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A Perfect Storm: CEO Succession Challenges in Retail

The 2011 Russell Reynolds Associates U.S. Retail CEO Study



​​Retail CEO Succession - A Perfect Storm

Executive Summary

The retail industry is facing critical challenges on many fronts, from market saturation in the United States to highly empowered consumers to continued advances in technology and distribution structures. At a time when the industry needs stable, transformational leadership, however, the sector is facing a significant leadership succession challenge. The 2011 Russell Reynolds Associates U.S. Retail CEO Study examined turnover and recruitment trends between January 2006 and April 2011 at 81 multi-channel retail companies headquartered in the United States with annual revenues of $1 billion or more. The findings include:

  • Retail companies are experiencing a period of sustained turnover at the top. Fifty-nine percent of retail companies studied experienced a change in CEO leadership during this five-year period.
  • Retail companies have a harder time than other companies in selecting CEOs that “stick.” Forty-two percent of the CEOs who left did so having served five years or less, compared with 32 percent of Fortune 1000 CEOs. More important, more than a quarter (27 percent) left after serving three years or less. In contrast, only 16 percent of Fortune 1000 CEOs who stepped down during the same time period did so having served three years or less.
  • While most boards traditionally prefer to fill CEO slots with current CEOs, there simply are not enough sitting CEOs to meet demand. Of the 18 external CEO appointments made during the period studied, only eight were sitting CEOs making a lateral move.
  • Retail companies seeking a new CEO are further constrained because of the tendency to recruit from the circle of immediate competitors rather than casting a wider net. Of the 18 retail CEOs in our five-year sample who were recruited externally, 16—or 89 percent—were recruited from the same subsector of the retail industry.

The second half of the study sets forth a strategy to help boards think through the issue of CEO succession. This strategy provides specific recommendations regarding succession planning, evaluation of company culture and the fit of CEO candidates to that culture, and the role of board composition in complementing the competencies of the senior executive team.

Detailed Findings

Retail’s CEO succession track record

While there are signs that U.S. consumers may be slowly starting to open their wallets, retail board members know that the industry faces a challenge that goes much deeper than current sales figures. At a time when retail companies must develop new strategies and ways of doing business if these organizations are to survive, the industry finds itself short on the type of talent needed to navigate these uncharted waters. It is increasingly difficult for boards to recruit top executives able to lead and, in some cases, transform their businesses. Boards need to understand the factors contributing to this predicament and then how to implement a more systematic way of building and harnessing the company’s senior human capital.

The statistics on CEO turnover make clear that the U.S. retail industry is facing a significant leadership succession problem. Examining 81 leading retail companies in a range of sectors with annual revenues of $1 billion or more, 48 of those companies (59 percent) experienced a change in leadership in the past five years. But of the 45 CEOs who left their positions during that time and who were not interim appointments to begin with, 27 percent did so having served three years or less. More significantly, 9 percent did not even make it past the first year, and 18 percent did not last through the second year.

Looking at comparable data for the Fortune 1000 brings the retail succession problem into high relief. Of the 575 CEOs in this larger group who stepped down from January 2006 to April 2011, only 3 percent did so after serving one year or less, and 10 percent did so by the second year. Retail CEOs thus are 80 percent more likely as large company CEOs to leave within the first two years. Given the opportunity cost of a poor CEO appointment, this record suggests that the retail industry is carrying the burden of significant “performance risk” when choosing its leaders.

It is noteworthy that after the third year, the variation between the two groups is much more random. This reinforces the conclusion that the retail CEO retention problem actually is a retail CEO succession problem. In addition, there are many fewer retail CEOs leaving in year six—the time at which the largest percentage of Fortune 1000 CEOs step down. We can hypothesize that these “missing” retail CEOs are the ones who did not make it past the third year.

Figure 1: Tenure of Retiring Retail CEOs, 2006-2011

Challenges on all fronts

Today’s leadership shortage must be understood in light of the unprecedented changes and uncertainties facing the industry, beginning with the market saturation that has taken hold in the United States. Consider that at the end of 2008, there were approximately 100,000 shopping centers in the United States—equivalent to 23 square feet per capita. This is nearly 10 times the per capita shopping space available in the United Kingdom, for example.(1) Successfully translating brands to foreign markets and managing the necessary supply chains and real estate portfolios, however, are not trivial tasks.

And expanding into underserved markets offers no refuge from larger cultural changes that transcend geographic boundaries. Consumers have become aggressive and empowered agenda setters who want products tailored to their individual specifications, provided with speed and affordability, and accompanied by superior customer service. The Internet has obliterated many of the traditional information asymmetries on which retailers built their business. Today, consumers can rapidly gather information from multiple sources. Using social networking tools, that information can be shared immediately to collaborate on a authoritative and authentic shopping strategy that can be carried out loudly and quickly. The result is a gale-force wind that can blow in either direction, elevating a product beyond a retailer’s dreams or crushing its market presence despite all corporate efforts. Harnessing this force—and staying on the right side of it—now is a CEO priority.

