Job-less: Steve Jobs's Succession Plan Should Be a Top Priority for ApplePublished: January 07, 2009 in Knowledge@Wharton
When Apple announced on December 16 that Philip Schiller, the company's senior vice president of worldwide product marketing, would deliver the keynote speech at this week's Macworld conference instead of CEO Steve Jobs, speculation swirled again about the future of the company -- and Jobs's health. Jobs disclosed in August 2004 that he had a cancerous tumor removed from his pancreas. Observers at recent Apple events reported that the visionary technologist appeared gaunt. Adding fuel to the fire, Apple also announced that it would not be participating in future Macworlds, saying, "Trade shows have become a very minor part of how Apple reaches its customers."
Responding to questions about his health, Jobs said in a January 5 open letter that he was suffering from a hormone imbalance that was "robbing" his body of nutrients. He also noted that he is receiving treatment and will remain CEO of Apple. "I have given more than my all to Apple for the past 11 years now. I will be the first one to step up and tell our board of directors if I can no longer continue to fulfill my duties as Apple's CEO," stated the letter.
Meanwhile, the looming question of who would replace Jobs if he had to leave Apple remains unresolved for shareholders, analysts and customers. While the company maintains it has a succession plan, it has offered no details. Observers are left to question what Apple might look like without Jobs and whether the company can continue pumping out hits like the iPhone, MacBook and iPod.
A succession plan is critical for most companies, but especially so for Apple, according to Wharton faculty. They acknowledge that every company is different, but also point to established best practices for succession planning, including hiring from within, conducting an audition period, easing the successor into a leadership role and providing some level of succession disclosure to shareholders.
Companies with strong corporate cultures can usually count on continued success if they can seamlessly transfer power to an executive from a strong bench of managers. But selecting Jobs's successor will be challenging, given the degree to which he is tied to Apple's identity. As Wharton management professor Michael Useem puts it: "There are few companies where the top person has as much of an impact [as Jobs has had] at Apple."
Apple and Jobs seem almost inseparable in the public mind. Jobs cofounded Apple in 1976, left during a power struggle with corporate investors in 1985 and returned to Apple in 1997 after the struggling company acquired NeXT, another computer firm started by Jobs. Apple ousted CEO Gil Amelio, who had been at the helm a little more than a year. Jobs became interim and then permanent CEO, quickly establishing himself as the voice of Apple and launching a string of consumer electronics hits.
"He really is the face of the company," says Kendall Whitehouse, senior director of IT at Wharton. "When you speak to Apple employees, there is always a lot of talk about Steve and what Steve wants. It's palpable. That has generally been a positive thing for [Apple]. Jobs was the centerpiece for refocusing the company and brand" following his return.
But some Wharton faculty say Apple now seems eager to show that there is more to the company than the vision of Steve Jobs. At an October press event, Jobs appeared on stage with Schiller and chief operating officer Tim Cook, the latter wearing Jobs's trademark black shirt with jeans. "The strategy here appears to be showcasing different members of middle and upper management to illustrate that Apple, as an organization, is more than just a cult figure at the top," says Wharton management professor David Hsu.
Analysts agree. "Apple could have diffused speculation regarding Jobs's health by having him keynote this year's Macworld," Piper Jaffray analyst Gene Munster wrote in a research note. "While we do not believe that this change provides any indication regarding Jobs's health, we do believe that it is a sign we are in the early stages of changing roles in Apple's management structure."
Although Apple's succession plan for Jobs remains unclear, experts at Wharton offer a few tips to help guide the company's succession planning process.
Promote from Within
Apple has a strong bench of executives who could succeed Jobs, but major stakeholders, such as investors, customers and partners, don't know much about them, according to Wharton faculty. The first step in any succession plan may be illustrating that Apple is more than Jobs.
According to Wharton management professors Useem and Peter Cappelli, Apple's effort to highlight executives other than Jobs is a good test for any successor. Why? Part of Apple's mystique revolves around messaging and generating buzz. By putting executives like Cook and Schiller in the limelight, Apple can give other managers some practice introducing products and familiarize them with investors and customers. "It is important for any company to be developing talent internally. And it is also important to be promoting people from within," notes Cappelli. The board "should pay a lot of attention to the abilities and potential of their leadership team -- always."
Wharton management professor Lawrence Hrebiniak also urges Apple to show off executives beyond Jobs. "Apple wants the world to know that it doesn't sink without Jobs. The company is addressing a common concern [that arises] when you have a powerful, well-known leader."
Useem suggests that a board of directors should be responsible for ensuring that a company has the right leader as well as the right leadership team -- especially if there is any hint that the chief executive may step down in three to four years. He cites numerous research studies indicating that internal successors are more effective.
One related challenge is determining whether a company even has the talent to adapt to the new environment. If the decision is made to hire from the inside, then "a CEO and board should be looking at the top contenders" and analyzing what is known about each one, says Useem.
If a company develops its internal talent well, there should be a strong bench of executives who can lead under various scenarios, thus making succession planning easier. "Succession planning per-se is a waste of time," says Cappelli. "It means trying to determine in advance who will take over a top job. But because the needs change so frequently, as often do the players, there is no real ability to plan. These plans take a lot of time and energy, they divert the attention of people in the company and they almost always get tossed aside because they are out of date." The solution: Companies need to develop talent internally so that they have multiple options when a successor is needed.
