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Wanted: A chief executive officer who is financially astute and tech-savvy and possesses strong leadership skills, vision and international experience.
This story first appeared in the July 23, 2012 issue of WWD. Subscribe Today.
Today’s leadership role is in flux as retailers morph into omnichannel organizations and consumers dramatically alter their shopping habits. The requirements for the ceo are changing, too.
According to management psychologists, executive recruiters and consultants, ceo’s need to be as well versed in the profit and loss and balance sheet as they are in merchandising, marketing, Facebook, Twitter, Pinterest and mobile technology. As a result, it has become increasingly difficult to find top talent that not only has the vision, leadership, execution and interpersonal skills but also the technological, supply chain logistics and international know-how to successfully lead a global organization.
As a generation of founder-entrepreneurs begins thinking about succession and Baby Boomers reach retirement age, boards are seeking ceo candidates who possess skills that are very different from those of the company founders. These founder-entrepreneurs are focused, appropriately, on the very vision that continues to drive their success. Succession planning is low on the priority list. Fashion companies in particular and retailing in general are characterized by a highly entrepreneurial spirit, and, for a typical founder, a company is not only a creative release and a source of wealth, it’s a way of life. Handing off the baton doesn’t enter into the conversation all that often.
And yet board members are required to be actively engaged in succession planning, homing in on a short list of candidates screened and ready should their ceo’s retire.
Consequently, discreet searches constantly go on in the industry. Still, this past year has seen quite a lot of activity in the c-level suites.
Ralph Lauren, 72, signed a five-year contract June 26 keeping him at the helm until 2017. And industry observers continue to watch with fascination Giorgio Armani, 78, who maintains a breakneck pace with his solely owned company. Asked in May about recent speculation about the company’s future and succession plans, Armani said that forming a foundation is one possibility, and that his family is equipped to carry on. “The foundation is only one of the possibilities; there is nothing substantial there. The continuity of the company is already well defined. I’ve had close collaborators for some time now that bring forward my work in the best of ways. The family, in addition, is integrated in the management of the company. I would say that the Armani Group is in excellent hands.”
Armani also remains disinclined to list his company, seek a partner or sell to an investment fund, for “one very simple reason: absolute independence. It is the element on which I have built my business and the last that I am willing to give up.”
Elsewhere on the high-profile ceo circuit, a search is said to be on for an eventual successor to Lew Frankfort, 66, at Coach Inc. Sources say Coach has hired Spencer Stuart to evaluate candidates, although there is evidently no specific time frame. Spencer Stuart declined comment.
Transitions, orderly or otherwise, abounded in recent months. In December, Andrea Jung, facing problems in major overseas markets, weakness in Avon’s U.S. business, and an SEC investigation into allegations of bribing foreign officials and improperly disclosing information to Wall Street analysts, said she would step aside as ceo of Avon Products Inc. and transition into the role of executive chairman. In April, the company named Sheri McCoy, who joined the beleaguered direct seller from Johnson & Johnson. Kellwood Co. went six months without a ceo while the firm undertook a search to replace Michael Kramer, who abruptly resigned to become chief operating officer at J.C. Penney. In May, Jill Granoff was named ceo of Kellwood after two candidates reportedly turned down the position. Warnaco Group Inc. experienced a smooth transition when Helen McCluskey succeeded Joseph Gromek as ceo in February. And just last month, Michael Francis, president of J.C. Penney, clashed with ceo Ron Johnson over marketing strategy, and Francis found himself out the door after eight months on the job.
So what does the face of the new ceo look like?
Thomas J. Saporito, chairman of RHR International, a team of management psychologists and consultants who work with industries on such issues as ceo succession, said that search firms will seek candidates with stellar, up-and-coming track records, but at the end of the day, the difference between those who succeed and those who don’t comes down to fit. This is especially true in an industry sector that is undergoing dramatic change.
“The onslaught of online is changing the kind of business strategy and leadership profile that flows from that in terms of people ready for the future,” said Saporito. He recently conducted research that concluded the major challenge for ceo’s and their boards is figuring out the leadership requirements of the future, as their companies and sectors are changing so quickly and so dramatically.
Saporito recalled the Sixties, when his team did a lot of work with automobile executives. “We used to describe them as ‘high speed, low torque.’ When the road was straight and flat and not particularly winding, they were great executives. When the road started turning with big bends, they were out of their element,” he said. “That’s what’s happening in many industry sectors because the world is changing so rapidly. You’ve got different forms of competition. At retail, you’ve got online and changing consumer buying patterns. The kind of leadership — intellectual agility, being able to think and formulate strategy beyond one’s experience, being able to shape a company and culture that thinks and acts in a more agile way — is going to be the difference between ceo’s who make it and those that don’t. Finding someone who merely has a great track record within an existing industry sector, such as retail, could have a lot of potholes in it.”
