Recruiting and identifying the next CEO are fraught with risk. But while the risks are known, they can also be managed, so that in the end, the board and its search committee feel strongly that the individual they have chosen will prove to be the right choice. This author conducted extensive research on CEO recruitment and he shares his findings and advice with readers.
In almost every organization, appointing the right CEO is crucial to success. Although certain recruiting practices around the world are similar, a number of them differ from country to country.
For example, consider the percentage of CEOs chosen from candidates inside the organization versus those recruited on the outside:
In the United States, a number of studies suggest that approximately two-thirds of CEOs came from inside their organizations.
In Canada, by contrast, my research indicates that the percentage of CEOs who had been internal candidates varies widely. In the private sector, among the largest 50 companies ranked by revenue, fully 80 percent of CEO appointments are internal. Among companies ranked 400 to 500 in size, however, the proportion drops to 50 percent. Outside the private sector, the percentage declines again: In Crown corporations, hospitals, educational institutions, economic development entities, non-government organizations, associations and charities, the proportion of internal appointees is fewer than 35 percent. (Organizations whose CEOs were either founders or family members were purposefully excluded from the analyses.)
There are two reasons why Canadian boards so frequently recruit CEOs externally. Transparency is one reason: In Canada, there is an expectation that CEO searches should be open to outside candidates, especially in the non-profit and public sector domains. Size is the other reason: As Ram Charan noted in a 2005 Harvard Business Review article, Ending The CEO Succession Crisis, “General Electric had around 225,000 workers in 1993 when Jack Welch identified 20 potential successors; over seven years he winnowed the number to three. In CEO succession, it takes a ton of ore to produce an ounce of gold.” The vast majority of our Canadian organizations are simply not large enough to consistently produce candidates who are fully “ready when needed.”
Recruiting a new CEO from outside the organization is a complex process. This article will suggest guidelines that boards and search committees can use when they must recruit a new leader. Drawing on Canadian research and best practices, it sets out a general framework that can be customized to each situation.
Just how successful are Canadian boards in choosing CEOs? My research shows that, on average, approximately 20 percent of the external CEOs appointed by Canadian boards depart within the first two years. While this compares favourably with reports from the United States that estimate 40 percent of CEOs fail within the first 18 months, the comparison provides scant relief: Any director who has governed an organization led by an inadequate leader knows first hand the agony and the cost of a poor selection. He or she does not want to repeat the experience.
All CEO appointments contain two risks. The first – the risk of appointing the wrong person – is very well known. The second – the risk of rejecting the right person – is practically invisible. This second risk, however, is greatest in the early stages of recruiting, when search committees and consultants reject candidates because of biases and beliefs that may have nothing to do with performance.
To demonstrate this point, I compared the backgrounds of hundreds of CEOs, contrasting those who were “successful” hires with those who were “unsuccessful.” (For purposes of this study, CEOs who remained in a position for five years or more were deemed to be successful hires; those who departed within two years of being appointed were deemed to be unsuccessful. No claim is made that the foregoing assumptions are always valid, or that the data used are representative of all Canadian CEOs and organizations.) Below are just a few of the interesting questions raised by the research:
Is a CEO with a history of frequent job change likely to depart sooner than a candidate with a history of career stability? Many directors seem to think so. However, an examination of hundreds of records shows that there is practically no correlation in this regard, either in their average tenure as CEOs or in the likelihood that they will depart within 24 months. (This finding does not mean that a history of frequent job change should be overlooked. I would advise investigating the reasons behind the moves.)
Who is more likely to succeed, a first-time CEO or someone who has already been a CEO at least once? It turns out that candidates with prior CEO experience are less likely to leave quickly than those who are first timers. But there is a catch: Prior CEO experience must have been gained in the same sector! If the previous experience was in a different sector, the risk of rapid departure is actually higher than for first-time CEOs who have same-sector experience in their backgrounds.
Occasionally, candidates are dismissed by search committees for having “too much” education, such as a Ph.D., or “too little” education such as no university degree. Are CEOs who have either too much or too little education more likely to depart within 24 months than, say, someone with a degree in business? They are not. In fact, among the non-profit organizations examined, having a business degree correlated with a higher risk of departing rapidly. The culprit behind the elevated level of risk, however, was not the business degree, but another factor that correlates with success: experience in the sector. Candidates who have business degrees but who otherwise lack sector knowledge are at times hired by boards in the belief that a business education will enable the person to learn what he or she needs to know. This brings to mind the old saying: “A good leader is a good leader, regardless of the business.” The saying may have some merit but, without relevant experience, it comes with a higher level of risk.
(To be clear: Although education by itself does not seem to predict CEO success, it may well increase a candidate’s effectiveness. It could, for example, assist the CEO in understanding certain parts of the enterprise, such as marketing, operations or finance. It could also enhance the CEO’s credibility in the eyes of new colleagues. My research simply suggests that education by itself is not a good substitute for experience.)
