I see this time and again. For the executive chairman, planning his succession is at best like staring retirement in the eye, or at worst writing his own obituary. Very few will willingly talk about a successor other than in a cursory way because, when you are top dog, the world conforms to your will. You will never get anything better. Why would you want to relinquish that when you feel you have all the skills and energy to continue overseeing the fortunes of the firm?

If you think you had a good run and are prepared to hang up your spurs, then fine: you can you look upon succession magnanimously. Otherwise, just forget it.