A conversation with the Harvard Business School professor.

Question: Why are "inside outsiders" the key to succession planning?

Joe Bower: In academia, in the beginning of the late ‘80’s and then into the ‘90’s, there was this idea being sold, particularly by organization economists that basically you could break up big firms and create more value because the corporate offices of these things was only overhead.  And that seemed wrong because actually if you were – if you believed in markets, you looked around the world and you saw an awful lot of big multi-business firms and they were prospering.  So, I thought I would spend some time exploring what I called corporate value added.  And I did that and all of a sudden it occurred to me that one of the things that was most closely associated with the creation of real value and sustained over long periods of time was management of succession.  And as soon as you say it, it’s pretty obvious that if you can continue to have good leadership, that’s going to be very important to a company, or to a nation for that matter.  When we study history, we see the same thing.

So, I did begin to explore and I studied CEO succession and that led to the book, because that’s the way academics communicate once they’ve got a body of knowledge.

Question: What's in it for a current CEO to think about his or her successor?

Joe Bower: Well, one of the critical findings was that the way you manage succession is basically the way you manage the company and companies that have problems with succession usually also begin to have problems with their business.  The two tend to go together.  Companies that are able to manage succession well have been investing in the development of leaders of their people at the same time that they’re developing businesses.  In any significant period of time, like several years—5, 10, it’s very, very hard to have a successful business without having great people running it.  This is a tough world that we live in today, lots of competition.  So, that emerged very clearly as one finding, and then there are lots of elements, which we can talk about if you want as to what it means to manage a company.

Question: How can boards evaluate candidates to succeed a CEO?

Joe Bower: Management succession begins with who you’re recruiting, how you bring them on board in the company, the career paths that are available for them, the training they get, the mentoring they get, the way in which they are developed.  So, a critical question that comes up all the time is: "We have a critical job that’s opening up that needs to be dealt with.  Who do we put in?"  In the world you just described, the simplest thing is to find the person who can probably do the best job and put him or her in at that point.  But that’s not what you really want to do.  You really also want to say, who has a good crack at doing that job, but would really grow because they had done it?  And that’s the story that is often used on this point is that of the career of Jeff Immelt.  He was brought in to turn around the home appliance business during a period of a big recall, and it was a nightmare, but he often says in discussing this that he’d never be the CEO of GE had he not had that really tough particular experience.

Question: What is an "inside outsider?"

Joe Bower: An inside outsider is someone who is growing up within the organization in just the way I’ve been describing.  He was recruited well, was developed and is identified as having potential and given more responsibility, but somehow has managed to also maintain a sense of where the world is going and what is going to have to change in the company if it’s going to be successful in the next period. Typically insiders are great, but by the time they get up to the very top, they’ve drunk the Kool-Aid and they really believe in their organization to the extent that they don’t see the need for radical change.  They know certain things have to change to do this, do that, and they tend to see things in terms of what you could do step-by-step.  But the world is changing very, very, very fast and that’s not enough.  And it’s often critical to see that real change is needed.

That’s what you look for.  I mean, typically we know, we see them in any organization they’ve been with.  They tend to be smart, they tend to be difficult, they don’t necessarily play well with others.  So, they need some work.  But that’s what it’s all about.  When you find those people and you can give them the management skills they need to budget well, to create teams, to lead teams, those are the things you can really help people with.  It’s very hard to give them that breadth of perspective, that maverick's willingness to see something and go after it even though no one else necessarily sees it.  And in organizations, you look for people like that and you try to develop them.

Question: What if the new CEO comes from the outside?

Joe Bower: Obviously a lot do and some succeed.  Generally, if you’re going outside, it means that the organization has failed.  It has failed. Either its performance is so bad that it’s clear that within the organization there isn’t someone who can see what needs to change.  Or they simply haven’t developed, it may be successful but for reasons as you have described there is a strong leader that has never developed others, there’s no one to take over who has the real strength.  A lot of school systems need change and they can’t get it from within because people from within don’t have the skill set.  One of the problems in universities is when you promote from within; very often you’re just promoting a good department chairman, or worse, just a good professor. Very few schools have a management development program.  We at Harvard Business School work very hard to make sure that those faculty who have the talent get a chance to administer over a decade so that when the time comes to pick a Dean, there are usually four or five people who have been running things and we can get a sense of whether they would be a good dean.

