CEO turnover in India has steadily increased year on year from 10% in 2010 to 15% in 2012
Boards run the risk of lobbying and politicking, in most CEO-hiring scenarios
You are the Chairman of the Board of a company. You need to appoint a new CEO. The reasons could vary: perhaps the incumbent is set to retire, or maybe you and the Board want to replace the incumbent for a variety of reasons that reflect poorly on the incumbent, or the company is undergoing a merger and you have to appoint a leader who can lead the merged entity. You have two choices: reach into the top leadership cadre and promote the most capable ‘insider’ or hire an ‘outsider’. For the purposes of this thought experiment, let us assume that your company decides to hire an outsider. Why would you do that, you ask? Because the company needs fresh leadership and new direction, the board wants change, your incumbent’s ascension led to his contemporaries and potential successors moving to other firms; the reasons could be any of these or all of these, take your pick. If this is you, then you are not alone.
Over 44% of Indian companies hire CEOs who are external to their organisation. This is the highest in the world. CEO turnover in India (and other BRICs countries) has steadily increased year on year from 10 per cent in 2010, to 13.8% in 2011 to 15% in 2012 according to Booz & Company’s annual study on CEO succession. Recruiting and retaining leadership talent in India is notoriously challenging. Given this context, the selection and retention of an external CEO candidate is exponentially more difficult. Research has revealed that CEO tenures are declining globally. All of these factors have melded to thrust CEO succession onto the top of the agenda for organisational Boards, both in the public and private sectors.
It is about time organisational Boards start acknowledging that CEO succession needs to be part of its ongoing contingency plan. The process of selecting a CEO is lengthy and iterative, and the stakes for the business are very high. One would think that months of discussion and careful deliberation from a group of highly experienced business stakeholders will result in the selection of a meticulously assessed successor who lasts the full expected tenure with success. How then, do selections go so horribly wrong? Research reveals that as the size of the company increases, the average tenure of CEOs decreases perhaps because of complexity of leading very large corporations and the demands they place on their CEOs. Besides laying the blame on the organisation and the Board when CEOs have to be replaced, it is necessary to investigate if the system of CEO selection has deep-rooted failure points.
The Board is faced with several decisions during a CEO succession event, whether it is planned or unplanned – Should they look outside or inside the company? If they look outside, should they leverage their own network to look for a successor, should they restrict their quest to the known universe or should they seek help from a headhunter? How can they get a neutral partner to do a fair evaluation of external and internal prospects?
In an ideal world, the Board’s hands-on involvement in the periodic assessment of the company’s leaders reduces the need for an external consultant or evaluator. Hands-on involvement includes the assessment and development of the CXO-level leaders as part of the company’s performance review and means that the Board has a deep understanding of the capabilities and the potential of the top leadership team. The Board, after all, is invested in creating a bench of CEO-material leaders. However, this does not always happen in the real world. Their views and opinions about prospective candidates for the top post may be based on perceptions and personal relationships, including bias and lack of objectivity in the process. In such instances, a Board may decide to call an external executive search consultant to assess with neutrality the prospective pool of both internal and external talent.
Whether a Board chooses to engage an external consultant or not, there are consequences to both processes. A closed door assessment may appear nontransparent, but it eliminates the risk of disengaged leaders within the company. For e.g, it may impact the morale and motivation of other prospects, teams or Board members by changing their expectations.
One the other hand, if the company is very open about disclosing the identity of in-house prospects, it might demotivate someone who has spent many years at the Board and has not been considered. The choice of the path the Board chooses to take is reflective of the consequence of the prevalent culture and the internal dynamics of the organisation.
The Chairman of the Board is the one who usually approaches an executive search firm with a request to assist the company in finding a CEO. He or she constitutes a hiring committee that is involved with the selection, shortlisting and assessment of candidates. In the CEO hiring process, it may not be wrong to say that the Chairman holds all the cards and is the biggest influencer in the hiring process.
Most Boards shortlist candidates based on a history of good performance in a previous company. However, precedents have shown that CEOs who thrive and flourish in an environment with standard systems and procedures find it difficult to adapt to business environments where there are no such systems and vice versa. Selection of a candidate with such a context may actually become a deterrent to organisational process maturity. For a home-grown company, the key question for the Board would be whether the candidate will be able to set up robust systems and processes in place where there are none.
Secondly, hiring a star performer may not necessarily work for the company. The Boards often feel proud about selecting individuals for a successor profile owing to their “star power” – an outcome (or consequence) of the individual’s interpersonal brand building. When an organisation is evaluating the induction of a “star,” it often fails to understand the difference between the values of a personal brand versus the value that the candidate is likely to bring to the organisation. The organisation, therefore, is not thinking in terms of what capabilities it is buying for the company but is more enchanted by the personal brand of the candidate.
