Leadership by Geoff Colvin

How McDonald's got CEO succession right

August 23, 2011: 5:00 AM ET

A look back at the way the restaurant chain handled the deaths of two CEOs and found the right man for the job.

McDonald's CEO Jim Skinner, photographed in 2011, is a product of the company's strong culture of promoting from within.

I wrote this article in 2005, a few months after Jim Skinner became CEO of McDonald's (MCD). The piece didn't run in the magazine because of space constraints, but this tale, presented here as it was written six years ago, remains as relevant as ever. The story appears with a Skinner profile in the iPad edition of the latest Fortune, underscoring the importance of CEO succession planning--and how McDonald's system of nurturing internal talent worked.

A strong bench certainly has paid off for McDonald's, which, in the span of two years, appointed three CEOs from its ranks--a feat made even more amazing by the tragic circumstances: Two of those CEOs died within nine months of each other. One authority on board governance, former Medtronic (MDT) CEO Bill George, calls McDonald's "the classic case study of continuity." Says Andrew McKenna, McDonald's nonexecutive chairman who has led the company through its succession challenges: "Part of the Boy Scout motto is 'Be prepared.' You have to be ready for that moment you don't want to happen."

It's hard for the folks in Oak Brook, Ill., where McDonald's has its headquarters, to fathom that it was just a year ago that Jim Cantalupo died. A 28-year McDonald's veteran and the company's longtime international boss, Cantalupo had recently retired when, in January 2003, the board called him back to replace Jack Greenberg, who had beaten him for the top job a few years earlier. Greenberg's mistake was spending rashly--too many new stores and too many expensive innovations that didn't pay off. Sales sputtered and profits nose-dived.

It took a decisive and disciplined manager like Cantalupo to get McDonald's back on track, and he did so quickly. In fact, in April of last year, Cantalupo was hours away from delivering a triumphant talk about the company's nascent turnaround to 14,000 McDonald's owners and operators in Orlando when tragedy struck. McKenna remembers getting the 5 a.m. phone call from Charlie Bell, then president of McDonald's. "He said, 'Jim has passed away?'" McDonald's chairman and CEO, then 60, had died in bed, beside his wife, after a massive heart attack.

Jim Cantalupo died unexpectedly of a heart attack.

If anything was serendipitous about that awful morning, it was that all of McDonald's top brass and eight of its dozen board members were together at the Peabody Hotel across from the Orlando convention center, where the company's biannual meeting was taking place. By 6:45 a.m., the eight directors were assembled in the hotel's boardroom; the other four joined the meeting by conference call. "We had three choices," recalls McKenna, 75, who is CEO of Schwarz Paper Co. and who, as chair of McDonald's governance committee, took charge. "We could have made no decision, which was unacceptable. We could have appointed an interim CEO, which was more unacceptable. Interim CEOs are never the best way. It's like buying something on trial."

The third and obvious choice was to promote Bell, who had been Canta-lupo's protege and heir apparent. Only 43 years old, he was supposed to be groomed for a few years before stepping up. But there was no time for preparation. "We immediately announced Jim's death and were able to elect his successor before the stock market opened," says McKenna, whom the board named nonexecutive chairman that morning.
Of course, a succession plan is only as good as the people in it. Bell emerged from a management pipeline that stands as a model for any company that strives to develop and retain its talent. Forty percent of McDonald's 50 top executives started in one of its restaurants, flipping burgers and sweeping floors. Every July the board devotes a big part of the day to discussing succession down to the officer level. At every board meeting, the directors meet without the CEO and talk about succession.

And so by the time Charlie Bell was on deck to succeed Cantalupo, everyone who mattered knew him well. Indeed, it was hard not to know Charlie. A gregarious Aussie with a booming laugh, Bell had started at McDonald's at 15, become a vice president at 27, and gone on to oversee operations in Asia, the Middle East, Africa, and Europe. When he stepped up last year, he was supposed to be McDonald's CEO for the long haul. But it didn't turn out that way. Right around that time, Bell was bothered by stomach pains. His doctor urged him to have a colonoscopy. He did, but the results were inconclusive. In early May, about three weeks into his run as CEO, Bell underwent exploratory surgery that revealed colorectal cancer.

