How Yahoo Changed the Guard

When a Yahoo co-founder, Jerry Yang, first called Carol Bartz to offer her his position atop the pioneering Web company, she told him in so many words to go away.

Yang persisted, Bartz reconsidered, and early in 2009 she became Yahoo’s president and chief executive officer. Most companies executing a CEO succession under pressure are not so lucky.

Nearly every management guru worthy of the name has written about CEO succession, and for once the savants have achieved near consensus: most companies do it badly. It seems that corporate chief executives and their boards treat succession the way that many people treat estate planning. It’s unpleasant to think about, so they put it off , often until a crisis forces their hand.

Briefings asked four thought leaders in the field of leadership and executive development to disclose what counsel they might have given to Yahoo’s directors before they began a search and to Bartz after she accepted their offer. More broadly, they were asked to share their perspectives and insights on how companies can better prepare for CEO succession, in good times and bad.

Although Yahoo’s choice of Bartz was not without critics, she is unquestionably a capable executive, having earned her stripes in the turnaround of Autodesk, a struggling company known for one product — the Autocad design software — when she arrived, now a computeraided design powerhouse with a market cap of about $6 billion. That Yahoo was able to lure her out of semiretirement is all the more fortunate, given the company’s lack of a coherent succession plan.

Bartz, 60, is actually the third outsider tapped to lead Yahoo. In 2001, Terry Semel, an accountant turned Hollywood mogul, succeeded Tim Koogle, who had been selected by the company’s venture capitalists to aid Yang and his fellow co-founder, David Filo, who share the title chief Yahoo.

By most measures, Semel was an able leader for Yahoo, broadening the company’s services through internal development and an aggressive acquisition program, and vanquishing its early rivals. Remember Excite or Magellan? But the rise of Google, with a different value proposition, siphoned advertising dollars away from Yahoo and its star dimmed. Semel came under fire from shareholders for his lavish compensation despite the company’s diminished market share, and for walking away from an unannounced, but much leaked, acquisition bid from Microsoft. He resigned in 2007.

But shareholders were no happier with Susan L. Decker, an insider who succeeded Semel as president, or Yang, who took the chief executive slot and rejected Microsoft’s bythen- public offer in February 2008 to buy Yahoo for $44.6 billion in cash and stock. At one point, one-third of shareholders voted against Yang’s re-election to the company’s board.

In one of many tart-tongued letters to Yahoo’s chairman, Roy Bostock, the activist investor Carl C. Icahn accused the board of creating “self-destructive doomsday machines” to thwart Microsoft’s attempted acquisition and of trying to “entrench their positions.” Icahn, who joined the board in August 2008 as part of a settlement of a fierce proxy battle, held a stake of roughly 4.5 percent in Yahoo as of August 2009, but has gradually been reducing his holdings. Yahoo now has a market cap of about $23 billion.

One of Bartz’s first acts as chief executive was also a disappointment to shareholders, who were perhaps hoping that she could bring back Microsoft’s hefty precrash offer. Instead, she sold Yahoo’s search business to Microsoft for an initial 88 percent share of search revenue in a 10-year deal, with no upfront cash. Yahoo shares dropped 15 percent.

Bartz told The New York Times that investors had misunderstood Yahoo’s charter, which was not to be a search engine, per se, like Google or Microsoft’s Bing, but to be a Web portal and content site, where users might also want to do a search. “We have never been a search company,” she said.

That explanation did not sit well with longtime Yahoo observers inside or outside the company, who pointed to several billion dollars worth of search engine acquisitions the company had made, and, not surprisingly, past and present Yahoos were not shy about posting their objections on the Web. “What a loser” was one of the nicer comments.

But Bartz can give as good as she gets. She met Jerry Yang at Cisco Systems, where they both served on the company’s board. John Chambers, Cisco’s chief executive, has said he believes that the two will work well together and that she was the best choice available to Yahoo. He also notes her plain-spoken style. “You always know where she stands,” Chambers said. “You may not always like it.”

Indeed, Bartz has been known to counter a reporter’s impertinent questions with a well-placed expletive or two. She is known as a tough cookie, but she also has an open, compassionate side, and comes across in person as direct and quick-witted, quick to laugh and willing to tease her way through tense situations.