Are internal candidates more successful than external ones? Internal candidates appointed to CEO positions have a slightly longer average tenure than externals: 6.4 years versus 5.8 years. Also, the percentage of internals who depart within two years is slightly lower: 16 percent versus 20 percent. The differences between the two, however, practically disappear when internal candidates are compared with externals that have same-sector experience.
The foregoing are just a few of many interesting findings that came from the research. As a generalized conclusion we can state that, unless there is an abundance of well-qualified candidates, boards should be careful about eliminating candidates too quickly. Several common reasons for eliminating people early in a search turn out to be groundless.
Relevant experience, on the other hand, is very important: those without it have a considerably higher risk of leaving within 24 months. While this conclusion may seem obvious, in the heat of selection interviews boards can be tempted to undervalue prior experience. My research suggests this is most frequent in certain non-profit and public sector domains. Hands-on experience, either in the same sector or in an organization where the dynamics and drivers are very similar, should be given substantial weight in any CEO search.
For a CEO selection process to be thorough and consistent, the assessment should be based on four criteria:
The candidate’s interest: Is the role fundamentally in the best interests of the candidate? Does he or she want the work and all that goes with it enough to make the personal sacrifices demanded by the job?
The candidate’s competence: Does the candidate have the critical skills needed to excel in the job? For example, will he or she be able to set the strategic direction and inspire others while exercising proper fiduciary responsibility? Does the candidate have the emotional intelligence and critical self-awareness to read situations accurately and adjust to changing conditions? Will he or she adapt to the new environment and build a base of support before introducing major change?
The candidate’s commitment to stay: Will the candidate commit to remaining with the organization long enough to contribute lasting value? Will family members and significant others support the move, especially if relocation is required?
The candidate’s crucial weaknesses: Does the candidate have a fatal flaw that could undo the value he or she would otherwise bring to the job? For example, does he or she have a management style that will be unacceptable, or a fixed opinion about the boundary between the board and the CEO that could lead to difficulty, or a pattern of behaviour that is unacceptable in a CEO?
The results of such an assessment are the best predictors of performance. They are very easy to understand, but unfortunately, they are not so easy to measure. To complicate matters, they must be measured while trying to attract, rather than discourage, qualified candidates for the position. Attracting candidates while you are measuring them requires the coordination of a host of activities, all of which must be completed on a timely basis. (See Table 1 for a list of the activities.)
How to set the profile of the next CEO
At first glance, developing the profile looks easy: “We want a visionary, a change agent, a great communicator, a team player and a skilled leader of people.” But while this is an admirable ideal, it isn’t sufficient to guide the search and selection process.
The profile of the next CEO must be driven by the organization’s strategic goals and priorities. The most important question that must be answered is: What core competencies will the CEO need to have in order to achieve the organization’s strategic goals over the next 3 to 5 years? (Note: This is a valuable question that should be part of the board’s ongoing succession planning, not asked only when a new CEO is being recruited.)
The number of critical competencies should be limited to no more than about five or six. Contrary to popular belief, increasing the number past a certain point can actually decrease the odds of a successful search. To organize a laundry list of attributes gathered from directors and other stakeholders such as the executive team, sort the attributes into three lists – A, B and C:
The “A” list should contain the competencies that are critical to the organization’s strategic priorities over the next three to five years. After creating the list, ask: Which of these competencies are already present among the other executives? Highlight those that are not already present in the organization
The “B” list should contain attributes that are important, but would be needed in practically any CEO role. An example might be the ability to understand financial statements.
The “C” list should contain attributes that would be nice to have, but are not essential.
Describe each of the highlighted A-list competencies in a paragraph. Each should be a clear statement of what the person must know or be able to do in order to succeed. Then, have the profile confirmed by the entire board.
Conducting the search
The following advice should help recruit top candidates and, importantly, avoid losing good candidates.
Decide which recruiting approach is best for your position. Generally speaking, there are three approaches for recruiting external candidates:
- The selective approach, in which a few candidates who are known to be well-qualified are targeted. In Canada, this approach works well when the experience needed is possessed by only a few, when there is considerable latitude for raising the level of compensation, and when there is not a need to conduct an open recruiting campaign
- The broad approach, in which a wider recruiting campaign is conducted by approaching many candidates, and possibly by advertising the position. This approach works well when the experience needed is widely distributed, and when there is a mandate to conduct an open search.
- A combination of the two, in which well-qualified candidates are selectively targeted and, simultaneously, a broad recruiting campaign is conducted. Although more time consuming, this approach works well when neither of the first two approaches is sufficient.
