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Managing Risk in Executive Selection
How does a company best assess which candidate for a high-level position is best qualified in the long run? This destinationKM white paper examines a possible strategy.
Posted May 23, 2001
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A recent study of over 450 of the world's largest private and public firms noted that nearly half of the CEOs have held their jobs less than three years, CEO turnover is rising, and changes in leadership are occurring more frequently. Over half of all CEO departures in the study were attributable to mergers, acquisitions, dismissal or resignation. Two factors driving much of the turnover were increasingly impatient boards and shareholders, and intensified global competition.

Obviously, no decision is more important to a firm than selecting a new leader. At stake are millions or billions of dollars of shareholder value, and possibly corporate survival. The risk of failure in CEO selection has never been greater, nor has the size of rewards for shareholders in making the right decision. One recent, highly visible CEO termination cost a Fortune 500 firm a reported $40 million in severance alone. Even more significant was the huge decline in shareholder value during the CEO's tenure. In contrast, John Chambers, CEO of Cisco Systems, has increased sales and profits tenfold in the five years he has been at the helm, enabling Cisco to become the third most valuable company in the world by the end of 1999. In 1999 alone, Cisco's market value increased by $180 billion!

Considering the criticality of selecting the right leader, why are so many CEOs not meeting expectations of shareholders? A recent article in a major business publication titled "Why CEOs Fail" concluded that an estimated 70% of CEOs fail not because of shortcomings in strategy, but due more to execution. Not getting things done, being indecisive, and not delivering on commitments were main reasons cited for their derailment. The conclusion was that mastering execution is the best way for a CEO to be successful. This was drawn from detailed evaluations of several dozen CEO failures.

How can such failures be anticipated to avoid poor performance for CEOs, companies and shareholders? A standard selection axiom is that past experience and performance are the best predictors of how a person will perform going forward. Three very critical factors for this to work in executive selection are a vision of the company's future challenges and goals, a clear understanding of what's required for success in the CEO job, and comprehensive and insightful assessment to best understand the strengths and potential derailment factors for each candidate.

CEO Selection -- The Internal/External Dilemma

While hiring a CEO replacement from within may offer some advantages (such as knowledge of the firm's current strategy, customers, products and challenges), it may not necessarily guarantee success going forward. Recent examples would include Mattel, Coca-Cola Co., Toys 'R' Us Inc., Humana, and Procter and Gamble. In these companies, internally promoted CEOs left after highly visible and less than successful tenures. Success or failure rests on a company's ability to not only define what they require in current and future leadership, but also its ability to assess whether an internal heir apparent is ready to meet the challenges. Conversely, hiring externally may expand the pool of qualified candidates and yield the very best candidate, but it remains the company's responsibility to determine who is truly best and who's not.

Typically, the Board of Directors or the retiring CEO initiate the process to look at external successors. A search committee is appointed and an executive search consultant is hired. The search process typically revolves around pre-established criteria of experience and personal characteristics created by the company. While there are highly qualified search consultants who are astute and experienced qualified assessors of talent, there are also a number who present candidates in the most favorable light with minimal balance in terms of shortcomings or possible selection risks. Regardless, the very best search firm can't have the full perspective that a Board has for the requirements of the position. As a result, it is truly the company's responsibility to thoroughly evaluate candidates and make the staffing decision.

Once the slate of candidates is established and agreed upon, the search firm's "selling" process begins. It intensifies as a lead candidate emerges, with the objective of creating a successful marriage between the company and the lead candidate. Reference checking, a critical tool in validating and expanding upon internal executive assessment, should be done by the company, but is often left to the search firm. The point is not that executive search firms do a poor job, or could be compromised by the desire to complete the deal. The real point is that there is often over-reliance on the part of the Board or a retiring CEO on a search firm's evaluation or reference findings. There has not been a high quality, objective assessment that fully explores the candidate's match to the job or full set of strengths and potential derailment factors coming into the job.

The process of hiring a replacement internally often involves only the departing CEO and the Board, particularly if there is a sound succession process in place. Selection decisions from among a group of internal candidates can also be flawed, for a variety of reasons. In a typical multi-divisional, decentralized company, potential successors to the CEO may not be properly evaluated due to a number of circumstances. For example:

• Focus begins on the individuals rather than identifying what is likely to make a CEO successful going forward. Challenges to be faced, critical success factors, and requisite experiences and skills need to be defined just as they would be in a search for external candidates.