Further, the communications platforms and technologies at the center of this shift are continually evolving. Only a few years ago, for example, social networking sites were a diversion for young adults; today, a retail company’s social networking strategy is a critical component of the organization’s larger marketing efforts. A decade ago, retailers were just starting to embrace the web; 10 years later, a web presence must be joined by increasingly sophisticated uses of social network and mobile communications tools. Bloggers, once derided as inconsequential and marginal, now command the access once reserved for editors of the most important magazines. The fluid, egalitarian nature of these and future communications environments means that corporate entities often are a step (or more) behind the consumers they are trying to reach; retailers must successfully appeal to consumers on their turf and under their rules.

Changes in technology and culture have brought an end to market hierarchies and lowered barriers to entry. On this flatter and more competitive testing ground, innovation is all. But the fact that everyone has access to many of the same tools and resources means that the innovation cycle has become dramatically compressed. So it is that pop-up stores, flash sales and unconventional tie- ins went from avant-garde to mainstream to passé in the span of a couple of seasons. As the cycle repeats itself with new innovations, the ante is upped, and the terms of the buyer-seller relationship are rewritten once again.

The elusive transformational leader

When boards look for CEO candidates who can develop a vision to meet this vast array of challenges and then execute accordingly, board members quickly find that leaders who have the combination of the competencies, experiences and perspectives needed is the ultimate scarce good. This is the case, for different reasons, whether boards look internally or externally. Internally, promising talent no longer is groomed in the systematic way it once was. There is no modern-day analogue, for example, to the old Abraham & Straus training program, which produced a number of iconic leaders who have shaped the industry during the past three decades. Few stores today methodically rotate their rising executives through various key operating divisions as was the case in the past. As a result, at many companies, the talent pipeline is uneven at best.

The availability of external talent is similarly far below demand. Most boards begin an external CEO search with the requirement that the candidates be a sitting CEO. This is understandable—a current CEO already has shown that he or she can fill the position’s shoes—but the constraints of supply and demand mean that this requirement often goes unfulfilled. Of the 48 new CEOs appointed over the last five years by the retail companies in our study, 18 were external appointments. Of those, however, only eight were sitting CEOs making a lateral move. There simply are not enough sitting CEOs to go around.

The retail talent shortage is exacerbated by an additional factor. Industries in need of transformational leaders often respond by casting a wider net, looking to executives in related sectors. The board of a clean tech company, for example, could look for leaders in both the technology and energy sectors. Many retail firms, however, do not think of themselves as having the option to search across these concentric circles and, instead, confine themselves to executives from their immediate competitors, further limiting the options. Of the 18 retail CEOs in our sample who were recruited externally, 16—almost 90 percent—were recruited from the same subsector of the retail industry.

Figure 2: Background of newly appointed CEOs, 2006-2011

Newly Appointed Retail CEOs Background

Recommendations

The retail industry thus is faced with a perfect storm: an acute need for new leadership to discover and seize the opportunities of a challenging business environment but an insufficient supply, both internally and externally, to meet such demand. To escape this bind, it is not enough merely to improve upon what has been done previously; retail boards must approach CEO succession in a fundamentally different way than many have in the past. While there is much in the process that will continue to rely on subjective judgment, the succession strategy of the future must be more deeply rooted in concrete, factual analysis of the company, its markets and the candidates. Further, boards need to regard the CEO succession process as interwoven with the broader issue of senior executive development, awareness of the company’s culture, and the composition and assessment of the board itself. Specifically, boards must do the following:

  1. “Raise their game” in their succession planning by identifying the specific leadership competencies a firm needs to drive its strategy and then building those competencies in its key people through planned executive development and, where needed, adding those capabilities to the talent pool through external recruiting.
  2. Understand their company’s culture and determine whether changes to that culture will be needed going forward. Include an evaluation of the fit of the various internal and external candidates to that culture in the assessment, balancing the need for assimilation with the ability to drive desired culture change.
  3. Evaluate the composition of the board itself so that, collectively, the group has the diversity of perspective and the strategic competencies required for it to provide the CEO and senior management with the highest level of counsel at a time when shareholders are demanding greater performance and transparency.

Succession planning

It is easy for boards to let succession planning lose its focus and urgency unless the current CEO is approaching retirement. But this is ill-advised for a number of reasons. The most obvious is that it leaves boards vulnerable to an unplanned departure. Beyond that risk, however, the fact is that the ongoing professional development of the senior management team must be driven by succession planning if that development is to meet the company’s human capital needs.