One critical issue facing companies is getting the board and ceo aligned around what really has to change. “If they’re not aligned, then it breaks down from there. You have to get them on the same page on what’s the new strategy and the pace of change,” Saporito added. Some ceo successions require a change in culture. “You can change people out, but the DNA of a company, you don’t change that overnight. It’s usually a two- or three-year process.”
Statistics, Saporito observed, overwhelmingly show that the success of an insider taking over the ceo role far surpasses that of an outsider. “When you have continuity and someone who knows the business model and knows the culture, there’s less risk associated with it. The problem is if you haven’t cultivated leadership. If your company has changed so dramatically, you haven’t prepared people for a new model, then you have to go to the outside. Usually going to the outside signals a failure of development of talent,” he said.
Levi Strauss & Co., for example, went outside when it named Chip Bergh president and ceo last year. Bergh had previously been group president of Procter & Gamble’s global male grooming unit. “It’s a great example of a company that had failed to cultivate the kind of talent because the world was changing dramatically and it was losing market share and it went to the outside.”
There’s no question an understanding of digital technology is having an impact on the type of ceo being sought. According to a recent Ad Age study, the U.S.’ largest advertisers, namely Procter & Gamble Co., Unilever and L’Oréal, devote 10 percent of their ad budgets to digital.
“It’s a digital tsunami,” said Hal Reiter, chairman and ceo of Herbert Mines Associates. “You need to get a guy who’s managed it or is open to it and is progressive-thinking. You can’t get anyone over 40 who grew up in it. They simply don’t exist.”
Reiter also said having international experience is important, but that’s an expertise that can be brought in from the outside. “Ralph Lauren hired Daniel Lalonde [president of Ralph Lauren International], he’s an international guy. You support your deficiencies with great hires,” Reiter explained. A great leader, he added, is still “somebody who listens.”
“The leadership model is changing because the brick-and-mortar retailer now has to focus on brand as well as the Web. On top of this, they’ve absorbed verticalization and globalization. Therefore, the classic merchant-and-operator leadership model has to be adjusted to take into account this enormous change,” added Les Berglass, founder and ceo of Berglass + Associates. He said the new leader not only has to have the sophistication but also the vision to see around the corner. “This business burns over product much faster than a classic packaged goods company,” he explained.
Berglass feels that today’s ceo needs a combination of skills. “You need the structure that comes from classic brand management, coupled with the need to have vision, see around corners and react immediately. This combination is a challenge to find in one person. The key is to find someone to respect the need for the vision and surround him or herself with people who can do it and gives them the freedom to do it.”
Bobbie Lenga, who heads the Global Consumer Sector at Russell Reynolds Associates, said the rise of omnichannel retailers is having a major impact on the candidates they’re seeking. “One of the big differences is the ability to be an omnichannel ceo. It’s not just e-commerce, there’s digital and social media. How do you integrate that into your business and how do you grow that?”
Lenga pointed out that Russell Reynolds has been doing a lot of succession planning. “[The ceo] may not be retiring for another two years, they want to go through that process,” she noted. The typical board, she said, generally weighs both internal and external candidates.
In the past, a headhunter would just go out and do the search, but now the better-run companies are planning ahead. “What happens is the talent gets more finite each year,” Lenga added. “It makes it even harder to bring in a great ceo. If you plan ahead and think outside the box, it’s a little better. Boards are a little more comfortable with that process than just doing a search cold.” She explained that if a ceo is not ready to go yet, you identify the candidates and do a thorough background check so when the board is ready to find a new ceo, they have a very good understanding of the landscape. “It’s hard sometimes to get used to the way the new world is going and thinking. You used to think the only people who could do retail jobs are retailers, and it’s changed.”
If you’re recruiting for a pure play, for example, you’d look at pure-play companies. “I can’t tell you how many board searches I’m working on today where they all want that digital [experience],” Lenga said. “From a digital perspective, the age of the active ceo’s or the top people in the organization are much younger than the board. It was hard for boards to get used to having these young, aggressive people on their boards. But that’s who this business is made up of. They’re a younger group of executives. These are people who are going on boards and being considered for ceo roles. There’s a huge shift going on.”
Lenga contends that the majority of ceo’s do a good job grooming people inside their ranks. Most ceo’s, she said, want their second-in-command to take over for them if possible. “In their heart of hearts, they’d like that because they spent the time grooming people for that. But sometimes the organization just doesn’t have it. Sometimes the ceo might think that individual is there, but he’s not.”
Melanie Kusin, vice chairman, board and ceo services at Korn/Ferry International, pointed out that hiring needs vary from company to company, making it difficult to generalize. “Some companies like to home-grow their talent. Coach would have different needs than American Eagle or Levi’s.”
