Boards Lack Skills in Appointing CEOs

In a recent article in the New Zealand Herald, Fran O'Sullivan rightly questions whether boards are starstruck by potential chief executive hires from overseas.

Our view is that boards could well be starstruck, however, this is a subset of a bigger issue. Boards Lack Skills in Appointing CEOs.

Make no mistake, appointing a CEO is a difficult task for a board on many levels. It is a very public challenge. It is open to scrutiny by investors, staff and other stakeholders, and of course the stakes are high. Get it right, and life is a lot easier for directors, and the organisation will likely do very well. Get it wrong and it has calamitous implications for everyone.

Reflecting on the world of chief executive hiring (we’ve very successfully hired well over 100 chief executives over the last 15 years), we believe that boards are often ill-prepared to manage the appointment process. There are a number of reasons for this.

In terms of training, the standard director education programmes give inadequate coverage of the process of hiring chief executives (yet directors are told CEO appointments are the most important things a board will ever do). Perhaps that is because very few existing directors would publicly lay claim to being experts on the subject.

Time is another issue. In order to get the chief executive hire right, directors need to invest considerable time in this process.

Compared to many other nations, our directors are "too busy". In other words, they have too many directorships and thus spread too thinly. A recent conversation with one director who has come out of a private equity environment, the comment was made "I don't know how anyone can do justice to more than three board positions". Yet clearly, we have a number of our most senior directors spread across many more companies and organisations than that. Furthermore, those with ‘just’ 3 or 4 directorships are desperate to get ‘more’!! “Too busy” manifests as delays getting potential CEOs in front of the board, poor candidate experience and too little time to devote to this vital work.

Directors can be overconfident in their own abilities. This is a well-known problem for smart people. There is much research that intelligent people do not always make the best decisions. Furthermore there is little consciousness around the impact of board dynamic on decision making in the boardroom, so poor outcomes result. We’ve met CEOs early in their tenure and within a few minutes worked out that they were ‘wrong’ for the job, yet somehow they got appointed.

Diversity can really help! A diverse appointments committee is vital. A range of perspectives and thinking styles is essential to a good hire.

Perhaps because of overconfidence, boards often fail to use the skills in their organisation. It is not uncommon for the human resources director or chief people officer to be left out of the chief executive succession process. This seems nonsensical in a boardroom that is typically populated by non-human resource professionals. The human resources director working as part of the appointments committee can add useful insights. A board would not think to exclude a chief financial officer from the audit committee!

In many cases, boards simply afford too little time to the process of selecting a new chief executive. Consider the contrast with often multi-day graduate selection programs for large companies or even the sophisticated assessment tools currently being applied to sales or call centre hires at the front line of the organisation. Often too little time (and too little science) is applied to the process of appointing a chief executive.

A CEO hire should never be a panic project. A board should always have options. The best boards know who is a possible successor internally and meet external potential CEOs on a regular basis.

Nine out of 10 boards we work with rely on us 100% to conduct the reference checking for CEO candidates. New Zealand is an outlier in this respect. In some geographies directors talk directly to a candidate’s referees and the search firm does none. A balance between the two is recommended.

As for the question of whether we are starstruck? The answer is possibly yes. Our contention is that there are very capable international executives who can succeed in the New Zealand context. This has been proven by many. Equally there are a number who don't. Sadly, many of these have been very high profile and have managed to erase billions of dollars’ worth of value from our share market.

Finally we do often pay like New Zealand is a hardship location! On top of ‘generous’ base salaries we compound the issue by having bonus structures that seem nonsensical. Any layman observer would see a non performing CEO walking away with millions is … well ‘confusing’ at best' and directors must do better here, else the social licence that business enjoys will be eroded further.

But that is another story!