Why do Volatile CEOs Have Nine Lives?
February 2 2012 by David Brookmire
Are you surprised when you see a volatile, high-profile CEO fired from one company and hired by another? To make matters worse, even when they’re abrasive or abusive, these “star” CEOs negotiate lucrative severance packages and often leave their company with tens of millions of company funds and stock. Most recent examples include HP’s Leo Apotheker ($13.2mm), Yahoo’s Carol Bartz ($10mm), and Burger King’s John Chidsey ($20mm). How do CEO leaders who have failed on the public stage land new CEO jobs in other companies? What is it about CEOs that creates a “near immunity to damage?”
There is a very common employee selection tenet that has existed for decades: The best predictor of future performance is past performance. There are several reasons that CEOs who have been fired can land in their new roles with other companies. These have to do with the process, candidates and the Boards of Directors.
The candidate pool of CEOs is very limited. Additionally, the CEO role has become increasingly risky and complex, with 24/7 demands that are undesirable for many executives. Also, selection committees lack qualified candidates. This is partly fueled by the common perception that only a few people actually have the skills to become a CEO. Couple that with the need for industry experience and the pool shrinks quickly for most open CEO jobs. You reduce the risk if you hire someone that has previously held a CEO position.
Compounding the problem, internal succession plans have been hit-or-miss at best. Promoting from inside sometimes takes too long, and many companies just don’t want to spend the time training an internal candidate. The problem is exacerbated if the CEO departure is sudden, as it is in many cases with failed leaders.
The selection process has many potential flaws. Just because you serve on a board doesn’t mean you have skills in talent assessment. Many hiring processes depend on “who you know.” Board members may serve on multiple Boards, networking and building relationships with C-level leaders from a variety of companies. Ken Langone helped recruit and hire GE’s Bob Nardelli to Home Depot, as he served on both Boards.
It’s difficult to find out what really happened with the CEO’s performance at the previous job, due to confidentiality agreements and the fear of defamation lawsuits. Even if a CEO was abusive in their last position, there’s often a “positive halo effect” for executives who have had good press and served in strong brands in the past.
CEOs don’t have an accurate perception of their own strengths and weaknesses, and many CEO’s can do very well in the job interview with their leadership, communications, influence, and other skills that helped them rise in the ranks.
There’s tremendous pressures on boards to act responsibly and help the company be successful. But boards are disconnected from the day-to-day requirements and demands of the jobs they are to be filling. Some boards are dysfunctional or certainly lack agreement on the best candidates to fill jobs. It has been reported that the majority of HP’s Board did not meet Leo Apotheker to interview him prior to his appointment, in part due to its dysfunctional state at the time. In many instances, Board members are ill-prepared to do a good job in CEO selection. When was the last time you witnessed a board member volunteering to be trained on behavioral interviewing?
Often, the need for financial results apparently trumps performance, judgment, and ethics. There are intense pressures to expeditiously fill the CEO vacancy due to increased stock volatility, opportunity costs, shareholder pressures, company morale, etc. Hiring the right CEO can increase stock prices, at least in the short-term. For instance, Oracle’s stock price went up 5% when it was announced Mark Hurd was hired.
And making a hiring mistake in the C-suite is costly. Nat Stoddard and Claire Wyckoff reported in their estimation that the costs of CEO hiring mistakes for replacing large-cap, mid-cap, and small-cap company CEOs were $52mm, $22mm, and $12mm, respectively.
So, why do these volatile CEOs get rehired? Their previous experience is valuable and eases concerns for board members.
These CEOs have a lot in common, including some fatal flaws that caused them to fail in their previous CEO position. These include:
- Weak CEO functional skills. In other words, they don’t use the right strategy, set priorities, acquire companies, etc. that result in higher performance. In fact, these failed decisions often led to declining performance.
- Big blindspots. There are gaps in their leadership skills that have been present for their entire careers and at the CEO level the impact is too much. Marshall Goldsmith used the term “over-used strengths that become liabilities.” This has led to key employee defections, lower morale at the top, poor company performance, and internal/external stakeholders losing trust in the company.
- Lapses in judgment. Sometimes CEOs really do act “human” and make decisions that are not acceptable based on company values, policies, and practices.
- Poor ethics. These are difficult to overcome. Ethical code violations stay with CEOs for a long time during their careers.
So what can companies do to ensure their CEO hiring is effective and avoid these costly mistakes?
- Focus on building the leadership pipeline. Internal promotions to CEO have been shown in research to be better performers than externally hired CEOs.
- Provide executive coaches for the CEO. Executive coaching has become widely accepted as a proven leadership development method for senior leaders. Experienced coaches can help on-board a new CEO successfully and help CEOs overcome poor leadership skills in most cases.
- Address the selection process problems. There are many potential problems in most current CEO selection processes, all of which can be addressed for improvements in the final selection decisions.
- Educate and develop the Board. CEO hiring doesn’t happen that often, but when it does, the costs for poor hiring are tremendous.