Since the recession, many retail and fashion companies have thinned the ranks of management, cutting back on training programs and leadership development programs. Interestingly, Macy’s Inc. recently hired 700 young people, which in this day and age is highly unusual. “That is volcanic in the recognition of needs for the future of Macy’s,” said Reiter. “This is an exciting new era of recognition that talent doesn’t really exist in the senior ranks, and they’re now looking at the next generation.”
Berglass doesn’t think fashion and retail companies are oriented toward succession planning. He observed that during a recession, the problems are amplified because training, in general, is curtailed and leaders become involved in the here and now, and what happens five years into the future loses importance. “Companies now have to plan for the future and project five years down the road and project those changes,” said Berglass.
While some ceo transitions are rockier than others, one company that experienced a smooth handover this year was Warnaco Group Inc. In February, Helen McCluskey succeeded Joseph Gromek. The company had identified McCluskey several years ago and worked with her to get the experience and training necessary to assume the ceo role. “With Helen, we always thought she’d be an outstanding candidate,” said Charles Perrin, non-executive chairman of Warnaco. “We did focus on trying to get her as many varied experiences as we could to be in a position [so] that when we made that choice, she would be as strong a candidate as she could.”
Perrin said succession planning should be number one on the list of things a board of directors needs to do. “Every year, we’d go through succession planning for the ceo and other top positions,” he said. When it comes to succession planning, one of the changes he has seen in the past five to 10 years is that the center of power has shifted from the current ceo to a governance committee or search committee. “The era of the regal ceo from the Eighties and Nineties is over. I applaud the change,” he said.
“I think boards surprisingly don’t do [succession planning] well. They need to make sure they prioritize it and have a process,” Perrin said. “It is about the ceo, but it’s not limited to the ceo. You should be looking at the chief financial officer. You just can’t continually be going to the outside. There’s a cost to doing that. At Warnaco, we have a succession planning process that is worked through by management and once a year discussed by the compensation committee and the full board; [it] details the top 15 to 25 people in the organization, those jobs, who are we grooming to succeed them. It’s pretty time consuming.”
Perrin, who also sits on the board of Campbell’s Soup, was recently involved with two succession plans at the same time. Both Campbell’s and Warnaco used external search firms, went through a long list of candidates and went with the internal candidates, whom they initially promoted to chief operating officer. “The research will show that the internal candidate has been outperforming [external candidates] in terms of shareholder return. Having said that, there’s a time that you need an external candidate because you’re in such a turnaround,” Perrin said. “Either the board has not done a good job with succession planning, or you’re in a turnaround and it’s very difficult for an internal candidate to make the kind of changes that are necessary.” The board, he noted, is responsible for grooming the ceo, figuring out the strategic plan and determining what kind of leadership a company needs.
“Companies need different kinds of leaders at different points of time, and match that internal candidate against external candidates to see what’s the best way forward,” Perrin said. There are always trade-offs with an external candidate over an internal one. “The reason you go to the outside is twofold: The board’s done a lousy job in succession planning, or the problems are so dramatic that you want an outsider to come in and shake things up. It’s much easier for an outsider to make those dramatic changes than it is for an insider.”
Do boards need to be looking for people even if a ceo hasn’t stated his or her intention to retire?
“People get in accidents, there are health issues. Succession planning isn’t just your ceo is getting close to retirement age. It’s an ongoing process. You should be doing it all the time,” said Perrin. “When you have a founder-ceo, it’s a tougher situation. Let’s say you have a founder-ceo who outlives his ability to manage the company. A lot of people have the entrepreneurial talent to initiate that new business, but when it comes to any kind of scale, are not good at running it. That potential friction between the founder-ceo, who may control 20 percent, what do you do about it? You have to have a strong board and an open dialogue with that founder-ceo. But to not talk about it and not plan on that situation is not good.”
Perrin believes it takes a few years to groom a successor properly. “It’s not six months. It’s three or four years, making sure that person gets multiple exposures, experiences. We were giving her [McCluskey] added responsibilities, involvement with shareholders and a larger role internally. Being a small company, we didn’t have multiple candidates. We had one other candidate, who was the same age as Joe. When you’re General Electric and you’re thinking [about] who could succeed Jack Welch and you’re a $50 billion company, you’re going to have multiple candidates and then it’s a different process.”
Paul Charron, senior adviser at Warburg Pincus LLC, who serves as executive chairman of the board of Campbell’s Soup and was a former chairman and ceo of Liz Claiborne Inc., has dealt with succession issues firsthand, both at Claiborne and in his role at Campbell’s. The succession-planning process is certainly one of the important roles of the board, he said, recalling that in the Eighties and early Nineties, “sitting ceo’s had an awful lot to say about who succeeded them.” But now, with shareholders demanding more oversight and more outside directors, the current ceo’s are not as directly involved in those discussions.
