CEO Succession – An Example from British Petroleum (BP)
On July 27, 2010, the Board of Directors at British Petroleum (BP) announced that Robert Dudley will replace Tony Hayward as Group Chief Executive Officer, effective October 1, 2010. This blog entry will share some of the existing literature and research findings on CEO selection. The intent of this entry is not to place BP, its board, or its managing executives in a negative light, but to compare the BP real-life scenario to theory and practices in the leadership selection process.
Corporate Board Responsibility
First, and most important, I extend my deepest and sincerest condolences to the families and loved ones of those who lost their lives in the explosion from the deepwater drilling. Hopefully, the BP Board of Directors and executive management team has done the same in addition to setting up a $100 Million Fund for workers and families impacted. It can be difficult in trying to place a price on the loss of human life. On the one hand, $100 million is a significant amount of money. On the other hand, $100 million to a company that consistently reports annual profits in the tens of billions of dollars is miniscule.
The corporation’s board of directors is accountable for CEO selection. Selecting a Chief Executive Officer is a crucial decision an organization makes. CEO selection is a reflection of the organization’s identity – its culture, people, strategy and structure, and environment. Simultaneously, Corporations are faced with the challenge of developing leaders, but corporations have not developed enough talented leaders to successfully fill the internal pipeline with CEO level candidates. As a result, a number of corporate boards now make it a requirement for the current CEO to help develop and groom a successor. Further, corporate boards now evaluate and compensate CEO’s on their ability to execute this critical assignment. Yes, company performance is a major measuring stick, but so is executive development to ensure longevity and sustainability of corporate operations.
Internal CEO Selection
In order to promote an executive from within the company to the level of CEO, there has to be a succession planning process and an executive development process where internal candidates are groomed for the CEO position. According to Mr. Dudley’s biography and accomplishments listed on the BP website, he has been extremely successful in his various roles. There are only a few executives within a corporation that would possess the knowledge, skills, and abilities to develop the company’s next CEO – the existing CEO; a prior CEO serving on the corporate board; or a corporate board member who has CEO experience from an outside company. The BP website did not give any information if Robert Dudley was developed and groomed by his predecessor, Tony Hayward, or by other board members. The information given was that the existing CEO is being replaced, and the new CEO has been chosen from within the organization.
From an alternative viewpoint, “promoting from within” is a positive sign to an organization’s employees. It demonstrates that hard work and appropriate employee development will be rewarded with additional responsibility and authority. A crucial selling point to newly recruited executives is the ability to grow and move up within the company. If a corporation does not have the development and succession planning processes in place to help their employees advance, talented executives from outside of the organization may be skeptical about joining such an organization.
Societal Perspective
During the past two months, one of the questions I have asked in both graduate and undergraduate business classes is “because of the BP accident in the Gulf of Mexico, will you still purchase products and services from the company?” The classes included were: Organizational Theory and Behavior; Management and Supervision; Critical Thinking; Organizational Analysis; and Introduction to Research.
Although this approach constitutes a highly informal survey, the responses were an overwhelming “yes”. The general consensus was if consumers were to boycott or refuse to buy goods and services from every company that makes a mistake, there would be very few companies to purchase any goods and services from. The amount of adult learners who emphatically stated that they would not use BP products and services was minimal. There were more respondents who stated that they did not give any consideration to the leadership selection or practices of the gasoline stations they went to. The only concern was one of the prices of the gasoline.
Final Thoughts
An additional critical role of the corporate board of directors is to protect the investments of the corporation’s shareholders. The board is responsible for reviewing the corporate strategies and processes for providing a return on shareholder investment. When selecting a new CEO, the board is communicating to the investment community their confidence in identifying the right leader.
Selecting an external CEO implies the organization is changing its direction and possibly its overall corporate vision. Selecting an internal CEO implies the existing direction and vision is fine. Monitoring the fluctuations in BP stock prices will give a clear indication of the investment community’s perspective and acceptance of the newly appointed leader. Of course, the true societal and investment community reaction will be seen at the end of the 4th Quarter of 2010 when Robert Dudley has been in the role for 90 days.
More information on CEO selection and can be reviewed in Corporate Leadership Selection: Impact on American Business, Employees, and Society (Authorhouse Publishing).
Feedback to this blog entry is always welcome.
Saturday, July 31, 2010
Sunday, July 11, 2010
What’s UP (Weekly, Hot, Applicable Topic Summary - Unbiased Perspective)
Luring and Retaining Top Talent – The Compensation Game
The entries in this blog have always pertained to current issues and management trends of the 21st Century business environment. This bi-monthly entry will address an interesting activity which has been highlighted in both the business world and the sports world with much anticipation and fanfare – LeBron James and the creative incentive packages this star athlete has been offered. These salary packages and perks can readily be compared to the salaries and perks offered to “star” executives and top talented employees at numerous corporations.
