Schafer: Replacing the CEO isn't easy for smaller firms

Techne Corp. CEO Thomas Oland, age 71, had a clear plan for CEO succession.

Appoint Chief Financial Officer Greg Melsen as CEO.

The board disagreed, and that's why Friday will be the last day of Oland's exemplary 27-year tenure leading the Minneapolis-based company. He has resigned from the board and will retire.

The disagreement between the CEO and his board illustrates just how difficult the job of management succession can be, as Techne is far from the first company to struggle with it.

There are good practices to make the process go smoother, and it starts with a board of directors that invests significant time on management succession.

One frustration for smaller company directors is that there seems to be a lot of great advice out there that's more relevant for directors who sit on the board of a Fortune 500 company. Those directors can read articles like the one A.G. Lafley co-authored a year ago for the Harvard Business Review based on his experience finding his successor at Procter & Gamble Co.

At one point Lafley described how he assumed the role of leadership coach, "especially with the top 500 executives."

Jay W. Lorsch, a professor of human relations at the Harvard Business School, said the real luxury big companies have in management succession is the opportunity to put up-and-comers into jobs running a business unit. It means executive experience with all of the functional areas of a business, and tracking results is easy.

The far simpler structure of smaller companies usually means the best candidates for promotion have jobs like vice president of marketing or director of operations, with little or nothing to do with other functions.

Creating a chief operating officer role at smaller companies solves that problem but creates others, in part because a new COO will almost certainly be seen as CEO-elect. Lorsch said it can also be difficult to manage the timing of the transition of executive authority.

The best small-company directors understand that it's their job to pick a CEO and make sure they have a good choice when the time comes. But they also get that board members can't develop internal CEO candidates. What the board must do is insist that the CEO is doing it, and has a process for doing it well.

"I really believe in the old adage that you inspect what you expect," said Linda Hall, an experienced corporate director perhaps best known for her work as CEO of MinuteClinic. "A board needs to devote a significant amount of time to having the CEO go through the management development plans of key people."

John Meeker, the founder of Meeker Search and Consulting of Edina, said he has been hired to, in effect, conduct an internal search by vetting the best candidates. He brings the same evaluation and screening process that he might use for a full executive search. Usually, he said, there is plenty of track record to review. "Which of the [internal candidates] has sought out the most diversity of experience?" he said, as an example of what he evaluates. Not just ambitions, he added, but concrete steps to learn new things, such as by volunteering in a trade association.

Even with rotating assignments, training and other hard work, Lorsch said, "developing the generalist internally is very difficult to do. It's one of the reasons that you see so many people picked from the outside. And that usually leads to problems."

Techne's Oland was certainly a strong advocate of hiring internally. In his short e-mail giving 30 days' notice as CEO, attached to a public filing, he argued that 30 years of progress will be put at risk by recruiting someone unfamiliar with the company.

The board's new chairman declined, through an assistant, to discuss the matter, and Oland did not respond to a request to comment.

It appears from a filing that the board intends only to look outside. Oland's choice, Greg Melsen, was named CFO in 2004, and will take over as CEO on an interim basis.

In its most recent quarter, Techne earned $25.7 million, or 70 cents per share, on sales of $75 million.

Leonard said he can understand a board's desire to look at other candidates, but added that he would also not be surprised if the directors take the easy way out and grab the guy who is right in front of them.

And appoint Melsen.