• Internal candidates have remained in the same positions over many years and have not been tested in new, different, challenging environments fostering the development of critical perspectives and skills.

• Executives geographically removed from the corporate environment are not really known in a qualitative fashion. A complete picture of their individual leadership attributes may not have been in full view, and their success may very well be seen through narrow lenses without full context as to not only what they've done, but also how they've done it. Also, potential derailers, such as indecisiveness, may be less visible when executives are at more remote sites.

• Executives may have a powerful mentor or sponsor who has lost objectivity and is working more to help their protégé than for the good of the company.

In succession or selection decisions where a company is considering several capable candidates, a thorough assessment of each will help assure that the very best individual is surfaced for the position -- the one with the greatest chance for success.

Not Taking stock of Talent Can Create Major Issues

When a company has failed to establish a process of assessing corporate-wide executive talent, or has not identified or addressed development needs, it typically takes a crisis for the Board and/or CEO to realize that the company lacks the talent depth it requires to achieve and sustain success.

Such was the case at Gateway where founder Ted Waitt brought in an outside consultant who focused on talent to evaluate his top 100 executives in response to a performance crisis. This systematic assessment process validated Waitt's intrinsic concern about Gateway's level of talent and appropriate skills, and provided the data and motivation to face it. The assessment process reportedly led to changing a majority of top executives as well as many more at other reporting levels. This degree of thoroughness and discipline tends to be the exception and not the rule, which may help explain why many senior executive derailments occur.

World Class Executive Succession

Over the years much has been written about General Electric's executive development and succession process. It is a fundamentally simple process, but GE works hard at it and utilizes it as one of a handful of basic management processes to run the company. It's a top-down, bottoms-up approach, much like an investment banker evaluating equities for his or her portfolio.

The recent appointment of Jeffrey Immelt as successor to CEO Jack Welch highlights the disciplined precision that characterizes talent assessment and selection at GE. In fact, there were two other highly qualified internal candidates who moved on to CEO roles at 3M and Home Depot within days of the Immelt announcement. Most companies feel fortunate to have one potential successor.

Much attention is being paid by outsiders to the CEO transition process at GE in 2001, especially given the unsuccessful handoffs in the last two years at Coca Cola, P&G, Gillette, Xerox, and Lucent.

The selection of Immelt was a culmination of succession work evaluating three potential successors to Welch over a two-year period. The scrutiny applied to the performance of the three finalists was unprecedented. Both Welch and the Board participated in ongoing business reviews with the candidates and sought out opportunities to visit with the three business unit leaders on their own turf. Significant interaction and evaluation took place over this 24 month period leading to their decision. Obviously, the soundness of the decision will be determined over time.

The key components to GE's succession process are engrained in its culture. Like so many things GE does, the company takes a broad, systems approach. It begins at the bottom of the leadership pipeline with campus recruiting and selection. Every year, in both good and lean times, GE goes to campus of targeted universities and hires hundreds of the best and brightest. Initially these graduates are put through intense two-year developmental programs, moving through a series of rotational assignments. Off-program, they move from business to business, giving them a broader array of business experiences from which to draw. Performance is closely monitored and is the primary ticket to new and more challenging assignments. This sifting for talent continues throughout individuals' careers, and only those who have sustained performance surface from this perpetual and demanding development path.

Throughout their careers, promising individuals are exposed to new and different businesses, functional roles, competitive landscapes, job challenges and management styles. By the time highly regarded managers reach consideration for officer level positions, they have typically worked and excelled in a minimum of 5 to 7 different job assignments. Supplementing their learning from job assignments are intense management and leadership development sessions at Crotonville, GE's renowned learning center.

Those individuals identified as officer level caliber during the annual talent review process go through an extensive assessment and development process. This process begins with a rigorous, in-depth interview where a detailed view of what they have accomplished as well as how they have done it is developed. Reference interviews with current and prior bosses, peers and direct reports are conducted to develop a broader and richer evaluation. Results of this assessment interview are shared with the executive through a feedback report complete with listings of strengths, development needs, and specific ideas for improving current performance as well as preparing for future roles. The report also goes to corporate GE as an additional source of evaluative data.

