Southern Co. favors no-drama succession
When Southern Co. announced a new chairman and chief executive late last month, the news rolled out with all the excitement of paint drying.
The newcomer, Chief Operating Officer Tom Fanning, had been at retiring chief executive David Ratcliffe’s side for years, both at Atlanta-based Southern and at its biggest subsidiary, Georgia Power. Financial analysts who follow Southern already knew him well. So did management throughout the company, where Fanning has run one part of Southern’s business or another for many years.
It was another seamless execution from Southern’s succession machine.
The tricky issue of replacing a retiring chief executive has added some epic turmoil -- think Bob Nardelli at Home Depot or Leo Mullin at Delta -- to the annals of corporate Atlanta over the years.
Exactly none of it has come from Southern, which is known for its smooth, no-drama turnovers at the helm.
The company’s far-reaching succession planning is a rarity: A recent survey by the National Association of Corporate Directors, found half of U.S. corporations have no formal plan for succession for its senior executive team.
Wall Street loves Southern’s approach.
“They do a better job of building people than about any other company in their industry,” said Jonathan Arnold, a utilities analyst at Deutsche Bank Securities.
“We weren’t particularly anticipating that, that [Ratcliffe]would go,” Arnold said. “But it ends up being not of particular concern. There were at least two credible candidates for the job in place.”
“We all respected David a great deal,” he said. Yet because of the company’s planning, Ratcliffe’s retirement “just wasn’t an event.”
Southern’s board and management consider succession planning a top priority, said spokesman Jason Cuevas: “Leadership development and succession are considered key responsibilities at the company, including of the CEO.”
The company begins identifying potential leaders early, using interviews and tests to determine how they stack up on critical competencies like formulating successful business strategies and persuading and influencing colleagues.
Southern then moves future leaders around, into a range of its businesses.
Fanning has been a chief executive of Southern’s Gulf Power in Florida, a chief financial officer at its utilities in Mississippi and Georgia and at Southern itself, a chief information officer at Southern and the head of business development for the Southern subsidiary that later was spun off into Mirant Corp.
Since the early 1990s, Cuevas said, the company reviews succession every year to ensure two people are prepared for each key executive position at Southern and its operating companies, which also include Alabama Power, Mississippi Power and Gulf Power.
“Ninety percent of the key leadership positions have at least two individuals ready to fill them,” he said. “And they all have at least one.”
Peter Gleason, managing director of the National Association of Corporate Directors, said others are beginning to emulate Southern’s rolling succession process: “There’s a growing consensus that you don’t want to hire a new CEO and then wait five years, and that internal development of leaders is more successful over time” than bringing in outsiders.
But Southern’s style of leadership change has its detractors, and in fact fell out of favor in many boardrooms in recent years, said Jeffrey Sonnenfeld, a senior associate dean at the Yale School of Management and fan of the Southern method.
Nationally, pressure from shareholders concerned about cronyism meant that “People who were tested, and who knew the company and knew its problems were disparaged as cronies,” he said. “Long term grooming of talent was something that a lot of board members tended to forget,” as they brought in outsiders whose imperfections weren’t known -- and who knew less and had less board independence than an inside candidate might.
Not everyone applauds Southern’s conservative approach to succession. Stephen Smith, leader of the Southern Alliance for Clean Energy, said the company’s approach leads to “insular thinking. It does not lend itself to outside ideas or fresh approaches.” He said that has helped make Southern the utility most resistant to change.
Arnold, the utility analyst, said outside leadership might have a hard time fitting in at Southern in any case: “They’re just very homegrown. But that’s not bad. They’ve got a good thing going and its works.”