“The biggest difference I’ve seen is what I would describe as the amalgamation of the ceo and chief operating officer roles. Historically, the ceo has been charged with charting the course and providing the vision. In many companies, the chief operating officer was charged with bringing that vision to life and executing [it],” Charron said. “Today, that vision without execution and execution without vision is a lose-lose. There’s much less margin for error. Boards are much more demanding, shareholders are much less patient and oversight is much more apparent. Regardless of what the title says, you have to have the vision and drive execution. If you come up short on either, I don’t think the future is bright for you or your company.”
Celeste Gudas, ceo of 24 Seven, an executive recruitment firm, said only about 20 percent of her 500 to 600 clients have any kind of true succession planning. “It should almost be changed from succession planning to succession development,” she said. Some of the European firms, such as LVMH and PPR, have these programs in place, but not many U.S. fashion firms do. “When a company has a succession plan, it has a better success rate of bringing in ceo’s from outside fashion and retail. For years, companies such as LVMH have been bringing in talent from Procter & Gamble and other consumer goods companies.” Gudas said if companies don’t have these development programs in place, when they bring in a ceo from outside, culture clashes are inevitable.
Skills that have always been in demand are functional ones, such as finance and marketing, and attributes such as leadership, intellect, integrity and vision, she said. “I think you have to add more skills today to that traditional list. We’re dealing in this complex, global environment. The recession has sped up or heightened the pace of globalization.”
And in a global economy, new skills come into play. “One skill is cross-culture communication. It’s being able to adapt to an ever-changing work environment, whether it’s technology, geography, culturally different people, language…all those nuances an executive needs to bring to the table,” Gudas said. “The other piece is that executives need to wield digital influence. They need to be effectively using online networks. They need to see the digital picture. And, they must have laser focus.”
For years, recruiters have tapped into other industries for top fashion executives. Gudas explained that for more than a generation, wholesale and retail companies haven’t recruited enough top talent from colleges and business schools. That talent was often drawn to the likes of McKinsey & Co., Goldman Sachs and Google. “I think we lost a lot of that bench strength by not recruiting out of the business schools,” Gudas said. The pure e-commerce plays are able to reach more into Silicon Valley for talent. And without organized leadership programs there will continue to be a dearth of talent among fashion’s management ranks, she said.
Headhunters also point out the importance of moving executives around and exposing them to different markets and cultures.
Karen Harvey, president of Karen Harvey Consulting Group, said, “What boards are recognizing is that these are complex companies and global organizations, and a lot of very good executives we have groomed in North America are not groomed holistically to handle the complexity of the back end, as well as having the vision to drive the front end.” The ante, she said, has gone up tremendously. “We are likely to look at an organization and company that have provided mobility for their executives so they have had the opportunity to live in multiple markets and multiple cultures, and so they are not solely ‘centric’ in one market.”
Elaine Hughes, president of E.A. Hughes & Co., said companies are required to do their quarterly due diligence on succession planning, but very few companies actually do it. VF Corp. is diligent about it and seldom recruits from the outside. Hughes said the ceo succession from Mackey McDonald to Eric Wiseman was seamless. At Jones Group Inc., president Richard Dickson was hired from the outside, as was William McComb at Liz Claiborne Inc. (now Fifth & Pacific Cos. Inc.)
Hughes explained that part of succession planning is to groom executives from within and give them rotating experiences to learn various aspects of the business. Companies like General Electric rotate their executives through different departments and assess their progress as they gather the skills to do the job.
“What you fall prey to is the recycled ceo,” Hughes said. “You become a ceo and you get your ticket punched and get called without anybody finding out what you accomplished in the prior job.”
Hughes also argued that you can’t expect an executive to parachute into a job and already be trained. Companies such as J.C. Penney, Macy’s, Gap Inc. and Liz Claiborne had training programs at one time and people were evaluated. If you didn’t cut it, you were out of a job. “It’s few and far between, with a few exceptions,” said Hughes, citing VF Corp., Loewe’s and Costco as examples of companies that move people from within the ranks.
Hughes believes Terry Lundgren, chairman and ceo of Macy’s, has done “an excellent job” developing key people on his team. She said at Kohl’s Corp., Larry Montgomery had Kevin Mansell. One company that went outside for its ceo was J.C. Penney, which named Ron Johnson. Johnson brought a mix of department store, mass-market and specialty experience, the latter of which was gained at the highly successful development of Apple retail. Hughes thinks Coach has been doing a good job in creating a bench, pointing to Victor Luiz, president of Coach International Retail and Michael Tucci, president of the retail division, North America.
And yet some of the industry’s most successful retailers have become so identified with their principals, operating without them is almost unimaginable.
“Does Mickey Drexler [of J. Crew] have a successor? No,” Hughes noted. “Does Mike Jeffries [of Abercrombie & Fitch]? No.”