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Three reasons why boards of directors are poor at appointing CEOs
By Dr. Nicola Rowe | October 22, 2008
CEOs can be remarkably short-lived – so much so, in fact, that consulting firm Booz Allen once called them “the world’s most prominent temp workers”. Doug Ivester, promoted from number two and successor to Roberto Goizueta, lasted two years and two months at Coca-Cola; Robert Nakasone held out for a year and a half at Toys R Us. Moving forward, John Thain managed eleven months at Merrill Lynch, while Alan Fishman, overtaken and overwhelmed by recent events, washed out after just eighteen days at Washington Mutual. According to the Center for Creative Leadership, 34% of internally promoted CEOs are gone after eighteen months; for CEOs brought in from the outside, the figure is a whopping 55%.
So why don’t boards make better choices? There are three reasons: amazingly, boards often take the job too lightly, they think about it in the wrong way and they focus on only part of the ability spectrum needed for the job.
First, despite the consequences attached to their choice, boards don’t devote themselves adequately to the search. Astonishingly, search committees are often made up, not of those who know the company best or are most representative of its functions, but, as Rakesh Khurana has noted, of those who have the most time to devote to the search.
Secondly, boards often don’t think enough about what they’re looking for. The best way to define the qualities needed in a candidate is to think about the challenges facing the company, determine the skills and qualities needed to meet those challenges, and draw up a candidate profile accordingly. Instead, boards often ask themselves how the usual suspects – the company’s top executives, and perhaps one or two outsiders – stack up against each other. Instead of comparing candidates with each other, the right approach is to ask which of them meets the criteria most critical for the company.
Finally, boards are scared of the soft stuff, the qualitative aspects of leadership. It’s easy to measure stock-price increases or change in market share, but it’s much harder to tell whether someone inspires others, can develop a strategic vision, or can negotiate with stakeholders. Yet these are often exactly the reasons a CEO fails: Ivester failed at Coke because his commanding IQ wasn’t paired with sufficient EQ: interpersonally inhibited, he took decisions alone, failed to build consensus, and alienated senior executives and the board. By contrast, Warren Bennis and James O’Toole have pointed out that when HP’s board was considering Carly Fiorina for its CEO slot in 1999, they visited her company, Lucent, asking questions not just about her technical nous but about her ability to inspire others. Her success in the latter category, members of the search committee said, was a weighty mark in her favour when selection time came. (You can think what you like of her leadership, but you’ve got to give her points for time: with five and a half years at the helm of HP, Fiorina’s tenure was just under the six-year average for CEOs of listed US companies.)
Boards of directors could find better CEOs with a little perspiration: the prescription is to sweat the search, sweat the details and sweat the soft stuff. And then? Hopefully, a rosy glow - for employees, shareholders and the Street.
Topics: Corporate governance, HR |
