The selection of the company’s CEO is one of the most fundamental duties of the board of directors, yet recent research suggests that many boards use incorrect criteria in the selection process.
Conventional wisdom has it that “a successful CEO is a charismatic six-foot-tall white man with a degree from a top university, who is a strategic visionary with a seemingly direct-to-the-top career path and the ability to make perfect decisions under pressure.”
However, the authors – partners at the ghSmart consulting firm, which supports Fortune 500 boards on CEO succession – note that over an extended period, about 25% of CEO departures were involuntary, suggesting that the process by which those CEOs had been selected or retained was likely flawed. They cite a 2014 PwC study of the world’s 2,500 largest companies showing that such CEO turnover costs shareholders an estimated $112 billion annually in lost market value. If ever there were a clarion call to reexamine how boards select CEOs, this evidence is undeniable.
All of which makes “The CEO Next Door” (2018, Currency) a very timely book, as well as an interesting read. The authors have done extensive research, drawing upon some 17,000 assessments performed over a ten-year period as part of their firm’s leadership advisory engagements.
Challenging the conventional wisdom cited above, they sought to measure rigorously what key selection attributes in fact correlated most closely with CEO success. They were able to boil their enormous data set down to “Four Behaviors”, which they maintain are reliable indicators of future CEO accomplishment, and should serve as guideposts for board members.
1. Deciding with speed and conviction
2. Engaging for impact
3. Adapting proactively
4. Delivering reliably
In discussing each behavior, they observe that it should not be expected for CEO candidates to excel at all four. Rather, they found that the best candidates had tested strongly in at least two or more of the four behaviors, and that focusing on these behaviors made it easier to weed out those candidates who tested weakly overall, many of whom were executives who might otherwise have been automatically evaluated more favorably if judged according to “conventional” criteria: graduates of top schools, appearance (usually unspoken but possibly a factor), ambition, etc.
The authors cite numerous examples of CEOs whose attributes diverged from the historical norms, but who exhibited the described behaviors and were successful as a result. Nearly half of the CEOs identified as high-performing had had at least one major blow-up in their career that had cost them their job, and/or had been very damaging to their company, which for many boards employing conventional criteria would be a deal-breaker. The implication is that these candidates had learned from the experience and were better for it – perhaps humbler.
Another noteworthy divergence from commonplace truisms was the lack of importance of a candidate’s educational pedigree in predicting success, with less than 10% of the high-performing CEOs having received an undergraduate Ivy League education, and an equal number having not graduated from college at all. And yet a candidate’s educational breeding is often one of the most important criteria employed by boards.
Another piece of helpful advice in the book is the importance for boards to create a “pipeline” of promising CEO candidates – utilizing the “Four Behaviors” as criteria – many years before the date when a replacement is expected to be needed.
There is substantial and unnecessary risk in a board failing to prepare for CEO succession well in advance, since there are many factors that might accelerate the need. The Four Behaviors can also become part of the board-supported culture and values of the company, which will make succession-planning that much easier.
The CEO Next Door is a valuable addition to any director’s bookshelf, and a must-read for board members looking for the “next big thing” in governance, when it comes to CEO selection.
Howard Brod Brownstein is president of The Brownstein Corporation, a turnaround management firm.