If the selection committee is driven by a candidate’s “star quality”, whether the candidate is an insider or an outsider, they feel compelled to be biased in their outlook toward a candidate. While the Board likes to believe that it is acting in the best interest of the business and its stakeholders, it may unwittingly commit itself to a fatal downfall with each incremental step.
A Bible saying summarises this with the words, “The road to hell is paved with good intentions.”
An external consultant is typically hired from the top at the behest of the Chairman, who acts as the de-facto client. In order to ensure good client relations, the consultant may refrain from providing objective assessments and the right judgement about individual candidates or put forward realistic timelines. They may not admit that their external search has not rendered anyone who is a perfect fit. This is a classic example of a principal agent problem where the organisation or principal’s interests are not aligned to the agent’s (the executive search firm’s) interest and may become one of the biggest sources of a business entity’s downfall. When engaging an external consultant in the process, the relevant question for the Board is, “How can we ensure that we are not engaged with the consultant merely as hand-shakers?”
In most CEO-hiring scenarios, the Board runs into the risk of lobbying and politicking. There are instances when specifications are twisted to skew the scale in favour of a particular candidate.
Under ideal circumstances, the external consultant must play an advisory role and put forth these issues to the Board and the Chairman. Unfortunately, that is not always the case thereby exposing the process to power politics and subjectivity. The very purpose of the external consultant as a trusted third-party advisor thus gets dissolved and the consultant becomes party to the partisan process. The role of the external consultant is even more unequivocal because the Board and the stakeholders place an inordinate amount of trust in the external consultant to make the process fair and balanced.
The importance of a process mandate outlining individual roles and responsibilities in a CEO selection process cannot be emphasized enough. The central question is not about having a good or a bad process, but more about the appropriateness of the process for the organisation.
Several systemic triggers make the CEO selection process far complicated than expected. For example, owing disclosure issues, the Board may refrain from announcing that a CEO selection process is underway and also subsequently refrain from documenting it. Since the selection process is not documented, more often than not, the Board is completely clueless about what the process looks like and how it can be improved. The lack of documentation also results in the participants of the process being unsure about their role resulting in everyone doing everything or vice versa. While the process may be managed by the CFO or divisional head, there is a risk that they end up being mere administrators of the process. But, the Head of HR is expected to play a support role for the process rather than being an active decision-maker.
To start with, the Chairman of the Board and Chairman of the hiring committee have to be two different people to bring fairness to the selection process. The Hiring Committee can comprise Board members, influencers and an external incumbent such as a trusted executive search consultant. Every stage of the hiring process must be documented clearly. The committee needs to assign roles to everyone in the selection committee so that there is no confusion. The role of the chairman of the hiring committee should be to ask tough questions to the Board, understand the internal factors that drive the appointment, and to act as a balance between external and internal stakeholders.
Who else do you bring into play? The external consultant can potentially become the biggest resource in the CEO hiring process and it is therefore important for the Board to assess if s/he is a trusted partner with the confidence that s/he works toward benefit of the organisation. The HR in the company should have the maturity, the gravitas, the access, the capability, and the objectivity to be able to help in the process.
After the communication protocols have been decided, it is important for the Board to decide who creates the specifications for the role and actually shortlists and selects prospects for the role. Finally, it is important that each of these steps is carefully taken through careful consideration of the relevance and context of the organisation’s culture, business position, and Board dynamics.
The process of search, meeting, liking and offering a position for an external CEO takes about six to eight months. If an agreement is reached, it takes another six to eight months before the CEO is on board. At the CEO level, there are several things that complicate the transition process from one organisation to another. It is not a linear process of submitting a resignation and serving a notice period. A CEO at that level is in charge of maintaining his personal brand and therefore, the entire handoff process from one organisation to another is an elaborate process of knowledge transfer and business handover.
Apart from professional commitments, what prolongs the process include factors like personal and family circumstances and relocation and other logistical complications of the hired CEO. It is important that the Board recognises that the average CEO hiring process will take about 12-18 months at the least.
The process of hiring a CEO is complex and difficult. While the lure of hiring a “star performer” may be hard to resist, it is imperative that the Boards recognize that hiring the wrong leader can only prolong their agony. Not only will it burn a hole in their pockets, but also affect employees and investors in the long run. Like G.K. Chesterton once said, “One of the great disadvantages of hurry is that it takes so much time.”