GE's approach is no longer unique as other CEOs have implemented similar processes. Many are ex-GE executives running other companies. One could successfully argue that GE's success as an "Academy Company," grooming talented executives for themselves as well as others, is a result of not only this refined succession process, but also the discipline of using it and strengthening it over the years.

Managing the Risks in Selection

Given the success of the GE process, what can be learned from it? How can a company make good decisions and reduce or eliminate mistakes in key executive selection decisions?

A proven and cost effective approach in obtaining a true picture of an executive's attributes and deficiencies is to put the individual through an extensive assessment process before the selection decision is made. Unless a similar process exists, a company places itself in the position of: 1) selecting an insider based on incomplete and often spotty data, made all the more difficult at times by pressure circumstances, or 2) relying on the uncertainty of an external executive search.

There are a number of other benefits beyond immediate selection in using assessments internally:

• In grooming an executive, the process better calibrates internal views on readiness for the next position. Experience has shown time and time again that different people have different standards for labeling talent. A good assessment and development intervention will identify in tangible terms what an executive does well, what areas need improvement, and possible development actions for the individual and the organization. Quality assessments help reduce risks in future staffing decisions.

• In this era of tight talent supply, investing in a sound assessment process signals to key internal executives the company's desire to invest in them. This process can be part of a cost-effective retention strategy for critical human resources.

• Some companies invest thousands of dollars in external executive development at key business schools in the belief that "hosing executives down" with the latest business tools will somehow meet key development needs. The problem here is that unless there is a specific need to be addressed at an external course, one can never be sure if there was learning or development. When an executive's development needs are properly identified, a company can better target investment in personal development. After all, job assignments, not courses or seminars, hold the greatest potential for developing new skills.

• Regardless of how well a company provides development feedback, it is generally far more difficult to execute effectively at the executive level. Some CEOs consider the feedback process a "dangerous swamp area" fraught with the risk of alienating a key protégé or talent. As a result, the development opportunities often don't get communicated clearly, or at all. The formalized assessment process legitimizes feedback and places focus on providing it in a structured setting by an objective third party. Companies such as Dow Chemical, Colgate-Palmolive, and Best Buy are investing time and resources into the grooming of future CEOs. Long- term executive coaching, executive mentoring programs and tailored leadership development programs are being utilized to develop potential CEO heirs, and to increase the odds of successful selection.

Executive Assessment: Real Impact on Succession

Succession decisions are typically driven by a number of possible events: the untimely death of an executive, retirement, poor individual or company performance, or voluntary resignation from the firm. Some firms, like GE, plan extremely well for all possible events driving a succession decision. Most others are faced with a scramble to find a successor.

Given that most firms don't have a well-defined succession process, how should they plan for succession in key executive positions?

Recently, a Fortune 500 diversified energy company launched an executive assessment and development process to provide evaluative data for succession planning as well as give senior executives extensive feedback and coaching on performance.

Under a succession approach sponsored by the firm's CEO, the firm's Chief Financial Officer, who saw himself retiring in the not too distant future, supported an assessment process of six of the firm's financial executives to determine the best internal potential successor. Three of the executives were from the Corporate Finance staff, while the other half were from large, decentralized, operating units in the firm. The timing was right in that it allowed time for positioning moves with internal executives as well as the opportunity to go outside the organization if the corporate staff and three senior finance executives working in the firm's largest operating units were not deemed to be potential successors. His goal was two-fold; gain an independent evaluative input on his internal succession pool, and examine other moves to leave the organization with the strongest overall team if there was not a capable successor.

Assessments were led by an external consultant who teamed with senior HR members within the company in conducting assessment interviews with each of the finance executives. Additionally, feedback interviews were conducted on each with the CFO, operating unit heads, peers and direct reports. The final outcome was a detailed report focusing on accomplishments, strengths and development needs. It was shared with the interviewed executive first in an extensive discussion of the findings as well as recommendations for different behaviors or approaches for greater effectiveness. Final copies went to the CFO and the senior HR leader.

At the end of the individual interviews, a summary of findings was presented to the CFO, which provided an overview of functional expertise, strengths, development issues and career recommendations. A directly result of the assessments was that one executive emerged as a strong successor. Potential moves were identified for others to best utilize skills and develop broader capability. The CFO met with the CEO to share the findings, gain his support, and begin making staffing moves. Subsequent to discussion with key Directors, the leading successor was moved within three months to the number two Corporate Finance position to expand his vision of the company as well as increase his exposure to the CEO, CFO and other key executives.

