How to Hire a CEO You Wont Want to Fire
By Reshmi Paul and Dionne Hosten
A lot of CEOs are being shown the door lately. In the
apparel industry alone, we’ve just seen the end of American Apparel’s Dov
Charney and the ouster of Lululemon Athletica founder Chip Wilson – plus the
installation of interim CEOs at Target and JC Penney following their previous
leaders’ firings. These companies are in trouble, and their boards must select
new CEOs under highly charged circumstances.
At least some of them are bound to make the mistake
we’ve seen so many times: pushing ahead with a sense of urgency around their
new CEO selection, and allowing their deliberations to be overtaken by strong
wills and unexamined emotions.
Here’s what they should do instead. First: take the
time to arrive collectively at a short list, not of candidates but, first, of
criteria. An open and rigorous debate over CEO criteria is the most important
step a board can take with succession.
Then: commit to a process by which the potential leaders
they consider will be honestly, consistently assessed against those criteria
and a winner will emerge.
Why is the early narrowing of criteria so important?
From the outset, it reinforces the reality that no CEO candidate is perfect.
All of the available options will have noticeable strengths and weaknesses. The
board’s challenge is to decide what deficits it can live with (usually because
they can be compensated for by the rest of the leadership team), and which two
or three criteria are non-negotiable must-haves.
The alternative, and unfortunately the usual route,
is to compile a laundry list of laudable qualities. While none of them is easy
to argue against, collectively they have no power, because the list doesn’t
allow the best candidates to emerge
.
Worse, a list that calls for everything gives every
director something to point to as they lobby for their own favorite. Someone prevails
and others, eager to wrap up this sensitive and time-consuming process,
capitulate. From the outside the process might look like solid work, following
best practice. But the board has essentially abdicated its most important
responsibility.
Consider the case of a specialty retailer whose CEO
was retiring after a long, successful run. The retiring leader advocated strongly
for an executive he had groomed for the job, in his own image. But the board
recognized that the company’s environment was changing dramatically, thanks to
global expansion, greater online competition, and customers’ evolving
expectations of their shopping experience. Diligently, the board drew up all
the criteria it felt it should consider.
Clearly it was time for a CEO who could handle
omni-channel complexity, but on the board’s wish list, that was just one item
among many. Among the others was merchandising experience, which the heir
apparent, like his mentor, had in spades.
Reluctant to oppose a leader who had dramatically
increased shareholder value, the board folded under pressure and ratified the
CEO’s pick. The result was disastrous, as the company suffered numerous
missteps in rolling out new channel strategies and overhauling back-end
systems.
When a board never engages in open debate over which
attributes matter most, not only does it fail to connect succession to what the
company most needs; it neglects to give the incoming CEO guidance about where
to focus his or her own efforts and in what areas it might be best to delegate.
Boards, and companies’ governance processes, are
idiosyncratic; exactly how to focus on what’s really needed in the next CEO
will depend on the firm. But, at a high level, it is a three-part process: Start with an exploration of likely scenarios
for the company in the next several years. Get input from executives,
high-potentials, and outside stakeholders on how those conditions will most
challenge and create opportunities for the company. Then develop a profile
limited to a few must-haves. This process is usually enhanced with the
departing CEO’s involvement, as long as the board shows leadership.
Greater focus brings better results. A global energy
company was struggling and seemed unlikely to survive the industry’s looming
consolidation. With its CEO preparing to retire with a mixed legacy, the board
at first generated a list of fifteen things at which the new leader should
excel, ranging from expanding into new markets, to driving a Six Sigma-based
culture of operational excellence, to getting a major facility project back on
track. Rather than work from this list, however, the urgency of the company’s
situation drove the board and CEO to debate which goals were most important.
They narrowed the list to three: defining a visionary strategy to survive
consolidation, driving a culture of accountability so the company could deliver
on promises to investors, and developing a strong bench of executive talent.
They consciously left out operational goals, because most directors agreed the
CEO could rely on the existing business unit heads, and a capable COO could
also be hired from outside.
That effectively ruled out the heir apparent, despite
the fact that some directors had felt he was “owed” the job. While his
strengths were significant, it was undeniable that the three key areas of need
were weaknesses for him. The board hired an external candidate, who over the next
few years made some transformational acquisitions, kept the company
independent, and greatly boosted the stock price.
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