Question: What are some possible threats to future business prosperity?

Joe Bower: Our research project involved talking with a number of business leaders and showing them some of the scenarios developed by the World Bank for the long-term future and asking them what they thought it meant for business leaders.  And I’m in the middle of finishing with some colleagues a book that we hope will be a fantastic answer to your question.  But basically, what we can see is that the way things are playing out is very uncomfortable.  The future could involve substantial breakdowns so that the people who were involved in our research were very concerned about capital markets long before the crisis.  They saw the volatility, they saw the extent to which the capital markets were drifting away from their function of serving industrial markets and were simply trading systems, and they were very concerned about it’s implication. When you look at any set of forecasts, what you see is growing in equality of income within countries and then across countries really bad.  So that even though China and India, by say 2050 or 2040 are expected to have together as much as say 40 percent of the world's GDP, the people in those countries will still have incomes that are, like, a third of those in developed nations, on average.

And the averages are a problem because even if you look at those nations, what you see are... the poor are coming up, but we’re getting staggering – somebody said China now has 62 billionaires, something like that.  Well, that kind of inequality is very rough in an age where television makes everything visible to everyone... on their cell phones.  So, inequality then leads to migration.  That can be highly destabilizing. And so we see, for example, in Europe, a population that’s shrinking because of age, Western Europe, and what do the voters want?  The voters want more benefits, they want lower taxes, they want shorter working weeks, and they want no immigration.  So, what we’re looking at is... we’re moving towards a something that’s going to break down.

And so what is the role of business leaders?  The role of business leaders is, as a community globally, to recognize these problems and to start making a difference and interestingly, there are companies that are doing just that.  A few are based in the United States, more outside.

Question: What are some examples of companies making a difference?

Joe Bower: If you look at... China Mobile is getting most of it’s growth these days by bringing cell phones to essentially a million villages, they’re getting down to the village level.  They’ve built a distribution system that’s amazing.  With those cell phones, they can now provide market information to what are essentially farmers.  They’re going to probably, if the government will let them, provide banking for that.  So, it’s a business that’s a solution.  If these people are poor, bring them into the market system.  And we’re seeing if people don’t have homes, find a way to help them build homes, that’s what Cemex is doing.  And figure out how to distribute to that level and finance it.

Then if you look at something like IBM, IBM has put the headquarters of it’s market facing activities for emerging markets in Shanghai—not in Armonk—and they’re working to provide the information systems so that those companies who are trying to do that can do it.  That’s where the future of the market is.  Essentially the business version of that nightmare that I was describing is: Do you want to spend your life fighting for the one-third of the market that’s well developed and in which every company in the world is present and fighting, or do you want to be a leader developing the two-thirds of the world’s market that has no competition?  So, that’s taking that big problem that I described and saying, “Well, wait a minute, that’s a huge opportunity.”  And that I think is what’s before us.  We either develop that opportunity or face some very, very uncomfortable problem.  

Question: Why have we seen a dearth of leadership in the past decade?

Joe Bower: I don’t know.  It really bothers me.  Basically what’s happened is that the size of capital markets has become huge, and then trillions of dollars move around the world every day in the banking system.  The result is that you can really make huge sums of money in activities that are fundamentally trading or arbitraging and lots of capital in the financial system has gone into those businesses.  So, in financial service firms, we see proprietary trading, proprietary venture capital and so on, and then you do those activities and you can leverage it because the banks are willing to put in large sums of money.  The earning on those activities are much more attractive than conventional finance.  This is why we see the financial system, in effect, drifting away from the industrial and commercial system.  The industrial and commercial system is much more boring, it doesn’t seem to offer the kind or profits, it’s more complicated, than financial.  So, I guess I’m saying that the leaders of great financial institutions have found that they can make a lot of money by building organizations that in effect have traders.  And we can be critical of that, but that’s the way the markets have developed.

Recorded on April 1, 2010