Confirm candidate interest and ‘pre-commit’ candidates to accept your position. Of the many things that can go wrong with a search, one of the most frustrating is to interview several candidates, select the top person, complete reference checks and present an offer — only to have it turned down. To avoid this scenario, meet with each person on the Short List prior to the Short List interview. The purpose of these meetings is to address issues that are important to the candidates, which will help eliminate concerns and deepen interest in the position. At the end of each meeting, ask the candidate, “Would you accept the position if it were offered to you? We want to avoid going through a lengthy selection process, only to discover that you are not really interested.” The ensuing discussion should bring out any remaining issues, including compensation needs. Ultimately, only those candidates who are truly serious, and whom the organization can afford, should proceed to the Short List interviews.
Table 1: The Board And Its Search Committee
Practically every board appoints a search committee to carry out some of the search. But, what actually needs to be done, and who should do it: the board, or the search committee? The following table presents a summary of the activities in a typical CEO search.
Activity Responsible Party
- Establish the search committee’s terms of reference, members, and Chair
- Choose a search firm
- Engage the board to determine the critical competencies
- Work with the search firm to determine: the types of experience that could produce the desired competencies, the recruiting approach to be used, and the names of stakeholders to be contacted
- Fix the dates for completion of Activities 7, 8, 9, 11 and 12 below
- Have board Directors sign a confidentiality agreement
- Review the Long List of candidates
- Decide which candidates should be on the Short List
- Meet with the Short List candidates to answer their questions and ‘pre-commit’ their interest
- Plan the details of the Short List interviews
- Conduct Short List Interviews and select a preferred candidate
- Obtain board approval of the recommended candidate
- Negotiate the terms of a conditional offer
- Oversee and support final reference checks and background checks
- Announce the chosen candidate
- Speak with the Short List candidates not chosen
Board and/or Search Committee, depending on terms of reference decided in “1” above
- Manage the timeliness of the search and selection activities
- Brief the board throughout the search
- Orient the new CEO and solidify the board’s expectations
- Provide guidance for the CEO via a board interpreter and 360 feedback
Plan the Short List interview in detail. As mentioned previously, the CEO assessment process should measure the candidate’s interest, competence, commitment to stay, and crucial weaknesses. To measure these well requires a structured process. Most search committees conduct more than one Short List interview. Because of the difficulty of coordinating the schedules of the committee members and candidates, many committees hold multiple interviews or meetings on the same day.
(Note: Although the following steps describe a formal approach to interviewing, a mix of formal and informal meetings with Short List candidates is preferable. Formal interviews lend themselves a bit too easily to canned responses, and may overlook important social behaviour. Informal meetings, on the other hand, may favour the candidate who is spontaneous or charismatic but not as thoughtful. A combination of the two should yield more useful information.)
Develop a list of interview questions well in advance. The A, B and C lists created at the outset of the search will form the basis for formulating Short List interview questions. Develop several questions that require the candidate to demonstrate each critical competency in detail. For example, instead of asking: “Would you describe yourself as a strategic thinker?” ask, “What are the main strategic issues faced by your current organization? Please tell us how you identified them, and the specific actions you initiated to deal with them.”
Reserve a portion of the second interview for issues that arose during the first interview. For example, if a concern has arisen about a candidate’s management style, the second interview is the time to address it: “We are concerned that your management style might be so rigorous as to cause difficulty with employees. Please tell us about this. Have you received 360-degree feedback from employees in the past? What will we hear when we speak with people about your management style?” Presenting a concern in a straightforward way can clarify perceptions that arose during the first interview. A second interview almost always adds to the search committee’s understanding of the individual.
Decide the content of the third interview after the first two interviews. Typically, this meeting is informal, perhaps a dinner. Discussions may range from terms of employment to the expectations each has of the other. By the end of the third interview, search committees usually favour one candidate.
Schedule a board meeting soon after the Short List interviews. Time is of the essence. Although the next step is typically to extend an offer to the chosen candidate, reference checks may still not be complete. Candidates who are employed usually want their candidacy to be kept confidential and do not want references checked until they are offered the position. The board, on the other hand, usually does not want to extend an offer until the references are complete. To resolve this dilemma, some boards extend an offer that is conditional on whether the board is satisfied with reports from referees. With a conditional offer in hand, candidates are more likely to permit the completion of reference checks.
Referees can be classified under two categories: a) those who will maintain the candidate’s confidentiality and are therefore safe to call (“safe referees”), and b) those who are unsafe from a confidentiality standpoint but are important to call (“important referees”). Reference information is typically gathered at two different times. Safe referees may be called prior to the Short List interviews, if the candidate permits. Important referees, on the other hand, cannot usually be called until the candidate has received and accepted an offer.