Charlie Bell was the charismatic executive selected to succeed Jim Cantalupo. Bell discovered he had cancer and resigned as CEO after seven months.

The cancer had spread to two lymph nodes. Still, the doctors were hopeful. Bell was in his early 40s, vigorous and tireless--at least he seemed to be. He had no other health problems and no history of cancer in his family. During the next couple of months, while undergoing chemotherapy, he was fully in charge--in the office every day, off to Cannes, France, in June to accept an ad industry Marketer of the Year award. He signaled his illness by frequently asking colleagues, "Have you had a colonoscopy?" Bell urged everyone over 40 to be tested, even though the American Cancer Society recommends colonoscopies for people 50 and older.

As the summer passed, Bell grew weaker, though he downplayed how sick he was. This is one of the burdens of being a seriously ill CEO of a public company: If Bell had revealed, even to a senior colleague, that he was intending to step down, McDonald's would have been required to disclose the news publicly. When he made that decision in November 2004, Bell was surrendering. "Charlie decided that, as much as he was a fighter, he was going to go back to Australia," McKenna recalls, noting that Bell's mother, his brothers, and a sister lived there. Having set aside more than $300,000 to help Bell return to his native Australia, McDonald's flew Bell, his wife, and his teenage daughter to Sydney in a private, medically equipped jet.

You would expect that McDonald's management pipeline might be drying out by now. Not yet. The board didn't hire a search firm to find Bell's successor; the directors never considered looking outside for a candidate because the right guy was right there in front of them. "When Jim was CEO, I sat on his left, and when Charlie was CEO, I sat on his right," says current CEO Jim Skinner, explaining the boardroom dynamics back then.

"Skinner is different from Cantalupo, who was a financially savvy turnaround guy. And he's no Charlie Bell--that is, not a charismatic cheerleader. A Johnny Carson lookalike, he has the TV legend's reserved manner and dry wit, as well as a Midwestern upbringing. The son of a bricklayer, Skinner started at McDonald's as a manager trainee in Carpentersville, Ill., in 1971, after nearly 10 years in the U.S. Navy. He never sought the spotlight, but he gained favor as a solid operations executive, working under Cantalupo for 14 years. "Charlie was an extension of Jim [Cantalupo]. And Jim [Skinner] will be an extension of Charlie," says McKenna. That assessment suits Skinner just fine. "Notice that when I took the job, I said that change in leadership does not mean change in strategy," he says.

Charlie Bell died at home in Australia in January. No one at McDonald's would ever say that the trauma of losing him and another successful CEO made management grow stronger. But no doubt management grew wiser. Skinner, 60, refuses to say how long he plans to stay in the job, but most people expect it will be three to five years. No matter. He regularly says to his managers, "Give me the names of two people who could succeed you." That kind of thinking has certainly paid off for McDonald's.

Click here to meet McDonald's U.S. President Jan Fields. She takes the health crusade personally: She lost 90 pounds and is training for her first marathon.

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Pattie Sellers has written more than 20 Fortune cover stories including "Marissa Mayer: Ready to Rumble at Yahoo," "Muhtar Kent's New Coke," "Oprah's Next Act", "The $100 Billion Woman" (Melinda Gates), and "Gone with the Wind" (Ted Turner). She co-founded Fortune Most Powerful Women and oversees the Fortune MPW Summit, the preeminent gathering of women leaders in business and beyond—and programs such as Fortune MPW Entrepreneurs and the Fortune-U.S. State Department Global Women Leaders Mentoring Partnership. Pattie also develops Live Content across Time Inc. Her blog, Postcards, is about how power players lead and navigate their careers. Pattie won Time Inc.'s prestigious MVP award for her performance in 2012.

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