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Coca-Cola: Succession Planning and the Peter Principle

SIGMA believes in ongoing learning and development. One of the most efficient ways to do this is to learn from the successes and failures of others. These cases highlight some of industry’s most powerful lessons in organizational management, drawn from the example of those who went before us.

Case Study

COCA-COLA: SUCCESSION PLANNING AND THE PETER PRINCIPLE

A business case for succession planning and how one of the world’s largest brands missed the mark.

Download SIGMA’s case on Coca-Cola’s CEO succession planning process to learn:

  • How key concepts in management psychology apply to Succession Planning
  • The value of communication between the board and the company
  • The importance of having a Plan B
  • The importance of having a proper Plan A
McDonald's

Sneak Peek: What’s Inside?

In 2000, Harvard Business Review (HBR) highlighted a growing trend in CEO turnover. Studies were showing that a third of Fortune 100 companies had replaced their CEOs in the last five years, and CEOs appointed after 1985 were three times more likely to be fired than those appointed beforehand.[i]

While some CEO turnover is organic and inevitable, most can be attributed to faulty succession planning. When companies don’t take time to intentionally groom successors, they end up promoting the wrong candidate or failing to equip the right one. This is why Ronald LeMay lasted less than four months as CEO of Waste Management Corporation, and Robert Nakasone resigned after 18 months at Toys R Us. And they weren’t the only ones.

Despite its status as a global brand and giant in the consumer-packaged-goods industry, The Coca-Cola Company (Coca-Cola) is no stranger to issues with their succession planning.

The Problem

On December 6th, 1999, Doug Ivester retired at age 52, resigning after only two years as CEO of Coca-Cola. During his short time in office, Coca-Cola’s return on shareholder equity dropped from 56% to 35%, and overall earnings declined for two years on-end. The company’s market value remained unchanged; little consolation given that it grew 34-fold during Roberto Goizueta’s 16-year tenure as their previous CEO.[ii]

Ivester began his career at Coca-Cola as an extremely successful CFO. However, despite being mentored by the previous CEO for over 10 years, Ivester failed to adopt his predecessor’s most valuable leadership skills. Why was Goizueta’s protégé and right-hand man unable to follow in his footsteps? To answer that question we’ve taken a look at McDonald’s succession planning process and applied current concepts from management psychology.[iii]

What Happened

As Coca-Cola’s CEO, Ivester did not inherit an easy job at an easy time. The company was at the end of a bottler-consolidation strategy that had given Coca-Cola a steady stream of extra revenue. Not only that, the weak dollar that had previously bolstered the company’s earnings suddenly strengthened. In addition, the Asian Financial Crisis that began in 1997 was raising fears of economic meltdown and harming sales in one of Coca-Cola’s major markets.2 All this did nothing to improve Coca-Cola’s performance during Ivester’s time as CEO.

That being said, Ivester did little to guide the company through its challenges. He was insensitive to socio-political contexts and unable to address stakeholder concerns. He lost the Orangina and Cadbury Schweppes business in most of Europe because he failed to address anti-Americanism among Orangina’s executives. Not only that, in 1999 Ivester mishandled one of Coca-Cola’s greatest health scares. The world was informed that a group of Belgian schoolchildren had fallen sick after drinking a contaminated batch Coke.1 This occurred after Belgium’s previous health minister and prime minister lost their jobs because they overlooked fears about dioxin-contaminated beef.[iv] Fear over food safety was prominent, and yet Ivester ignored public relations and reported simply that his product had been tested and raised no health concern. Belgium’s Health Council later called the subsequent epidemic of Coca-Cola “poisoning” a case of “mass sociogenic illness” (the politically correct term for large-scale panic-induced sickness). Whether or not the public’s fears about Coca-Cola were valid, Ivester failed to address them.

Closer to home, Ivester’s lack of social awareness also resulted in the loss of Coke’s highest-ranked African American executive, Carl Ware. Ware left after being effectively demoted, despite saving the company from a potential discrimination-based public relations disaster when he established a $50 million program to encourage Black vendors. Coke employees and the city of Atlanta were outraged by his demotion, and Ware resigned soon after. It wasn’t until after Ivester stepped down that Wage was rehired and promoted to VP, Public Affairs and Administration and took back his position, reporting directly to the new CEO.[v]

At the end of the day, Ivester may have been a good manager, but he was not a leader. He was insensitive to the socio-political circumstances in which he was operating, and he failed to balance Coca-Cola’s long-term financial strategy with the company’s immediate challenges. How could someone so strong as a CFO be so lacking as CEO? Unfortunately, it’s not an uncommon occurrence, and it’s a phenomenon that has been explained by the Peter Principle.

How They Got There

Because Ivester spent 10 years being mentored by Goizueta himself, the board thought they were honoring their late CEO’s wishes by passing the role on to his protégé. In doing so, Coca-Cola fell victim to a common succession planning mistake, dubbed ‘The Peter Principle.’

The Peter Principle dictates that people tend to rise to their own level of incompetence.[vi] This happens because we mistakenly assume that employees who excel at one level ought to be promoted to, and to find success at the next. In the case of Coca-Cola, Doug Ivester was a remarkable CFO, so rather than promoting him to CEO the board would have done well to keep him where he worked best.