To offset the tendency of referees to give only positive information, concentrate on referees who are known personally by a board director or a partner of the search firm. Personal contacts are more likely to provide the most complete and accurate information. If there is a desire to contact someone who is not on the candidate’s list, ask the candidate before doing so. If referees are not known personally, try to arrange a face-to-face meeting. This should provide better information than a discussion on the telephone.
In addition to checking references, verify the candidate’s education, professional designations, and credit and criminal history. Some organizations also obtain a psychological assessment of the candidate.
|Table 2: Four criteria of assessment|
|Assessment Category||How Assessed|
|Candidate Interest – Is the role fundamentally in the best interests of the candidate?||
|Candidate Competence – Does the candidate have the competencies needed to excel in the job?||
|Candidate Commitment – Will the candidate remain with the organization long enough to contribute lasting value?||
|Candidate Crucial Weaknesses – Does the candidate have a ‘fatal flaw’?||
Bringing the new CEO on board
What is the leading reason why executives depart within two years of being appointed? I studied a series of these cases and found a surprising result: Almost half of the executives who departed were perceived as having one thing in common: They had failed to adapt to the new organization’s culture.
“Poor fit” is a term often cited as a reason for departure, but this explanation assumes that behaviour is rigid; it overlooks the ability of the CEO to adapt. A few years ago, George Browning (not his real name) was hired as the CEO of a well-known private-sector company. As is often the case with new executives, George tackled the job using the same leadership style he had developed in his previous assignments. Unfortunately, he failed to adapt to the new organization’s culture and was soon fired. Everyone, including George, said the situation was a poor fit for both parties.
Several months later, George was offered a position with another company in a related business. As with the previous company, change was desired by the board. This time, however, the board set an additional expectation. To paraphrase the chair: “We told George that, if he accepted this position, he would need to adapt his approach to our organizational culture. We helped him do this during meetings with our executives and board. We also told him that we would arrange 360-degree feedback for him a few months after he started, to help gauge how well he was adjusting.”
George accepted the challenge. He made it a priority to adjust to his new environment. Years after his first day on the job, his board continued to be very happy with his performance.
In my experience, both boards and new CEOs emphasize the need to change the organization, and downplay the need to adapt to it. Yet if change is to happen, it will almost certainly require the help of the existing team. Adaptability is therefore important in enabling change. (Note: The message here is not that the new CEO should live with existing organizational norms forever, but to find a balance between adapting to an organization’s culture on the one hand, and introducing change on the other.)
To determine and enhance the incoming CEO’s ability to achieve this balance, try the following:
Ask interview questions that probe for examples of adaptability. Listen carefully for examples of how the candidate adjusted to new organizations.
When conducting reference checks, ask about the candidate’s flexibility. For example, ask the referee to rate the candidate on a scale of 1 to10 regarding his or her ability to adapt to a new culture, or to be flexible if a cultural shift occurs.
Assign a board interpreter or executive coach. A board interpreter is a director assigned by the board to help the CEO read between the lines and accurately understand the board’s unspoken messages. Board chairs often fill one or both of these roles informally.
During the person’s first few months on the job, conduct a 360-degree survey and provide feedback. By providing feedback from a 360-degree survey, organizations help new CEOs understand what behaviour is working well and what needs to be changed.
Although the challenge of adapting falls mostly on the new CEO, the board can help by setting expectations and providing tools such as those above that assist the CEO in managing his or her adjustment.
Setting the mandate of the search committee
Should all board directors be fully involved in every aspect of the selection process, including interviewing all candidates? Or, is their responsibility just to ensure that a sound search and selection process has been followed?
The answer varies widely from board to board, as I found when documenting five frequently used options and the pros and cons of each. While a discussion of the five options is beyond the scope of this article, one conclusion was evident: It is very important to set the roles of both the search committee and the board at the outset of the search. Do not leave the matter “hanging,” or much valuable time will be lost when it is most critical to make decisions.
On a related and highly sensitive topic: When deciding who will serve on the search committee, be cautious about appointing any director who jumps to conclusions quickly or is highly opinionated. A well-run selection process must weigh and balance a variety of candidate attributes, both objective and subjective. Members of the board who are unable to do this well could detract from the soundness of the decision.
If the candidate must relocate: Consider using a professional relocation service. Otherwise, the individual and his or her family will have to deal with an array of bothersome items by themselves, which is not the most positive way to begin a relationship with a new community and employer.
If your search encounters difficulty: Consider raising the level of compensation. In cases where a desirable candidate is interested in the role but is unwilling to relocate, perhaps the position can be restructured so the candidate will not have to move. In many searches, the pool of qualified candidates is very limited. If all else fails, sometimes re-launching the search generates success: As the circumstances of candidates’ lives change with time, a well-qualified person who was not available previously may become available in the future.
In the end, it must be remembered that choosing a CEO cannot be entirely free of risk. However, a well-structured approach can do much to eliminate error and enhance the likelihood of a positive outcome.