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Ciptapangan Visitor
Managing: Tough Question For L-3's CEO: Who's Next?
posted by admin on 22/06/06

Entrepreneurs who build empires based on their own unique vision.

And then face questions about how they will pass it on when they grow old or begin to lose their health. 

Frank Lanza, presiding over back-to-back shareholder and analyst meetings last month, displayed his usual wit, candor and command of the myriad products made by the company he founded. But the 74-year-old chairman and chief executive of defense contractor L-3 Communications Holdings Inc., who appeared gaunt and pale, lifted the veil on an issue investors have been pondering for months: his health. 

Mr. Lanza disclosed to shareholders that he recently underwent esophagus surgery. In an interview after the meeting, he said the operation successfully removed acid-reflux-related scarring that had prevented him from swallowing food for two months. He says he is feeling "about 80%" and adds that his doctors say he is approaching full recovery "very rapidly." 

Mr. Lanza's situation echoes the quandary faced by entrepreneurs who build empires based on their own unique vision, and then face questions about how they will pass it on when they grow old or begin to lose their health. New York-based L-3 is a fast-growing company with a market value of $10 billion and expected sales of $12 billion this year from products as diverse as luggage scanners and advanced military electronics. Mr. Lanza assembled it from other contractors' discards, often by making contrarian bets on markets -- such as airport security before the Sept. 11, 2001 terrorist attacks. 

Mr. Lanza -- who was back at work a week after surgery -- doesn't face a mandatory retirement age and is adamant about staying put. "I'm having too much fun at L-3," he says. "I have no plans over the next several years to retire." 

He also doesn't have a designated successor. "I don't go for that. I think it's not the smart thing to do," he says, noting that the executives who run L-3's operating units are "more than capable of conducting business ... if something were to happen to me." Choosing a corporate heir will begin in earnest "once I get to within a year of retirement," he says, without being more specific. 

L-3 insiders aren't suggesting that Mr. Lanza step down. But the board has begun mulling succession, focusing on a clutch of internal executives who each run billion-dollar divisions. "The board talks about this a lot," says Peter Cohen, an L-3 director and managing partner of Ramius Capital Group, New York. "The board is very comfortable with the management of this company and any succession requirements that might arise." He adds of Mr. Lanza: "He's very much on top of his game. He's totally focused and in control." 

Mr. Lanza isn't unique in holding tight as both chairman and CEO. News Corp. founder Rupert Murdoch is 74, and fellow self-made media mogul Sumner Redstone, 82, only recently ceded his CEO role at Viacom Inc., though he remains chairman. 

Nonetheless, Mr. Lanza is bucking a corporate trend. David Nadler, chairman of Mercer Delta Consulting, which advises large companies on organizational and leadership issues, says more CEOs are looking to quit before their firms' mandatory or customary retirement age. "There is a certain burnout factor," he says, but also an increasing "degree of uncertainty that something might happen within the company that could cause them to be removed as CEO." 

A survey on CEO succession published last month by the National Association of Corporate Directors and Mercer Delta cited statistics that CEO departures doubled in the first 11 months of 2005, compared with the same period a year earlier, as the mean tenure of corporate bosses diminishes. 

Procter & Gamble Co. recently started transparent succession planning for Chief Executive A.G. Lafley, even though he is seven years shy of the mandatory retirement age of 65. George David, 64, United Technologies Corp.'s long-serving CEO, this year designated a successor without facing the pressure of required retirement age.
Even Warren Buffett, the 75-year-old chairman and CEO of Berkshire Hathaway Inc., discussed succession in his annual letter to shareholders in February. Without naming names, he said the board had unanimously chosen one of three internal CEO candidates "if a replacement were needed today." If the need for regime change arises "not from my death but rather from my decay," Mr. Buffett said, he was confident the board would act in the best interest of shareholders. 

Companies run by "guiding geniuses" face an especially delicate succession-planning challenge, says Warren Bennis, a professor at the University of Southern California and an expert on leadership and organizational change. Such leaders "identify so much with their role that it's very difficult for them to let go," he says. 

Mr. Lanza's longevity and reluctance to pick a successor resemble the career of his friend and aerospace-industry icon Bernard Schwartz, former chairman of Loral Space & Telecommunications Inc. Mr. Lanza worked with him, as Loral's president and chief operating officer, and has often spoken admiringly of Mr. Schwartz's stamina and leadership. After some three decades at the helm of the company, Mr. Schwartz championed an investment that drove Loral into bankruptcy. He steered it out of Chapter 11 protection, though at the cost of enlisting investors who weren't beholden to him. This year, at the age of 80, Mr. Schwartz reluctantly stepped down. 

By contrast, Mr. Lanza firmly controls his board, and L-3 is on tear. L-3 reported a 48% rise in first-quarter sales to $2.9 billion and 36% growth in net income to $138.9 million.
His name may account for only one "L" in L-3, which he created in 1997 with then-partner Robert Lapenta and funding from Lehman Brothers. But Mr. Lanza embodies L-3 in a way no other defense CEO dominates his company. It's been that way since Mr. Lanza 
formed L-3 from an assortment of businesses Lockheed Martin Corp. wanted to shed. 

His initial focus was communications equipment, and Mr. Lanza sought to grow through acquisitions. L-3's portfolio of products and services expanded into other military electronics, aircraft maintenance, military-training services, and then homeland security. To critics, Mr. Lanza appeared to pursue growth for growth's sake without any cohesive strategy. 

Even as L-3 spreads its tentacles, Mr. Lanza has kept firm control. The company is so Lanza-centric that after his personal five million shares of L-3 stock (worth more than $400 million), the closest executive holders own just 171,000 shares each. Among potential CEO successors, the biggest holder is Robert Drewes, president of the integrated systems unit, who owns just 8,683 L-3 shares, according to L-3's proxy statement. Mr. Drewes has received 50,000 stock options in the past two years, though.
L-3 stock has performed well, recently hitting a historic high of $88.50. That's partly because all defense stocks have soared, but also perhaps because L-3 is considered a takeover target in Mr. Lanza's absence. 

Some Wall Street analysts believe that Mr. Lanza's outsize personality overshadows a strong senior management team. Analysts say Mr. Lanza recently has been doing more to promote the heads of L-3's operating units to Wall Street. At the investor meeting in late April, Mr. Lanza was flanked by his team. After opening remarks -- in which he gave a geopolitical overview, chided analysts for wrongly predicting cuts in the Pentagon budget and lambasted the Department of Homeland Security for failing to make port security a priority -- Mr. Lanza jocularly tasked executives to elaborate on programs. 

--Andy Pasztor contributed to this article 

Write to Jonathan Karp at

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