In his 30 years at GlaxoSmithKline, in particular as head of Human Resources, Dan Phelan played an integral role in the company’s most significant leadership transitions. This included the successful CEO hand-off between J.P. Garnier and Andrew Witty in 2008. Witty, promoted from within, has proven to be one of the more dynamic leaders in the industry.
In the following interview, Phelan looks at the question of whether to pursue internal or external candidates in a life sciences executive search, and explores what lessons other companies can take away to ensure that their CEO successions are smooth and successful.
Q: What was your basic approach to CEO succession planning at GSK?
Phelan: When J.P. Garnier was chief executive beginning in 2000, we had a mandatory retirement age of 60 for the CEO and top management team, so we knew that J.P. would be turning 60 in October 2007 and then retiring at the annual meeting in 2008. So from that standpoint, it was fairly easy to plan and to have an orderly transition. J.P. and I first met with the Board in the summer of 2004, so a little more than three years before a final decision would be made [on a successor], we laid out a process and timeline.
Q: What were the risks of having internal candidates vying for the top position (ultimately filled by Andrew Witty)? Would you recommend it for all types of life sciences organizations?
Phelan: I don’t think there’s a “one size fits all” approach to succession, and every company has its own unique set of circumstances. We were in the very enviable position of having three people that we felt could be CEO, and it was a very tough choice deciding on who the person would be. The disadvantage is that it’s a very public process and, much like at GE when Jack Welch retired, it is extremely difficult to retain the people who are not selected. You’ve got the external world watching and thinking, “If this person is good enough to be a candidate to run GSK, maybe they are good enough to be a candidate to run our company.” So that’s the downside, that it’s very hard to keep people.
Q: When a CEO is hired, should planning for an eventual successor be addressed relatively soon after?
Phelan: Yes, I think that as soon as J.P. become chief executive in 2000 he started thinking about his succession, realizing it was probably eight years away. You don’t want to get too ahead of yourself, but I think that there is always the issue of people having an emergency back-up in the event that something happens. And I don’t think you can plan it too far in advance either. Then, two to four years before somebody is going to step down is probably the time to really start looking at the process and start to evaluate your candidates. The most important decision a board makes is who the chief executive is going to be, so I think it’s something that should always be top-of-mind.
Q: How do you go about deciding who to look at internally and then whether to go outside?
Phelan: For us, I wouldn’t say it was obvious but these were people that had big, big jobs in the company and were logically people that would be considered to run the company at some point—one of them was basically the chief operating officer, one was running pharmaceuticals in Europe, the other was running our U.S. pharmaceuticals business. So that’s really kind of how we came at that. We did look externally, too. We don’t fill any jobs in the company without at least doing an external scan to see who else is out there. But we came to the conclusion that we had three candidates that were as strong if not stronger than other people in the industry and decided to stay internally. Had we not come to that conclusion we would have probably pressed to look for somebody outside.
Q: At a large company like GSK, succession planning is fairly sophisticated. Do you get the sense that most life sciences companies can be more sophisticated and really do a lot more strategically in this regard?
Phelan: Yes, I think that probably a lot of companies can. We’ve seen over the years some succession that hasn’t worked out terribly well, where executives are selected and don’t work out, where companies are not prepared if their CEO either steps down or is removed by the board. So I think there are more sophisticated things people can be doing. I think just having it on the board’s agenda is the most important thing. Again, I don’t believe there’s any “one size fits all” approach, but there are best practices out there that can certainly be borrowed and enhanced.
Q: Let’s talk about the life sciences CEO of today and the future. What should companies be looking for in a new kind of CEO, maybe different than in the past?
Phelan: That’s a great question. The Life Sciences industry has changed dramatically. You need somebody who really is going to focus just not on cost but also on growth. Certainly the whole issue of R&D productivity is really critical and something that CEOs need to focus on. And whether it’s drug safety or safety of medical devices—which is obviously critical after the situations with fen-phen and Vioxx—I think there’s just far more industry regulation and a lot more conservative regulation in the industry, whether it’s getting medical devices or pharmaceutical products approved. And then finally I think industry reputation is critical—I think there’s a need for much greater transparency whether it’s in clinical trials, in the pharmaceutical business, or with medical devices. Those are the things I would say you want a CEO to be able to focus on to not just deal with the company’s reputation but also enhance it.
Q: Do life sciences CEOs need to have a deep understanding of the broader context of healthcare reform?
Phelan: Absolutely. You need to have people on your team that can help you look at what these industry changes are, whether it’s dealing with patients, or how physicians are practicing and industry regulation, productivity, or costs. All that has to come into the equation and I think you need chief executives that understand that. The industry is very different than it was in the late 1990’s and early 2000’s.
Q: Is it really too much for one person to understand altogether and is it a matter of surrounding yourself with good people as well?
Phelan: Yes, I think that’s really critical. I think the world is so complex at this point that no chief executive can really fully grasp all the issues. You need to surround yourself with a great team and be able to motivate them, have a very open dialogue, and have a great deal of transparency to get things done.
By Paul Thomas, Witt/Kieffer Senior Writer