These characteristics should ease her way at Yahoo, where she has moved swiftly to reshape the company to her design, revising the organizational structure, replacing senior executives and cutting costs, including 675 jobs, or 5 percent of the work force. She has shut down parts of the business, including the GeoCities Web-hosting service, which Yahoo acquired for more than $4 billion in 1999, and is expected to shutter or divest other suboptimal units.

Early indications are that Bartz’s efforts are paying off . In the quarter ended Sept. 30, Yahoo’s profit more than tripled to $186.1 million, or 13 cents a share, up from $54.3 million, or 4 cents a share, a year earlier. Revenues fell 12 percent, to $1.58 billion, but Yahoo executives said that spending on Internet ads was stabilizing, particularly from large marketers.

Even Icahn was mollified, as he indicated in letters to Bartz and Bostock announcing his decision to step down from the board. “I wish you could be cloned; because so many of the companies in the country could use a Carol Bartz as CEO,” he wrote. “My resignation in a way is a compliment to you, in that I do not believe that Yahoo any longer needs an activist shareholder.”

Michael Useem,

William and Jacalyn Egan professor of management and director of the Center for Leadership and Change Management at the Wharton School, University of Pennsylvania. Author: “The Go Point: When It’s Time to Decide” (Crown Business/Random House, 2006).

I’m dumbstruck, as i try to put myself in Yang or Bostock’s office, considering how to choose a successor, and knowing the answer to that question has to be responsible to the company, and to each of them too.

As I run a bunch of these abrupt forced exits through my mind, a few thoughts stand out. One is if you’re a publicly traded company and you have any market cap at all, inherently you have lots of money managers breathing down your neck and you have no choice but to pay attention to them. That has a pernicious side, but you can’t turn a blind eye to equity analysts and the largest shareholders. It is the nature of the beast. You have to be focused on and hearing what the collective drumbeat is.

Second, particularly for Jerry Yang, you’ve got to ask yourself, have you reached the Pierre Omidyar [founder/chairman of eBay] moment in 1998. You’ve built the company, it’s grown beyond your wildest imagination. Now, are you the person to run it when it’s almost been reincarnated? The name is still there, but it’s a diff erent vessel with a different charter.

Third, take a look at successful transitions in which a founder found himself in a similar circumstance — and eBay is a pretty good example — to see how this can be handled. It’s best to handle it before you have to handle it. You run the risk that a small perturbation can precipitate a desperate move, when you never should have allowed that to happen. You should see that there is this possibility.

When Charles Schwab gave the heaveho to David Pottruck, Pottruck didn’t see it coming. When Eckhard Pfeiff er got ousted at Compaq, he didn’t see that coming. Often there’s a precipitating event, and this antagonism toward the chief executive has been building up. In the case of Pottruck, he had a big success with Schwab’s movement onto the Internet, but his relationship with Charles Schwab began to suffer. They might have ridden it out.

Also, what we don’t see but no doubt happens much more often is top executives who lose favor with the board or top executives, learn that and get out before there’s a push. I think it’s far more common than any of us read about. For a host of reasons, CEOs fall out of favor with their board or a key director or even their investors, even though the company is not doing badly. I think that one reason CEO pay has exploded — to much public chagrin — is it has gotten tougher to get people to move into that role.

For Carol Bartz, or any new CEO coming into a similar situation, I have four humbly submitted suggestions:

• Get out there on a road show to meet all the key shareholders and personalize the relationship with the top 25 investors and equity analysts.

• Architecture is everything, so make certain that you’ve got people groups aligned appropriately, that you’ve got a top management team, and that incentives match what you want them to do. This is diff erent in a big company like Yahoo. Smaller companies run by the seat of the pants. Company culture is the way you ultimately carry the day with people.

• Pull out the checklist, almost like the pilot’s checklist before they take off of the things you’ve got to do, including create a strategy, confirm that you have faith in the people you have and let them know who you are.

• Make certain you’re getting great feedback, maybe even hire an executive coach or consultant, to give you an alter ego who is extremely well informed about what you’re doing and how you’re doing, with customers, with employees, with the board. Know the board: I cannot overstress how important it is to develop a real relationship with them.