CEO succession planning for the retail industry today must be rooted in a clear understanding of the specific challenges and opportunities a company is facing over the next three to five years.

Because the industry is undergoing so much change, this analysis is an exercise in itself and needs to be updated on a regular basis to reflect the evolving environment. How are the company’s consumers, and their expectations, changing? How are distribution channels evolving? How will changes in technology lower barriers to entry and empower new competitors? The strategic road map that comes from this analysis then is used to identify the specific competencies needed by the next CEO.

This competency framework is used as the basis for the regular 360° assessment of a company’s senior leaders and succession candidates. These 360° assessments can be made using online surveys or conducting structured interviews of these leaders and their colleagues. Both methods must provide complete confidentiality for the respondents to ensure that the quantitative and qualitative information they provide truly is meaningful.

The next step is for these internal executives to be benchmarked against external peers to ensure that a company maintains a broader best-in-class—rather than merely a best-at-hand—perspective. Effective talent benchmarking typically includes an assessment of three areas of executive functioning:

  1. Background and technical skills (for example, track record, functional skills and scope of current responsibility).
  2. Leadership competencies and motivation (for example, the ability to set strategy, execute for results and use influence).
  3. Cultural fit (how well the executive fits with the current and needed culture of the company).

Depending upon the expected time frame for the transition, this benchmarking should encompass not only direct reports to the CEO but high-potential executives who may be two or even three levels below the chief executive. Given the complexities of the market today, it is increasingly unrealistic for companies to expect to find or groom a “silver bullet” CEO who combines all the qualities of the traditional “merchant prince” with that of the operations expert who can manage supply chains and real estate portfolios. It is more likely that boards will have to compromise in places, and having a well-developed C-suite team that can support the CEO with a range of functional expertise makes it easier to do so.

Making succession planning continual rather than episodic also means there is time to let the assessment of internal candidates drive their professional development plans, informing the assignments they are given and the mentoring they receive.

Culture analysis and fit

When a new CEO is hired from outside the company, he or she invariably brings a track record of success. But why, then, do so many new CEOs fail to thrive in their new environment? The problem almost always is one of poor cultural fit—an obstacle that technical competence and experience rarely can overcome. “Hired for technical skills, fired for fit” is an all-too-common outcome. It is important to remember that cultural fit also is a factor when the CEO is an internal promotion. (Of the eight non-interim CEOs who left that position after two years or less, three were internal promotions.) The fact that a candidate is from within the company does not guarantee that he or she is a good fit in critical areas or will be able to transform the company’s culture to a desired future state. This last point is important given the period of extraordinary transition the retail industry now is in. Even successful companies may well find that they will have to change their cultures to continue to thrive.

What kind of culture do retail companies need in order to succeed in their new reality? There is no one-size-fits-all answer, but some broad guidelines are clear. Successful retail companies must be driven by a passion for, and curiosity about, the customer. There must be an openness to new people, thoughts and ideas and an inclination to challenge assumptions. Thriving organizations must be nimble in the face of change and have a “play-to-win” mentality and a relentless focus on results.

A well-managed CEO transition, then, must include an analysis of the company’s culture—that is, the collective set of values and priorities that guide the day-to-day actions—to see both what sort of culture the company now has and how that culture must change to meet the organization’s objectives going forward. While it often is thought that culture cannot be subjected to objective analysis like other business factors, in fact it is possible, through online surveys and diagnostic interviews, to examine an organization’s culture across various dimensions and to identify the distinct combination of core values that drives behaviors within the enterprise. Different types of cultures have different “fingerprints,” scoring higher or lower on various cultural measures. Figure 3 plots the cultural characteristics retail companies will need in order to succeed in their new environment vs. a baseline typical culture found in corporations today.

Figure 3: Five dimensions of retail corporate culture
Retail CEO Corporate Culture

In some ways, the new retail culture simply is an amped up version, more strategic and slightly more disciplined and performance and relationship oriented, of today’s typical corporate culture. The notable divergence comes in the strategic growth orientation. These are the areas where retail CEOs most likely will be asked to lead a cultural transformation. This insight then can be incorporated into the interview process to probe for relevant experiences and attitudes.

Strategic board composition and board evaluation

Boards today find themselves under increased scrutiny from investors, regulators, shareholder activists and proxy advisory firms. In response, boards are examining their composition with a more critical eye. Nominating committees are looking to construct boards whose members represent a wide range of experiences and perspectives to avoid the perils of groupthink and to serve as a broadly capable resource to the CEO. At the same time, board members must have, in varying combinations, the technical competencies that are required for hands-on engagement with senior management. The need to meet both imperatives—diversity of perspective and technical competence—has significantly complicated the process of evaluating and recruiting board candidates.

