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Today’s financial results for WorleyParsons (ASX:WOR) make a happy swan song for the engineering firm’s chief executive, John Grill, who is leaving the role after 41 years.
The company posted a 24.7% rise in revenue to $7.4 billion and a net profit after tax profit of $353 million. The profit is down a bit (3%) from last financial year, due to acquisitions, and underlying profit increased 15.8%. A handsome goodbye.
Grill’s departure after such an astonishing length of time in the job throws up special challenges for his successor, Andrew Wood, who is currently the group managing director.
Stepping into the shoes of a long-standing leader presents a special set of challenges for board, the departing leader, the new appointment and the company as a whole, experts tell LeadingCompany. It’s a challenge that several top companies are currently facing: blood products company, CSL; freight company Toll Holdings; manufacturer, Hills Holdings; and sportswear company Billabong, to name a few.
In the near future, many more private and public companies will struggle to keep the ship steady while a leadership transition is made. As today’s Suncorp survey reveals, the average age of the leaders in our top 50 listed companies is 53; they are approaching retirement.
In private companies, especially family-owned ones, the issue is a live one, the CEO of Family Business Australia, Philippa Taylor, says. “We are seeing more and more of it in family businesses, and in some cases the next generation are not willing or able to take on the leadership role.”
For longstanding CEOs, it can be a challenge just to step down, Taylor says. “A successful transition depends on the ability of the existing CEO to completely relinquish their position. Many take on the role of chairman, which can create issues when they are overseeing a role that they have just left.”
Adelaide company, Hills Holdings (ASX: HIL) – best known for its iconic washing lines the Hills Hoist – was a family company until it listed in 1999. Hills recently appointed former Telstra executive Ted Pretty to the top job of managing director. The incumbent, Graham Twartz, had been managing director for only four years, but spent the 15 years prior to that as finance director at Hills. Big shoes to fill.
The best way to replace a long-standing leader is by grooming a successor in the role, says Martin Nally, managing director of human resources company, hranywhere. “Some people will wait around and learn from the guru,” he says. “The best thing is to bring someone in early.”
This is the case for WorleyParsons; Wood has spent 18 years with the company.
In Hills’ case, Pretty is a newbie. “If you are going to parachute someone in from outside, they have to be up to the challenge,” Nally says.
He points to the example of Westpac’s Brian Hartzer, anointed as a potential successor to CEO Gail Kelly, but without a time frame, promises or guarantees. “He has been you perfect low-level year, with a vision but not out-there.”
Taylor says a leader taking over from a long-standing CEO needs to understand the existing culture of the business. “Some families do it well; they document the history of the business, and they have an induction for every employee, especially leaders, where they meet the family, and find out about the history of the family and the culture of the company – how we do things around here.”
Nick Waterworth, the CEO of recruitment company, Watermark Search International, says leaders in this situation require certain personality traits. “If you appointed someone who is strongly egotistic, it would not work in this situation because they have to be subordinate before they get the reins and take over.
“I am not talking about a shrinking violet, but they must be able to work in a team of two and understand they have to wait to get the reins.”
Brian McNamee has been the CEO of blood products company, CSL, for 23 years. His resignation has been flagged a year ahead of time – he will leave in July 2013. The CSL board has announced his successor – Paul Perreault, currently president of CSL Behring – with plenty of time induct him.
The board’s role is especially important in any change of leadership, but more so in the case of long-standing leaders, Nally says. “If the leader has been there 20 years, the board has to say, ‘Where are we going to go, what is the structure we need to get there’, and then build that structure,” he says. “Otherwise the company is really going to come a cropper. It is the board making the decision and then the grooming starts of someone underneath.”
Replacing a longstanding CEO is generally a sought-after position because the leader has usually been doing a good job and the company is stable, Nally says. This allows the new leader to come into a situation where the short and medium-term business horizons are stable. “So the leader thinks, I have to maintain the stability, and that gives me the largess to look to the future and create a vision.”
It’s not always smooth sailing when long-standing CEOs leave. Billabong’s new CEO, Launa Inman, took over from the 20-year incumbent Derek O’Neill in May this year, when the business was in a downward spiral and subject to a private equity takeover bid. Just four months into the role, Inman announced a $275.6 million loss, and explained to shareholders that it would take four years to turn the company around. “In that case, the first horizon goes on for ages because the business is not stable,” Nally says.
The chair plays an important role in this kind of leadership transition, Waterworth explains. The chair needs to make it clear to the new leader what their role is, when they are going to get the reins. “The new leader needs unfettered access to the chair,” Waterworth says. “If they are shielded from the chair and working like a normal executive it is not going to work. They need to get some mentoring.”
However happy the board and shareholders have been in the past, a new leader signals at least some need for change, says FBA’s Taylor. In family businesses, a helpful tool in making a successful transition can be to establish a family counsel. Taylor says: “The family counsel is not strategic or executive; it is just there to feed the expectations of the family through to the CEO.”
The trickiest element for the new leader is decided when and how to make their own stamp. Waterworth says: “They have to keep what is good, but be prepared to bring their own style and ideas. It cannot be change for change’s sake, but they must communicate that they are now the CEO, that before it was that person, now it is me, and while not everything is going to change, some things are.”
Wesfarmers CEO Richard Goyder, the former chief financial officer who took over from a long-standing and widely respected Michael Chaney, is a good example of this issue. Goyder’s ambitious $20 billion acquisition of Coles in 2007 added to an entirely new business to the original company, and stamped his leadership clearly on the entire operations.
Failing to make changes can be just as damaging as making them too fast, and lead to employee disengagement, Waterworth says. However, shareholders also need to be convinced of the case for change. For example, when Goyder diversified Wesfarmers, he risked the ire of shareholders who had bought into the company when its business was narrower. Fortunately, the acquisition has been so far been a successful one for Goyder’s company and its shareholders. This year, Wesfarmers announced an uplift in revenue (6%) and net profit after tax (11%).