Ana Dutra.

Chief executive officer of leadership and talent consulting and executive vice president, Chicago, Korn/Ferry International. Author: “Fast Consolidation: Creating Value in a Brutal Economy.”

It seems to me that yahoo actually did the right thing. They had their internal candidate, and then they looked outside and found somebody who was more strategic, more of a visionary and more charismatic. One thing that boards fail to realize in CEO succession is that a great president or COO will not necessarily be a great CEO, though sometimes it’s the only option.

If we look at best practices in CEO succession, the companies that do it better not only have identified potential candidates, they’ve done it years in advance, so it’s not an event, it’s a continual process. They follow them, and others are added to the pot, from inside or out, and some are removed. What they do really well is market scanning, so they’re always looking at and developing their internal talent, but also who is available in the marketplace.

One thing that surprises me is when I ask clients whether they have a contingency plan and so few do. It’s shocking, even after stories like Coca-Cola, where Bob Goizueta died of lung cancer with no successor in place, or McDonald’s, which lost two CEOs in a year — one to cancer, one to a heart attack. Does the board know exactly who will take over and for how long?

Succession planning is much easier for companies whose CEOs are not doing well, or if the company is not doing well, than for companies that are very successful or with a CEO who is very charismatic. Those boards are handicapped, they are so fearful of even addressing the issue with the CEO.

But I ask them, how many of you do performance reviews every year, how many of you do comp studies? It’s the same thing. If you call it succession review instead of succession planning, I think that boards would be more comfortable dealing with it.

Another question is, to what extent do we involve the CEO? My answer is, it depends. As you look at the company going forward, if successful execution of the strategy is going to require a CEO very different from the current one, then you should probably involve the CEO less, because the tendency is for people to pick people like themselves. The other issue is how open-minded is the CEO really to identify, groom and transition to the person who will be their successor.

Understanding exactly what leadership traits and what knowledge will be necessary to pull the strategy forward is incredibly critical. That’s exactly the value of having a very objective process to follow and a tool to measure the candidates. Make the strategy very clearly articulated.

But often times we find that the board is not aligned. We need to identify then what factors may prevent an insider or outsider from succeeding. Condition No. 1 is a clean process. Second, be very open and very clear on the process to the internal candidates. You have to ensure that somebody who comes in will be able to engage the people who were not chosen. If you don’t want to lose them, you have to think about what the dynamics will look like going forward.

Some companies are at the point where they have just finished identifying the strategy moving forward and they are entering the execution phase. Think about a company that has just completed a major merger or acquisition. They need somebody who can come in and embrace the road map that has already been laid out and accepted by all the main stakeholders. If you bring in somebody who’s intent on moving and shaking and starting from scratch, you have a problem.

But there are cases where what you need is somebody who is really going to challenge the status quo and redefine what the strategy is and will be. Here’s the challenge: in a situation like that, on the one hand, you do need to take the time to understand the context, to know who your stakeholders are and what they are expecting. On the other hand, the honeymoon is going to be shorter because there is such hunger for results that you have to do a few things quickly to be real.

I would advise Carol Bartz to look at everything that’s broken, that needs to be changed, from an ease of implementation or risk approach, and then she will start to see things that you can just get done. What you’re doing then is gaining credibility and buying time to do the big moves that if you try to do right upfront, you will be questioned.

From a people perspective, very quickly identify who are your high-value players. You want to empower them to do the right things for you. Identify the people first who are your true supporters, identify the ones who are not, and you can see that in their body language, in the way they interact with you in the first days.

Some things you have to do right now, because they’re no-brainers, because you’re hearing from everyone that they have to be fixed. Figure out what are three things to do right away that will show you are for real. Sometimes, it’s something as inconsequential as changing the business development call and changing the day. It just shows there’s a new sheriff in town.

Second thing is make your expectations for your relationship with the board very clear: here’s what I expect from you in terms of support and advice. I’ve never heard of a board that has denied this kind of help to an incoming CEO. The truth is boards want to see the new CEO succeed. But what often happens is because that CEO is so driven by pride — wanting to succeed on his or her own — he or she ends up alienating that very board, which should be their biggest fan.