Similarities and Differences in Management Approach
Some of the reported salary terms and perks presented to LeBron - also known as LBJ - were $30 million/year in salary; a lifetime supply of beer (not sure if there are many people who make $30 million/year that can’t already supply themselves with enough beer for a lifetime); and a personalized episode of a cartoon show called Family Guy. These were some of the “goodies” the Cleveland Cavaliers offered in order to keep their top talent. There was no mention if there was any communication between the organization and LeBron James to see if these were the types of compensation and perks that he was looking to receive.
According to the Wall Street Journal (July, 2009), some of the biggest banks (who also received federal financial assistance) offered multiyear/multi million packages, not only to retain their own talent, but to also lure top talent from competitors. This trend of offering salaries at the top or above the “normal” pay scale has drawn additional scrutiny for a couple of reasons. First, when major banks and lending institutions requested federal financial assistance, was compensation for luring and retaining top talent the primary intent? Second, it is one thing for profitable and successful organizations to offer hefty compensation packages. It is something different for unprofitable and unsuccessful companies to also offer similar types of salary packages and perks. However, the attitude and behavior is almost necessary by the smaller and less profitable organizations if they want to try and remain competitive. In the sports world of the National Basketball Association (NBA), this is equivalent to currently unsuccessful franchises like the New York Knicks or the Los Angeles Clippers offering LeBron James $30 million/year.
The notable differences observed between offering huge salaries in the business world and the sports world is the business world’s concept of a hefty salary is $2-3 million/year, whereas the NBA is offering $20-30 million/year. In the business world, the leader’s integrity is questioned for making such offers. In the sports world, the leader’s sanity is questioned. A final observation is the federal government is paying close attention and is considering a means to regulate compensation in the business world. The federal government has not considered regulating compensation in the sports/entertainment world – yet.
Pay to Play
From another perspective, organizations that choose not to compete for top talent with large salaries and exorbitant perks stand to lose out. In the business world, loss of top talent may result in poor productivity and effectiveness. Loss of talented employees may also mean a loss of investors or a lower valuation of the company’s stock. In the sports world, the loss of top talent could result in a loss of fan support or maybe a relocation of the sports franchise. In both cases, a leadership decision of opting not to play along can be just as costly as conceivably overpaying a highly talented star.
There are no guarantees that bringing in top talent from another organization will result in success. The environment and surroundings that helped the star in the prior environment might not be in place in the new environment. Establishing a cohesive and highly productive unit occurs over time by working together with other teammates; not in the negotiation or selection phase which is conducted by the organization’s leader(s).
Nonetheless, the ultimate winner or loser will be the customer and/or sports fan. Some way, somehow, the organization will devise a means of relaying the expense to those who use, view, or enjoy the organization’s products and services. Compensation entails a number of components: base salary; short-term incentives; long-term incentives; employee benefits (i.e. health, medical, tuition reimbursement, etc.), and perquisites or perks. Because the organization’s objective is to make a profit, the employee compensation expense is transferred to the customers/fans by raising the price of the goods and services offered.
Final Thoughts
Based on one’s ethical values and beliefs, offering large salary packages to talented “stars” may be inappropriate management behavior. How can a company justify hefty salary increases and bonuses, especially if the company is not profitable? However, some may view the tactic of offering large salary packages and bonuses as a savvy business decision, or as a necessary evil. Organizational leaders in today’s business environment must carefully walk that fine line and make choices.
First, a leader must decide if they are going to actively engage in the competition to lure and retain top talent. Second, a leader must decide to what extent (or just how much) they are willing to offer and invest in a talented player. But most important, a leader must determine how to COMMUNICATE their decisions to the rest of the organization and its stakeholders in order to ensure the desired productivity and effectiveness of the team is not diminished. It is a very challenging task to navigate. On the one hand, it can be very successful and result in a championship or increased profits. On the other hand, the decision has the potential for chaos, low morale, and team dysfunction. It can be a distasteful, unsavory situation to be in. Those on the outside looking in will have mixed emotions; some will like the decisions; some will not. But in the words of my sons’ generation, “don’t hate the player – hate the game.”
More information on the selecting and retaining top talent can be reviewed in Corporate Leadership Selection: Impact on American Business, Employees, and Society (Authorhouse Publishing).
Feedback to this blog entry is always welcome.
