When a company is suffering from dysfunctional leadership, the fallout can be severe. According to a 15-year study conducted by PwC, CEO turnover hit an all-time high of 16.6 percent in 2015. Company boards are increasingly replacing bosses with outsiders in hopes of “getting it right” and effecting change.
But, there is no guarantee that a new CEO will result in growth. On the contrary, new CEOs usually fail within the first 18 months on the job. A key reason for this alarming stat is that they fail to build senior teams that can drive change fast enough to stay ahead of new entrants, evolving consumer needs, digitization and inevitable scrutiny.
To maximize their chances of a successful transition, boards and companies should avoid these four mistakes in selecting a new CEO.
Treating this as a personnel decision instead of a change process
Selecting a new CEO is potentially transformational, and the first step of a planned organizational change effort; it is an intervention into the company and its culture which, when executed correctly, can enable growth.
Unfortunately, when this crucial move is treated as just a hiring decision, boards tend to overlook critical steps like creating a transition plan, building a coalition of support for the change and conducting an impact analysis before, during and after the decision. They almost always focus instead on the impact the decision will have on other potential successors and on market perceptions, investors and even customers.
While this is important, it can lead to tunnel vision. The assumption that boards tend to make is that the right CEO will just “make it work” once they are on the job. Boards ought to be considering the impact a hiring decision will have over time, and across a broad set of internal and external stakeholders. Boards also need clear metrics so they can monitor that the transition is going as planned. Start every CEO selection process with a clear profile of success for the CEO, the senior team, and the business. Done properly, this can lay the foundation for the leadership team change plan, aid decision-making and inform other key leadership decisions.
Hiring individuals instead of teams
A common mistake, undergirded by an assumption that the sum of all that talent will be greater than the parts, is to hire the “best” individual performers—the ‘A’ players. In practice, those seasoned and successful executives tend to bring with them loyal, tested teammates from former roles. Or, they seek out people in the new organization who resemble those trusted colleagues, thereby replicating the mistake further down into the organization.
Boards that ruminate over questions like, “Will an outsider or insider drive more change?” or “Do any of the successors have the right amount of experience?” may be at risk of looking for some heroic individual leaders instead of building a change-ready team. They need the right mix of experience, capabilities and change orientations to launch and deliver transformation. This kind of team possesses complementary skills and qualities and then—under the right leadership—collaborates to deliver the strategy. Boards need to look beyond the individual being hired and also consider the team they will inherit, build, or bring with them. Any CEO succession process should include a review of all the roles and leaders on the executive team.
Scrutinizing CEO actions more than supporting their transition
New CEOs need to learn to be a CEO—a point easily overlooked after an extensive selection process. This is a pinnacle role with unique pressures, unlike any other in the company. CEOs have unique strengths that land them in these positions. Like everyone else, they also have development needs, some that they carry throughout their careers and some that they inherit with the unique role they are assuming.
The pressure to perform, and the significant scrutiny that comes with the position, makes it difficult for CEOs to talk openly about their weaknesses. Yet, the reality is that they need to learn about the company, people, products, and especially the culture, before they can envision a change plan. First-time CEOs must also learn the basics of the role, such as how to partner with the board, lead peers, deal with investors, “wear their authority” and manage their time.
One of the simplest, most effective things that the board can do to set up a new CEO for success is to acknowledge their unique learning needs, factor these into the transition and change plan and then support them through the transition. Because most boards have members who are former or current CEOs, they have a set of ready-made mentors and coaches at their fingertips. The best board members know this and leverage it effectively; the worst use that experience as a benchmark from which to judge and critique the CEO, which makes it difficult, if not impossible, for CEO to learn his/her way to success.
Boards are not aligned on their role and do not have a clear vision for success
The CEO selection process involves a high-stress decision—arguably, the most important one a board may make. As such, it often causes or exacerbates cracks in relationships between board members who enter into the process unaligned. A key strength of a good board comes from a good Chair to integrate that diversity, especially when many members may be accustomed to running their own businesses autonomously.
Symptoms of misalignment may include dysfunctional pairings that spring up in board meetings, or complete divides on critical issues like how the hiring decision will be made and by whom. These dynamics are often reflective of deeper boardroom dysfunction that does not serve either the CEO selection process, or the company, well.
To mitigate the risk of misalignment, directors must work on themselves first. Two practices that help are: 1) developing a deeper, shared understanding of the company’s strategy, and 2) aligning behind a clear profile of success for the executive team which will help the company achieve it. This should happen well before launching a CEO selection process, but if the search begins unexpectedly, resisting the urge to “delegate” it to the HR committee, is essential.
The increased scrutiny on boards and companies over the past decade has led to more focus on the process of hiring CEOs; identifying common pitfalls is becoming easier as a result. Boards take these decisions seriously and understand the risk of getting it wrong, so they marshal significant resources—money, time, emotional energy—to getting it right. Making time to understand and address the issues above will serve them well as a starting point for making the best decision.