I would recommend that she find one or two personal mentors on the board, people with whom she can get together one on one, because these people can be invaluable in times of crisis. People love to be in that position. It’s just silly for too-proud CEOs not to take advantage of that.

Joseph Bower.

Baker Foundation professor of business administration, Harvard Business School. Author: “The CEO Within: Why Inside-Outsiders Are the Key to Succession Planning” (Harvard Business School Press, 2007).

Clearly yahoo had reached a point where the directors felt they had to act, and they chose to look outside the company for a successor. At such a time, the board has to step up and say we’re not doing well enough, and we have to get a new CEO and it’s as simple as that. It’s a question of when the board loses confidence in the management.

Ideally, I would suggest you look for an insider that has the perspective of an outsider — an insider who is able to really have a broad view, a strategic view of the company. Almost all the time, if you get consultants in, all they do is ask what are your strengths, what are your weaknesses, and most of the time people inside a company think they’re pretty good. It takes an unusual insider to understand where the weaknesses really are.

If you look at what private equity people do, they tend to hire from within the industry broadly. Or look at Ford. They went outside the automobile industry, but commercial aircraft is still about massive manufacturing with union workers, and Alan Mulally [Ford’s president and chief executive, previously executive vice president of Boeing and chief executive of Boeing Commercial Airplanes] is doing pretty well. In picking Carol Bartz, Yahoo chose an outsider who is also a Silicon Valley insider, although from a much smaller company with a very different customer base.

When I look around and think of the companies that have really done a good job managing for succession, they have been the companies that are very strong, that have had steady profits. It’s not so much the level as the steadiness — that they’re under control. In those circumstances, some number of them really do invest in talent and the process of succession. The rest of them just scramble.

Even in earlier times, succession was not something to which many companies paid a lot of attention. When they got near the time that the CEO was going to retire, the board looked at who else was good and said, Let’s pick one of those. Occasionally an active board would decide that the insiders weren’t good enough, and they would look outside.

A Booz & Company study showed that if your company performed in the bottom 10 percent of its industry for two years in a row, the chance that you got rid of your CEO was roughly 5 percent. Why isn’t it higher? He or she might be near retirement anyway. Or the board isn’t of the view that responsibility for the performance is the CEO’s, it’s just circumstances.

At least in principle, when you are conducting a search, you’re looking for someone who has a specific set of skills. There are always overriding things, like intellectual integrity, personal integrity, evidence of leadership, but you have a sense of what the company needs going ahead, and those criteria flow from some sense of what the future strategy should be.

You can say, wait a minute, isn’t that the job of the future CEO? Yes, up to a point, but it would be an unusual situation that anybody from the outside could come in and say, this is what this company needs. The trick is to find someone who, as far as you can tell, has enough experience with the industry and enough strategic capability that he or she can devise an appropriate approach once they got into the company and have a good understanding of what is there.

I can think of other situations where it seems perfectly clear in retrospect that the mandate for the new CEO is basically clean it up and get it ready for sale. But in Yahoo’s case, Icahn’s been satisfied. I’ve seen before the experience of outside investors that once they’re inside and see the situation, they relax. It’s easier to be critical from the outside.

Carol Bartz has really two or three very high priority items. First, she’s got to meet and come to understand and assess her team. Second, she has to get a quick fix on her financials, the balance sheet, the cash flow. Is she in a healthy situation, is the ship leaking, are there threats ahead? Then, as fast as she can, she has to assess what the strategy is and how it has to be modified.

It’s really strategy, people and finance, and she has to get on top of all three quickly. In some ways, getting on top of finance is easiest. The people, if you’re any good, you begin to get a sense and understanding of fairly quickly. The strategic problem, unless you’re already intimately familiar with the company, takes longer, because you tend to get disparate views. It’s surprising how different the views of the board members can be.

One of the most extraordinary paradoxes in the whole process, whether the situation is healthy or problematic, is that the board is looking to the new CEO to develop new strategy, which is inherently critical of the existing CEO. If there have been problems, it is critical, but even if things are going well, what you’re really saying is, How are we going to change, because the world is changing.