The entries in this blog have always pertained to current issues and management trends of the 21st Century business environment. This bi-monthly entry will address an interesting activity which has been highlighted in both the business world and the sports world with much anticipation and fanfare – LeBron James and the creative incentive packages this star athlete has been offered. These salary packages and perks can readily be compared to the salaries and perks offered to “star” executives and top talented employees at numerous corporations.
Similarities and Differences in Management Approach
Some of the reported salary terms and perks presented to LeBron - also known as LBJ - were $30 million/year in salary; a lifetime supply of beer (not sure if there are many people who make $30 million/year that can’t already supply themselves with enough beer for a lifetime); and a personalized episode of a cartoon show called Family Guy. These were some of the “goodies” the Cleveland Cavaliers offered in order to keep their top talent. There was no mention if there was any communication between the organization and LeBron James to see if these were the types of compensation and perks that he was looking to receive.
According to the Wall Street Journal (July, 2009), some of the biggest banks (who also received federal financial assistance) offered multiyear/multi million packages, not only to retain their own talent, but to also lure top talent from competitors. This trend of offering salaries at the top or above the “normal” pay scale has drawn additional scrutiny for a couple of reasons. First, when major banks and lending institutions requested federal financial assistance, was compensation for luring and retaining top talent the primary intent? Second, it is one thing for profitable and successful organizations to offer hefty compensation packages. It is something different for unprofitable and unsuccessful companies to also offer similar types of salary packages and perks. However, the attitude and behavior is almost necessary by the smaller and less profitable organizations if they want to try and remain competitive. In the sports world of the National Basketball Association (NBA), this is equivalent to currently unsuccessful franchises like the New York Knicks or the Los Angeles Clippers offering LeBron James $30 million/year.
The notable differences observed between offering huge salaries in the business world and the sports world is the business world’s concept of a hefty salary is $2-3 million/year, whereas the NBA is offering $20-30 million/year. In the business world, the leader’s integrity is questioned for making such offers. In the sports world, the leader’s sanity is questioned. A final observation is the federal government is paying close attention and is considering a means to regulate compensation in the business world. The federal government has not considered regulating compensation in the sports/entertainment world – yet.
Pay to Play
From another perspective, organizations that choose not to compete for top talent with large salaries and exorbitant perks stand to lose out. In the business world, loss of top talent may result in poor productivity and effectiveness. Loss of talented employees may also mean a loss of investors or a lower valuation of the company’s stock. In the sports world, the loss of top talent could result in a loss of fan support or maybe a relocation of the sports franchise. In both cases, a leadership decision of opting not to play along can be just as costly as conceivably overpaying a highly talented star.
There are no guarantees that bringing in top talent from another organization will result in success. The environment and surroundings that helped the star in the prior environment might not be in place in the new environment. Establishing a cohesive and highly productive unit occurs over time by working together with other teammates; not in the negotiation or selection phase which is conducted by the organization’s leader(s).
Nonetheless, the ultimate winner or loser will be the customer and/or sports fan. Some way, somehow, the organization will devise a means of relaying the expense to those who use, view, or enjoy the organization’s products and services. Compensation entails a number of components: base salary; short-term incentives; long-term incentives; employee benefits (i.e. health, medical, tuition reimbursement, etc.), and perquisites or perks. Because the organization’s objective is to make a profit, the employee compensation expense is transferred to the customers/fans by raising the price of the goods and services offered.
Final Thoughts
Based on one’s ethical values and beliefs, offering large salary packages to talented “stars” may be inappropriate management behavior. How can a company justify hefty salary increases and bonuses, especially if the company is not profitable? However, some may view the tactic of offering large salary packages and bonuses as a savvy business decision, or as a necessary evil. Organizational leaders in today’s business environment must carefully walk that fine line and make choices.
First, a leader must decide if they are going to actively engage in the competition to lure and retain top talent. Second, a leader must decide to what extent (or just how much) they are willing to offer and invest in a talented player. But most important, a leader must determine how to COMMUNICATE their decisions to the rest of the organization and its stakeholders in order to ensure the desired productivity and effectiveness of the team is not diminished. It is a very challenging task to navigate. On the one hand, it can be very successful and result in a championship or increased profits. On the other hand, the decision has the potential for chaos, low morale, and team dysfunction. It can be a distasteful, unsavory situation to be in. Those on the outside looking in will have mixed emotions; some will like the decisions; some will not. But in the words of my sons’ generation, “don’t hate the player – hate the game.”
More information on the selecting and retaining top talent can be reviewed in Corporate Leadership Selection: Impact on American Business, Employees, and Society (Authorhouse Publishing).
Feedback to this blog entry is always welcome.
Subscribe to:
Posts (Atom)