Executive Assessments represent an excellent tool to support a company in making the right succession decisions by clearly contrasting the strengths and development needs of potential successors for key positions in the firm in relation to the requirements of the position.

How Thorough Assessment Works and What It Yields

A talented assessor will skillfully navigate the pathways of an executive's background and work experience and deftly extract the most meaningful information for projecting the likelihood of success in select assignments. GE, Honeywell, Gateway and other companies that do this well rely on personal interviews and reference checks to gather 360( insight rather than instrumentation. They believe there is significant value-added in the experience and insight a skilled business assessor brings to an evaluative process.

The best assessment work occurs when there are clear targets. These targets may be a job specification for a specific role, a clear understanding of requirements for operating successfully at a given organizational level, or leadership standards or competencies which have been communicated and are used as part of ongoing performance management.

An assessment covers a broad range of the candidate's life, often ranging beyond work experiences. It typically begins with early life experiences that shaped the individual, on the premise that these events often reveal early clues as to a person's motivation and development. It covers educational experiences, academic results and continuing education to learn about the individual's intellectual breadth and interests. Focus is placed on early leadership experiences to get a sense of drive and motivation for taking leading roles. While the assessment covers an entire career, it places primary emphasis on the most recent roles an executive has played to get a sense of how their style has developed and matured in the context of their most complex challenges.

Understanding work history provides rich input. It reveals keys to the executive's reported successes and failures including obstacles that were overcome and what learning may have taken place. The quality of executives' experiences, how they adapted to meet the challenges in different roles, and their ability to learn are very significant factors in predicting success and reducing risks of derailment in future assignments.

Other critical measures assessed are the degrees of self-awareness and practical intelligence ("street smarts") that an executive possesses. Can they gauge how effectively they interact with different stakeholders or customers and change gears in real time when necessary? Do they have a real feel for how to get things done to lead the organization, get results, anticipate marketplace issues, and react swiftly and effectively to change? The assessment will give strong insights in an executive's ability to connect within the organization -- up, down and across -- a key ingredient to leading complex and diverse organizations.

A comprehensive final assessment report will quantify key accomplishments to provide a context for discussion around focus and style as well as strengths and things that might be done differently to be more effective in the executive's current role. It will focus on development in the current role as well as experience, knowledge and skills that can enhance capabilities for future roles.

Summary

Choosing the right executive has clear and measurable impact on the company and all its stakeholders -- customers, employees and shareholders. Imagine what might have happened had GE or IBM selected CEOs other than Jack Welch or Lou Gerstner. The wrong executive selection can cost a company millions of dollars in lost shareholder value. Although there is no foolproof system to ensure that the right candidate is selected, comprehensive assessments of candidates for executive positions can help ensure that hiring or promotion decisions are made with real and relevant data, thereby reducing selection risk. Selecting from within can reduce risk if a sound succession process is in place and the successor is developed and tested in a measured approach.

Beyond selection, executive assessment can be very powerful in strengthening individual performance as well as retaining key contributors who recognize the investment that the company has made in them.


Lou Font is the President of strategic Talent Group, Inc., a consulting firm based in Northern Virginia, assisting companies in assessing, developing, and strengthening executive talent. Prior to founding stG, Lou's career included senior executive positions responsible for corporate human resources at two different public firms in the energy and industrial sectors; working directly for CEOs, and with Board of Directors and other senior executives at each company on strategic talent management issues. In these roles, he was specifically involved with selection, development and succession of executive talent. He has strategic talent management experience throughout the Americas, Europe and Asia. A major portion of his career was at General Electric in executive and managerial human resources roles working in GE's medical systems, telecommunications, simulation and defense electronics businesses.

Chris Horn is Director, Talent Assessment and Development for Spherion Human Capital Consulting. His consulting practice focuses on strategic talent planning, leadership assessment and development, and assessment skills training. He and his colleagues have consulted with some of the world's leading companies and done work in Europe, Asia, Africa and Latin America in addition to the United states and Canada. Before entering consulting, Chris spent 10 years with General Electric in various human resources leadership roles across different businesses within the United states and Europe. He also worked in corporate human resources at Citibank where he was one of the executive resources team members who designed and implemented Citibank's global talent planning process. Chris is presently based in Chapel Hill, N.C.




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