As Chinese Firms - and Their CEOs - Mature, Succession Planning Gains Urgency

It's hard to imagine that Ren Zhengfei has much in common anymore with China's hundreds, if not thousands, of entrepreneurs who set up their own companies like he did back in the 1980s. Now vice chairman and CEO of Huawei Technologies, one of the world's largest telecoms equipment companies, the Shenzhen-based executive is a big name in international business circles thanks to bold global expansion that other Chinese entrepreneurs only dream of.

Zhengfei has also sought to distance Huawei from the companies of China's many other so-called "first generation" founder-CEOs by modernizing its management and governance. "Huawei has established a clear and comprehensive governance framework, which is the cornerstone of sound corporate performance and sustainable growth," trumpets its website. That framework includes a supervisory board, an independent auditor and a 12-member board of directors, including Zhengfei, with Sun Yafang as its chairman. What the website doesn't mention is how questions over Huawei's governance surfaced last year. Several members of the executive team resigned after Ren announced plans to install his son as chairman and his daughter as chief financial officer. According the company's annual report, his plans were only partially successful, with his daughter being voted in to the top finance job earlier this year, while there is no mention of his son.

So Zhengfei has more in common with China's senior private sector executives after all. Trying to find a smooth, transparent way to hone and appoint successors is flummoxing more than a few chief executives in China today, says Liu Shengjun, deputy director of the Case Center of the China Europe International Business School (CEIBS) in Shanghai. What's more, he predicts that the challenge will intensify over the next few years as the country's entrepreneurs of the 1970s and 1980s near retirement age.

Not so long ago, founder-CEOs would most likely have looked to their children to take over the running of their companies. Indeed, a 2005 survey by the quarterly academic journal China Perspectives showed that 88% of founder-CEOs in the country wanted to groom their children as successors. But statistics today reveal a change. An article published earlier this year in China Daily newspaper reports that a poll of business leaders by the Guangdong Federation of Industry and Commerce (GFIC) found that 13% of private companies in Guangdong province -- of which there are reportedly more than 800,000 registered -- are run by the owners' children, while another 21% have sons or daughters in senior management roles. The poll also found that 62% of the respondents hoped their family members would manage the business in the future, but 51% are worried that it is unlikely.

For a number of reasons, handing the baton to a family member is no longer the sure-fire solution it once was. As companies have grown, often becoming more global, managing them is increasingly complex, dampening the enthusiasm of younger generations to take over the executive suites. Another reason is that their offspring have diverging career plans. According to the GFIC survey, 40% of the respondents said they sent their children to study abroad, and 13% said their children have started their own companies.

Right Place, Right Time

Of course, the challenge isn't unique to China, nor its family-owned firms. In a global survey by HR consultancy Towers Watson published in late 2010, less than a third of the 750 respondents at a range of firms said they believed their companies had good succession and leadership development in place while an almost equal number agreed their current capability is limited. The consultants noted that gaps were particularly pronounced in the Asia-Pacific, where respondents in the region cited succession planning and management as their second-highest workforce challenge (at 50%), behind loss of talent in key skill areas (54%) but ahead of attracting talent (48%) and use of incentives (29%). Only 24% of the Asia-Pacific respondents said their succession planning was up to snuff.

Even companies with solid succession plans and that are good at moving promising managers up through the ranks aren't guaranteed a successful handover for CEO or other top jobs, say experts. Lining up successors to be ready at the right place at the right time can be a feat in itself, particularly as company's leadership needs change and impatient would-be successors seek opportunities elsewhere.

But management experts like Liu predict that pressure is now mounting on Chinese companies of all types to understand when and how to introduce more rigorous, transparent succession planning of their own despite of a number of cultural and management traditions adding to the challenge. Given the extremely hierarchical way most companies in China are organized, just the mere mention of succession planning by, say, a firm's human resource or risk management executives can be viewed as inappropriate, even insulting, if the founder-CEO is still in charge.

And the process becomes tougher if the CEO has a cult-status among China's corporate elite. "It's very, very challenging [when] the CEO becomes the icon of the company," says Marshall W. Meyer, a management professor at Wharton.

More often than not, it's the CEO rather than the board that will have the ultimate influence over the process. "At most Chinese companies, there is no real corporate governance. The CEO has the final say, like a little emperor; the executives are subordinates," says Liu of CEIBS. "Although Huawei has a board of directors, every member of the board is a subordinate of Mr. Ren. The board is more symbolic."

In the Hot Seat

Given both the CEO's influence and the country's culture of guanxi (the deep personal networks that run through China's society), it's not surprising that "the successor is usually an 'insider' and has a good relationship with the former CEO," Liu says.