Some boards also are adopting more formal methods to evaluate their performance by using independent advisors to conduct confidential interviews of board members, aggregate the findings and benchmark the board’s performance against corporate governance best practices.

Optimizing board performance has special importance for retail companies given the leadership challenges they face. Together with a well-developed C-suite team, a board that collectively represents a range of experiences and competencies is in the best position to provide support to the CEO where he or she may have competency gaps. Not surprisingly, executives with extensive experience in digital communications, international markets, customer engagement and connectivity, and global supply chain management are in particular demand.

Conclusion

Choosing the right CEO never has been more important than it is in today’s retail industry. For boards to succeed at this task, they must have an unvarnished view of the challenges facing the retail industry in CEO succession. These challenges can be overcome, however, if boards adopt a broader view toward the succession process, incorporate cultural fit into that process and strategically manage board composition to support the CEO.

Russell Reynolds Associates

Leadership for a Changing World. In today’s global business environment, success is driven by the talent, vision and leadership capabilities of senior executives. Russell Reynolds Associates is a leading global executive search and assessment firm with more than 300 consultants based in 40 offices worldwide. Our consultants work closely with public and private organizations to assess and recruit senior executives and board members to drive long-term growth and success. Our in-depth knowledge of major industries and of our clients’ specific business challenges, combined with our understanding of who and what make an effective leader, ensures that our clients secure the best leadership teams for the ongoing success of their businesses. www.russellreynolds.com

Methodology

This study was conducted by examining publicly available data on the following 81 multi-channel retail companies headquartered in the United States with annual revenues of $1 billion or more:

Abercrombie & Fitch Co.
Advance Auto Parts, Inc.
Aéropostale, Inc.
American Eagle Outfitters, Inc.
ANN INC.
Apple Inc.
AutoZone, Inc.
Barnes & Noble, Inc.
Bed Bath & Beyond Inc.
Best Buy Co., Inc.
Big Lots, Inc.
Blockbuster Inc.
Borders Group, Inc.
Brown Shoe Company, Inc.
Burlington Coat Factory Warehouse
Corporation
Charming Shoppes Inc.
Chico’s FAS, Inc.
The Children’s Place Retail Stores, Inc.
Claire’s Stores, Inc.
Coach, Inc.
Collective Brands, Inc.
Cost Plus, Inc.
Costco Wholesale Corporation
CVS Caremark Corporation
Dick’s Sporting Goods, Inc.
Dillard’s, Inc.
Dollar General Corporation
Dollar Tree, Inc.
Family Dollar Stores, Inc.
The Finish Line, Inc.
Foot Locker, Inc.
Fossil, Inc.
Fred’s, Inc.
GameStop Corp.
Gap Inc.
Genesco Inc.
Guitar Center, Inc.
The Home Depot
J.C. Penney Company, Inc.
J. Crew Group, Inc.
Jo-Ann Stores, Inc.
Kohl’s Corporation
Limited Brands, Inc.
Lowe’s Companies, Inc.
Macy’s, Inc.
Men’s Wearhouse
Michaels Stores, Inc.
Neiman Marcus Inc.
NIKE, Inc.
Nordstrom, Inc.
Office Depot, Inc.
OfficeMax Incorporated
Pacific Sunwear of California, Inc.
PETCO Animal Supplies, Inc.
PetSmart, Inc.
Pier 1 Imports
Polo Ralph Lauren Corporation
RadioShack Corporation
Reebok International Ltd.
Retail Ventures, Inc.
Rite Aid Corp.
Ross Stores, Inc.
Saks Incorporated
Sears Holdings Corporation
Shopko Stores Operating Co., LLC
The Sports Authority, Inc.
Stage Stores, Inc.
Staples, Inc.
Stein Mart, Inc.
The Talbots Inc.
Target Corporation
Tiffany & Co.
The Timberland Company
The TJX Companies, Inc.
Toys “R” Us, Inc.
Urban Outfitters, Inc.
Walgreen Co.
Wal-Mart Stores, Inc.
Williams-Sonoma Inc.
Zale Corporation
99¢ Only Stores

(1) “Insight into Equities: Overstored in the U.S., Retailers Look Overseas,” by Vera Kahn, September 27, 2010, The TCW Group, Inc. https://www.tcw.com/News_and_Commentary/Market_Commentary/en/Insights/09-27-10_Overstored_in_the_US_Retailers_Look_Overseas.aspx

©2011 Russell Reynolds Associates, Inc. Russell Reynolds is a trademark of Russell Reynolds Associates, Inc.

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A Perfect Storm: CEO Succession Challenges in Retail