Corner Office-Hire Slow, Fire Fast
Hiring the right CEO and letting the wrong CEO go are the most difficult, yet important, decisions that corporate directors can make. It’s an emotional, draining process fraught with political land mines, blame games, and time bombs. Let’s face it: Most directors would rather have an autopsy while still living than to fire their CEO.
But it’s a terrible task that directors are facing more often. According to a recent report by New York–based public relations firm Weber Shandwick, the turnover rate of chief executives at the world’s 500 largest companies by revenue increased 10 percent in 2007 according to the firm’s CEO Departures report. Currently, the CEO departure rate is 16.2 percent, which is near the global high of 16.4 percent set just three years ago. Although a certain level of turnover will always occur due to retirement and leadership succession, an increasing number of CEOs left involuntarily in 2007.
And replacing those CEOs can be difficult. Brad Smart, author of Topgrading: How Leading Companies Win by Hiring, Coaching, and Keeping the Best People, conducted research that indicates the average financial cost of mishiring an executive can be as much as 27 times his or her base salary. So hiring the wrong CEO who makes $300,000 a year could cost the company $8 million! And failing to fire the wrong executive (keeping a B or C player instead of an A player, as Smart would say) can be just as costly in terms of time wasted, opportunities lost, decreased employee morale, and disappointed customers and shareholders.
With so much at stake, why are directors too slow to fire an underperforming CEO, and too quick to hire a replacement? As the saying goes, “Nobody has ever bet enough on a winning horse.” However, by making a conscious effort to hire carefully and fire quickly, directors can increase their odds of having the right executive in the corner office.
Slow to Hire
Jim Collins advises in his book, Leadership Excellence, how to get the “right people on the bus.” Jack Welch, former chairman of General Electric, author, and well-respected business leader, writes about spending 50 percent of his time hiring, coaching, and developing his team. Many top-notch human resources consultants talk about using a Six Sigma quality approach to hiring. The common denominator in all of these best practices is taking a deliberate, thorough, careful approach to hiring the right executive.
The most common mistake I’ve seen as directors go about selecting a CEO is to repeat the same process that is used to hire all other employees: checking with their cronies or hiring a recruiting firm; reviewing rÃ©sumÃ©s and bios; conducting interviews; maybe checking references, background, and reported accomplishments; and doing all of this with the least amount of time and effort possible.
But due to the uncommon demands, risks, and rewards of the CEO’s job, you have to find them differently, evaluate them differently, and offer them jobs differently. There isn’t a shortage in the outfield of candidates, but to find the one that will consistently be a home-run hitter requires careful recruitment and screening.
To begin: Don’t just screen and interview based on rÃ©sumÃ©s. After all, we are all our very best on our rÃ©sumÃ©s (and during our eulogy). Before the screening process even starts, define specific accountabilities of the position (e.g., results) as well as mission-critical competencies that the ultimate CEO would exhibit (e.g., the manner in which you expect the results to be delivered).
Next: Devote a lot of time to screening and interviewing. I know that interviewing seems like the biggest waste of time, but taking the time to do it right up-front will save a lot of pain later on. Smart’s Topgrading book, training materials, DVDs, and interview forms are some of the best I’ve seen (topgrading.com), and are used by many top business leaders, including General Electric, Bank of America, Barclays, and Honeywell. A key component of the topgrading approach is a thorough chronological interview, conducted by two people at a time over about three to four hours, that covers key successes, failures, decisions, and relationships in all full-time jobs.
Fast to Fire
While too many directors make the mistake of being quick to hire, they do the opposite when it’s time to fire: They drag their feet. Why? Factors include the emotional ties that directors have to the CEO who has become a friend, not wanting to admit that a hiring mistake was made, or not wanting the organizational disruption and distraction that a new boss causes.
And there’s never a clear, black-and-white answer (other than in cases when the CEO has engaged in illegal or unethical activity). The CEO’s job is tough; they perform many tasks that require a broad range of skills, experiences, and depth of knowledge. No CEO is mistake-free. No CEO comes with all of the skills needed in his or her tool belt. And no CEO operates in a vacuum; some market conditions are beyond the power of even the most adept CEOs. So there can be plenty of reasons for underperformance, missed deadlines, and lost opportunities.
It’s the role of the board of directors to discern the difference between a good CEO who made a mistake and a CEO who is incapable of leading a company toward profitable growth. A long, long time ago (even before I was born) in 42 B.C., philosopher Publius Cyrus wrote, “Anyone can steer the ship when the sea is calm.” The long-term success of the company and its shareholders’ interests are dependent upon the corporate directors to determine whether the CEO is capable of captaining the ship when rough seas are encountered.
Directors must understand their CEO’s strengths and weaknesses as they monitor and assess his or her performance. They should know what the CEO is doing to strengthen his or her weaknesses, and leverage his or her strengths. Over time, a level of trust is built between the CEO and the board where these issues can be discussed openly without resentment or recrimination.
If the directors are doing their jobs properly, it will become apparent when the company’s troubles are due to the CEO’s poor leadership, subpar judgment, or questionable character. If this happens, don’t fool yourselves into thinking these characteristics will change. It’s time to fire quickly and stop wasting time. Don’t make any excuses or care about disrupting the work force. (Besides, employees already intuited the firing months ago, and rumors are flying about the inadequate boss and the board’s indecisiveness for a long time.) It’s like pulling a decayed tooth—do it quickly to minimize the long-term pain.
So, directors, remember that you didn’t win a beauty contest to sit in that chair in the board room. You have a duty to make tough decisions for the long-term good of the company and the shareholders you represent. Be slow to hire and fast to fire, and you will succeed in having the right executive occupying the corner office. Rather than taking a risky bet, it’s the best way to avoid headlines about the cost of your poor choices or indecisiveness.