Do You Know Where Your Next CEO is Coming From?
from
What Directors Think 2003
by Sasha Issenberg
Before Jack Welch was a poster boy for industrial management (or, later, a symbol of CEO greed), he was a risky hire. When he succeeded Reg Jones as General Electric’s CEO in 1981, Welch was the relatively unknown head of GE’s consumer-products division; he hadn’t even been on the first list of 14 finalists for the job. But by the time he left GE in 2001, it seemed every company in America wanted someone just like him in the corner office. Yet outfits searching for the next Welch appear to have forgotten many of the lessons of his hiring.
Fewer of them have been looking within their ranks for Welches—people with direct experience inside the company and industry-specific expertise. According to Harvard Business School research, in 1980 7% of the 850 largest U.S. companies went outside for new CEOs, and five years ago 33% did so. Now, says Rakesh Khurana, an assistant professor at the school, that figure is about 40%. A random review of five CEO hires in September at companies of various sizes showed former chief operating officers advancing to the top job at Chico’s FAS, Stratos Global Corp., and Centex Construction Products, and outsiders being brought in at MedCath Corp. and Crystallex International Corp.
“Boards have lost confidence,” says Jeffrey Sonnenfeld, associate dean of the Yale School of Management. “They bypass internal people for fear that that person is not a branded, marquee name. But the branded name may not know anything about your company or your industry.”
Two key questions arise about the search for CEOs today. One is whether it has been a mistake to kiss off insiders. The other is whether the board, not the retiring CEO, should control the selection process.
There is an important link between the two issues. The system that selected Welch—in which the outgoing CEO effectively appoints his or her successor—is under assault, and that cuts the chances of an insider’s moving up. “The role boards are taking with CEO selection has increased dramatically,” says Thomas Saporito, senior vice president of the management-psychology consulting firm RHR International.
A major argument for diminishing the hiring power of the outgoing CEO, says Sonnenfeld, is that CEOs, like other people, are instinctively drawn to those who most resemble them. “It’s unlikely a CEO is going to say, ‘We need someone different from how I am,’” Sonnenfeld contends. “They will likely look in the mirror and look for people with similar friends, parallel hobbies, who will join the same types of clubs and read the same magazines.” But the succession at GE in ’81 did not bear that out: The ambassadorial Jones had little in common with the man who quickly became known as Neutron Jack. And the list of other insiders who have brought fresh ideas—and big profits—to companies is long, says Harvard professor Rakesh Khurana. It includes Coca-Cola’s Douglas Daft, Procter & Gamble’s Alan G. Lafley, and UPS’s Michael Eskew.
According to participants in the Corporate Board Member survey, the board should wield most of the clout in the search for a new CEO. “But what you don’t want to create is a divisive scenario where the CEO is off on the sidelines the whole time,” says Saporito. “You want to build a strong sense of teamwork around the process.”
Many boards—notably Pfizer’s—earn accolades for their succession planning. And instituting proper planning is the linchpin of a board’s ability, and right, to take charge of the hunt for a CEO. Yet more than a third of the directors in the Corporate Board Member survey say their boards do not have a succession committee or a succession process.
Management experts recommend that long before a board committee is charged with filling a vacancy, the company put in place an annual review of succession strategy. This means scouting out viable internal prospects and developing a plan—with, say, trial assignments and training platforms—to groom them as strong CEO candidates. The annual review should also determine what the company will be looking for in its next leader. And rather than “a lot of blathery platitudes (‘good team player,’ ‘long-term thinking’),” says Sonnenfeld, the review should produce a document unique to the company and industry, its practices and culture, that identifies the particular analytical skills, functional expertise, and experience required of the next CEO. For example, he says, “does it matter if they have no legal experience?” Sonnenfeld’s advice is backed by people at executive search firms, who, asked what they look for in a potential CEO, invariably respond with some version of “It depends on the company.”
When companies haven’t taken the first step of thoroughly reviewing their needs, they increase the risk of poor hires, even if search firms work with the boards. George Fisher’s move from Motorola to Kodak, and John Scully’s from Pepsi to Apple, are famous examples of celebrity CEOs whose transitions to different corporate cultures didn’t pan out. And directors must remain aware that search firms have a stake—their commissions—in promoting outside candidates, particularly those whose high salary demands will generate windfall fees. Instead of paying the traditional one-third of the first year’s cash compensation, a board should consider negotiating a flat rate, which will make the search firm more likely to serve the company’s interest and not its own.
Directors need to get face time with candidates on the short list. But for a more personal analysis than those interviews, boards often turn to independent management psychologists like RHR International’s Thomas Saporito, whose firm claims to have assessed 10,000 candidates for president and CEO jobs over
its 60-year history.
Saporito’s firm does not administer clinical tests but relies on in-depth assessments and interviews linked to a company’s strategic leadership requirements, often quizzing peers and subordinates to garner additional information. “When we’re doing an interview, we’re looking at experiences that shaped their personal philosophy and business philosophy,” Saporito says. “Digging into their relationship with their mother—no, we don’t do that.”
Executive search firms are increasingly bringing their own psychologists in-house, but Sonnenfeld disapproves. “It’s the equivalent of buying a home and having the home inspector working for the realtor,” he says.
Even after psychological assessments, training regimens, and critical vetting by independent board committees, there are no guarantees. “It’s like getting married,” says Andrea Redmond, managing director and co-head of the CEO and board succession practice at the executive search firm Russell Reynolds. “You know this person so well and think you want to spend the rest of your life with them. I don’t know about when other people got married, but me, I held my breath: ‘Is this person going to be the biggest disappointment of my life or everything I know him to be today?’”
It’s an apt comparison. Until the CEO’s contract ends, you’re in the relationship for better or for worse.