For that reason, it is also tough for a foreigner to ascend to the top job. "The Chinese culture is very indirect, very complex," says Liu. "For Western people, it's very hard to integrate into this kind of culture. Maybe for overseas Chinese, it is better, but the possibility [of being promoted to a CEO post] is still not very high," he says. "So far, we haven't seen any successful cases."

Liu cites the 2009 departure of William Amelio, the American CEO of Lenovo. The Chinese computer maker felt it had to have an American face at the helm in part because it had taken over the PC business of IBM and its headquarters is in North Carolina in 2004. Under Amelio's tenure, however, the company fell behind Taiwanese computer maker Acer to fourth place globally. Shares tanked. After Amelio's resignation, Lenovo's chairman, Yang Yuanqing, became CEO and founder Liu Chuanzhi resumed his role as chairman.

So what's the key to CEO succession planning? In general, if passing the reins to family members is important, a CEO-founder can consider putting them in posts [that will prepare them] to take over early, says Peter Cappelli, management professor and director of Center for Human Resources at Wharton. To avoid later accusations of nepotism, he adds that stakeholders' confidence in the new CEO will be bolstered if there is a well-designed and communicated process for honing the leadership skills of the candidates -- with, say, varied roles throughout the company, not just at headquarters.

Along with open conversations about the process, Robert Nason, assistant director of STEP, a family business research initiative at Babson College in the U.S., says CEOs should set up a committee to vet and interview candidates, internal and external, which could include the founder's children. As tempting as it might be, he adds, the committee should also aim to avoid appointing a replica of the founder, bearing in mind the company's future needs and strategy.

Arguably the toughest challenge lies not in managing the CEO but with the candidates, according to a recent white paper titled, "Overcoming the Obstacles to CEO Succession Planning," by consultants at Oliver Wyman. According to the paper, many companies are reluctant to launch succession plans -- or what it refers to as a "horse race," in which colleagues start to view each other as competitors.

Citing guidelines Oliver Wyman developed with the National Association of Corporate Directors in the U.S., the paper says an escalation of internal politics can be thwarted if succession planning is placed within a larger development program for all senior executives. What's more, companies should begin as far ahead as three to five years prior to the time a CEO transition is expected. The paper also says the full board should be involved in well-defined assessment processes that allow them to interact with internal candidates, and these should be discussed at formal board meetings at least once a year. What's more, the outgoing CEO should either leave the board when a departure date is set or stay on as chairman for a transitional period of six to 18 months. Those are high standards to meet, acknowledges the paper.

Role Models

To understand how that works in practice, many Chinese companies look for guidance not just in Western companies, but also in Singapore, which is a regional star of corporate governance. The latest annual Corporate Governance Watch report, co-produced by Hong Kong-based investment group CLSA and non-profit Asian Corporate Governance Association (ACGA), ranked Singapore ahead of 10 other Asian countries, including Hong Kong, Japan and Taiwan. The report covered 580 Asia-listed companies and studied various factors that affect corporate governance, including succession planning.

Not only does Singapore have a similar culture, its "political system is a little bit like China," says Liu. "China's government has sent many delegations to Singapore to learn how to manage huge companies and try to borrow their experience." While there's no central party system, Singapore has large state-owned companies like China, such as state investment firm Temasek Holdings with a portfolio of S$186 billion (US$152 billion).

However, while its board and management team are said to run without government intervention, it's hard to overlook the fact that CEO Ho Ching is the wife of Singapore's Prime Minister Lee Hsien Loong -- Reuters reported last summer, after a series of high-profile senior appointments, that Temasek has no succession plans in place for Ho. In this respect, then, China is on its own.

Where does succession planning in Corporate China go from here then? As Wharton's Meyer notes, even private companies take their cues from Beijing.

Government-owned firms with party officials running the show continue to set the pace. According to Liu, officials, who often have offices inside these companies, appoint and remove the CEOs and other senior executives at will. For example, in 2003, Wei Liucheng, CEO of state-controlled CNOOC, one of China's largest oil companies, was suddenly named governor of Hainan province. "He knew nothing of the change until the party's announcement. It was a shock to him," Liu says.

The reverse also happens when party officials are appointed chief executives. The musical chairs often make little sense from a strategic perspective: At one point, the government shuffled the heads of China Unicom, China Mobile and China Telecom, the country's largest phone companies. "It sounds ridiculous but it happens in China," Liu says.

But as China's businesses change rapidly to meet global standards, corporate governance practices, including planning for CEO succession, will be in the public spotlight. What China's style of good governance will eventually look like is anyone's guess. "It remains to be seen how it will play out over time," Nason says

Knowledge@Wharton