Useem notes that some companies turn to testing as a way to vet internal candidates. For example, they may hire third parties to interview executives who report directly to the CEO. More often, companies like GlaxoSmithKline pick internal candidates and then ask each of them to take on a CEO-level project and present it to the board. "This approach gives a company a better fix on how executives perform head to head. It can be awkward because these executives work together every day, but it is important to pick the right person."
What remains to be seen at Apple is whether Jobs would stay as a non-executive chairman with a new CEO. While these arrangements are rare in most American industries, says Useem, there are many examples among technology firms. Intel, Microsoft and Dell have all had CEOs become chairmen as day-to-day management was transferred to a new executive. Such an arrangement is more likely if a company founder -- such as Michael Dell or Microsoft's Bill Gates -- is involved, Useem adds.
Meanwhile, a company also has to prepare for the inevitable mop-up duty that follows the appointment of the new CEO. It is unlikely that executives who lost out on the top job will stay. For example, when General Electric transitioned leadership from Jack Welch to Jeff Immelt, the other top candidates for Welch's job -- Robert Nardelli and James McNerney -- departed to become the chief executives of Home Depot and 3M, respectively. Nardelli is now CEO of Chrysler and McNerney is chief executive of Boeing. "Having successors just waiting in the wings is not a good idea," Cappelli says. "If they're good, they won't stay."
Transparency Is Key
Generally speaking, companies in the midst of succession planning need to deliver some kind of transparency to customers and investors. In Apple's case, disclosure -- or lack of it -- about Jobs's health and future plans appears to be a sore point with some analysts. Wharton faculty agree that Apple needs to disclose more about its succession plan, but how much detail is needed is open to debate.
Wall Street is clearly worried about Apple's future post Jobs. Any rumor about Jobs's health can move the stock. Following Apple's announcement that Jobs would not be the keynote speaker at Macworld, Oppenheimer analyst Yair Reiner downgraded Apple shares because the company would not disclose details about the state of Jobs's health or a succession plan.
In general, having a succession plan is a good idea since it minimizes uncertainty, but how much a company discloses depends on culture, says Hrebiniak. If a company is too transparent, "every would-be CEO would leave if he or she was not a finalist," and performance would suffer.
Cappelli agrees. It "isn't obvious" that Apple needs to outline its plans. "Whatever [Apple] outlines today will be irrelevant as soon as circumstances change, and that will happen in months. Apple probably will go through three or four plans before Jobs steps aside, so what's the point?"
Meanwhile, it's unlikely that Apple will fall apart without Jobs, suggests Cappelli. "Investors get worried if they think the future of an entire company depends on a couple of key individuals. In fact, that is almost never the case. This bias -- attributing the success of organizations to individuals -- is pretty common. Several studies have looked to see what happens when CEOs ... die unexpectedly. All the studies show that, rather than collapsing, share prices in fact actually go up. The current leaders are not that crucial. Companies don't collapse when the leader departs and there is some time to fill the job."
Whitehouse, however, says Apple "needs to articulate something." If the company needs a disclosure blueprint, he adds, it doesn't have to look any farther than its long-time rival -- Microsoft.
In January 2000, Bill Gates signaled the beginning of a transition of power at Microsoft. He named Steve Ballmer, who became president of the company in July 1998, as CEO. Gates said he was stepping down to focus on long-term strategy, but he remained chairman and added a new title -- chief software architect. At the time, Gates said making Ballmer CEO was a "very good transition" for Microsoft. Over the next eight years, Microsoft gradually put other executives in the spotlight. In June 2006, Microsoft announced that Gates would transition out of his day-to-day role to focus on the Bill & Melinda Gates Foundation. The biggest change for Microsoft was appointing Ray Ozzie, then chief technology officer, to be the chief software architect working side-by-side with Gates. Gates' last day as an executive was June 27. He remains chairman and advises Microsoft on "key development projects."
"Microsoft had been about Gates for so long. But he scheduled a long, phased wind down. You can see the way that the succession was comfortable for the company, customers and shareholders," Whitehouse notes.
Preserve Corporate Culture
What remains to be seen is whether a post-Jobs Apple will retain the corporate traits that made the company successful with its iconic leader at the helm. The conventional wisdom is that Jobs's control has influenced everything from marketing to design at Apple, says Hsu. After a decade of leading Apple, he argues that it's quite possible Jobs's imprint is permanently etched on the company. "No one could move up in the organization without Jobs's approval. Eventually, management fits the mold Jobs wants."
Hsu says the secret sauce for all successful companies is having a corporate culture that transcends any individual. "You want a culture to be so ingrained in the rest of organization that it [provides a] competitive advantage."
Useem agrees. "You cannot overstate how important corporate culture is -- if it's a good one -- in sustaining and carrying on a company." Some companies, such as Wal-Mart, Mary Kay Cosmetics and Southwest Airlines, support strong cultures that have lasted well beyond their founders' departure, Useem notes. "A strong culture will transcend the exit of leaders. At Wal-Mart, pictures of Sam Walton keep the company thinking about the values that were used to create the company."
The problem for Apple is clear: No one will know until after Jobs leaves how thoroughly his imprint permeated the company. Useem acknowledges that developing a corporate culture is not clear cut. "Culture is one of the great mysterious aspects of company business. It is very important, but poorly understood. You can try to copy a company like Southwest, but rivals can't get their hands around what it is that makes these companies so successful."