Looking at yahoo, the strategy they were following was based on the environment, but the environment has changed. It is a difficult leap. Incumbent CEOs find that process uncomfortable, unless they’re very confident. It’s easy to feel that you personally, and your thinking, are under attack.

William Rothwell.

Professor of human resource development, Smeal College of Business, Pennsylvania State University. Author: “Effective Succession Planning: Ensuring Leadership Continuity and Building Talent From Within” (AMACOM, 2005).

For yahoo, they should bear in mind that most CEOs brought in from outside fail. They are often saddled with keeping a senior executive team who have support from the board, so it’s difficult to bring in people beholden to the new CEO rather than their own agenda. Then the chances of failure are dramatically increased.

A smart board will give the CEO a free hand to replace the key reports, and look at the senior team as a whole fabric and take a systems view, rather than coming in as a lone gunman.

Another problem that we run into a lot in succession — and my clients never really listen to me about this — is avoiding the likeme bias to clone ourselves. Men prefer men, women prefer women, white people prefer white people. If business conditions are changing, we might need a completely different kind of person, one who might be off ensive to the current leader, one with completely different values. This raises questions even about Bill Gates’ successor, and whether that person can help Microsoft get over its problem of wanting to keep everything proprietary and keeping a monopoly, which just isn’t working. They need someone who can strike alliances.

The question with yahoo is, Do they have a board that is on target with this, does the new CEO have the freedom to deal with the complete executive team? Or is this just an external hire and the direction isn’t clear and the choice of the person is superficial?

One of the issues that is always a factor is how knowledgeable the board members are about the talent available in the business and the talent that is available outside. Board members are often not that knowledgeable about succession. CEOs pick their buddies to serve on the board, and people with H.R. background are often not well represented.

This also plays out with the issue of executive pay. There’s nobody that knowledgeable about H.R. on boards, with the result that they do things about compensation that an individual knowledgeable about comp practice wouldn’t advise.

There are three general rules of thumb about how we pick successors. If the board is happy with the direction of the business, and we have one or more qualified candidates internally, then the usual advice is to promote from within, to get more of the same and continuity.

If they’re not happy, but don’t want to make too radical a change, they source a CEO with a track record in their industry, who will be comfortable making the sort of changes they want. The third rule is if the board is not happy with direction and would like a radical change, they should select a CEO from outside the business and outside the industry. That leads to a CEO who does not buy into industry wisdom, but comes in with a lot of questions that might otherwise be taken for granted.

One of the reasons CEOs don’t build successors from within is the board doesn’t insist they do so. There are really just three things to pay attention to: goals, roles and accountabilities. What do we want out of this? Who is doing what? What is the CEO’s role, the board’s role, H.R.’s role, the role of operating managers? Then accountabilities: how are we holding people accountable for achieving the goals and acting the roles?

This is Management 101. But for some reason when we get into succession issues, everyone forgets Management 101 and goes off half-cocked. About 70 percent of successions fail, and it usually goes back to one of those three things.

Another key issue is sustainability, keeping it going. A lot of companies experience a succession crisis, and then since it personally affects the leadership, everyone is highly motivated to do something for a short time. But the program eventually fails for lack of sustained support.

A bigger group of companies suffer from what I call the like-us syndrome. They look at outside candidates and say, they won’t fit in here. The real problem is taking that at face value and not digging deeper. Maybe we don’t want someone who fits in here, maybe we want someone who thinks quite differently, to take us to the next level.

Many of these problems start at the board level. We see too little discussion about how to get boards more accountable, more active, more knowledgeable, and more willing to hold CEOs accountable for things that go beyond the quarterly result or even the daily stock market. Everything in our culture rewards that short-term thinking.

It takes time, even with the right person, to get results. If we’d judged Lee Iacocca on just his first year at Chrysler, we’d have fired him. But he brought them around.

The question is, Where do we need to drive the business, and who’s best equipped to do that, and then will we give them the free hand they need to pick the people they need to best accomplish that? Or are we going to play the politics of the senior group?

Lawrence M. Fisher has written for The New York Times, Strategy + Business and many other publications. He is based in San Francisco.