The Peter Principle wasn’t the only flaw in Coca-Cola’s succession planning process. Another issue the company faced was a lack of communication between the board and corporate leadership; this made their succession plan regrettably one-sided. In a memorable article, HBR described Ivester as being known among co-workers as an “arrogant version of Jimmy Carter – consumed by details and unable to see the big picture.”1 He was well known among Coca-Cola’s employees as a skilled CFO, but few inside the company thought of him as a leader. This insight would have been available to the board if they’d taken the time to consult their corporate leaders. For this reason, succession planning requires the collaboration of all parties involved.

Despite these issues, Coca-Cola may have been able to navigate a less-than-effective CEO. The original plan was for Goizueta to remain an advisor and public figure in the company’s management but allow Ivester to take over the technical reigns as CEO. Unfortunately, Goizueta passed away and Ivester was clearly unequipped to bear the entire burden himself. In this case Coca-Cola would have done well to have at least one other candidate groomed for succession, in addition to ensuring that their primary candidate was fully capable of taking on the role.

Key Takeaways

  1. Don’t Fall Prey to the Peter Principle – Just because someone excels at one level of leadership does not mean they will be successful at the next. Remember that technical expertise isn’t an indicator of managerial potential, and that employees should be encouraged to stay in positions that capitalize on their strengths. To help you overcome the Peter Principle, we recommend assessing candidates’ skills, not just for the current role, but for the role they are slated to take on. Use objective measures as well as feedback from others; this will help you overcome biases and understand which candidate is right for the role.
  2. A proper succession plan requires collaboration from the board, corporate leadership, shareholders, and employees. Diversify the perspectives available to you so that you can make an informed decision about what is best for the future.
  3. Have a Plan B – Ensure your leadership bench is well developed so that you have multiple succession candidates groomed for each role. This will allow your organization to promote internally even if your primary successor is unable to take on the role.
  4. Don’t Settle – Coca-Cola’s original plan was to have Ivester take on the technical role of CEO but keep Goizueta as a visionary leader. This should have been an early indication that Ivester was not entirely fit for the position. When identifying and grooming succession candidates, look for those who have the potential to truly take on all aspects of the role.

Succession Planning at Coca Cola Today

It’s been two decades since Ivester’s resignation as CEO of Coca-Cola, and the company has improved their succession planning since. James Quincey is the incumbent CEO and has been since May 1, 2017. Quincey was groomed as a CEO succession candidate during his time as president of the company’s Europe group, then as the company’s overall president and COO. He had a 20-year career with Coca-Cola, and was personally mentored by Muhtar Kent, the previous CEO, during the latter half. Quincey was given the opportunity to establish a new international operating structure and raise up a leadership team. He was familiar with Coca-Cola’s brands, values, and systems, and was quoted by Kent as having an “acute understanding of evolving consumer tastes.”7 In short, Coca-Cola invested in developing a leadership pipeline that allowed Quincey to both demonstrate and develop the strategic vision and inspirational leadership that Doug Ivester was lacking. In this way Coca-Cola has served as an example of both the risk in unplanned succession and the benefit of ongoing succession planning.

SIGMA Can Help

Like Coca-Cola today, you can get succession planning right. We’re here to help. Over the last 50 years SIGMA has worked with more than 8,500 private and public organizations to develop people potential and increase organizational effectiveness. We provide full-service succession planning, custom consulting, and a range of templates and resources. We also offer a number of succession planning workshops. To learn more about our solutions click here or contact us directly for more information.

[i] Bennis, W. & O’Toole, J. (June 2000). Don’t Hire the Wrong CEO. Harvard Business Review. Retrieved from https://hbr.org/2000/05/dont-hire-the-wrong-ceo.

[ii] Morris, B., & Sellers, P. (January 10, 2000). What Really Happened at Coke. Fortune. Retrieved from https://fortune.com/2012/11/21/what-really-happened-at-coke/.

[iii] Wagner, R. (April 10, 2018). New Evidence The Peter Principle Is Real – And What To Do About It. Forbes. Retrieved from https://www.forbes.com/sites/roddwagner/2018/04/10/new-evidence-the-peter-principle-is-real-and-what-to-do-about-it/#1267059f1809.

[iv] Sellers, P. & Tarpley, N. (1999). Crunch Time for Coke His company is overflowing with trouble. But CEO Doug Ivester says he’s in firm control of “the most noble business on earth.” CNN Money. Retrieved from https://money.cnn.com/magazines/fortune/fortune_archive/1999/07/19/263104/index.htm.

[v] Reference for Business. (2020). Carl H. Ware. Reference for Business. Retrieved from https://www.referenceforbusiness.com/businesses/A-F/Ware-Carl-H.html.

[vi] Wagner, R. (April 10, 2018). New Evidence The Peter Principle Is Real – And What To Do About It. Forbes. Retrieved from https://www.forbes.com/sites/roddwagner/2018/04/10/new-evidence-the-peter-principle-is-real-and-what-to-do-about-it/#1267059f1809.