A director as CEO successor.

• Author: Burlingame, John

Should there be, as a rule, on a board of 10 or 12 people at least one or two directors able to step in as CEO in the event of an emergency?

Asking a director to take over as chief executive has generally been regarded as an unusual, stop-gap measure. However, in recent years this situation has become more commonplace. There have been a significant number of instances in the last few years where a director has been named as the permanent successor.

Stanley Gault, then chairman of Rubbermaid Inc. and a director of Goodyear Tire & Rubber Co., stepped in as the CEO and ran Goodyear through a tough cycle. Other examples include Randall Tobias, the vice chairman of AT&T who became the chief executive of Eli Lilly & Co. after having served on its board for seven years. Laura Ashley PLC tapped one of the company's non-executive directors to lead its turnaround efforts: an American executive, Ann Iverson, who had been president and CEO of Melville Corp.'s Kay-Bee Toy Stores.

More often, a director will be called upon to step in for a shorter time, as was the case when Richard Morrow, former Amoco Corp. chairman and CEO, took over as CEO of Westinghouse Inc. until the search for an outside CEO was completed. Thomas Holmes, formerly of Ingersoll-Rand Co., did the same at W.R. Grace & Co. until the board found Albert Costello. With John Smale serving as chairman, the directors of General Motors Corp., while not holding executive positions, established executive committees to oversee and involve themselves in the company's operations.

Historically, emergencies that prompted these situations usually resulted from a company's changing needs, inadequate performance or an executive's unexpected physical problem. In these cases, the succession issue, which normally would have a several-year timetable, suddenly grew urgent. The question then became: Is there a board member who is qualified to serve, if only temporarily, as the company's chief executive?

Though recent history suggests that directors can manage the transition from one CEO to another, these almost always were totally unplanned occurrences. Having observed the successes and failures of these unplanned successions, directors obviously must weigh whether such considerations should be built into the planning process. In other words, should one element of planning the company's ideal board composition provide for this potential nightmare: having to fill the CEO position without an executive in the ranks who is an obvious replacement and with no immediately identifiable top-notch outside candidate?

Should there be, as a rule, on a board of 10 or 12 people at least one or two directors able to step in as CEO in the event of an emergency? Responsible boards must consider the pros and cons of...