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Recent history shows that directors who take more active roles—particularly in CEO selection—are fundamental to the long-term health of their companies.

The Risks of a Wrong Choice

When the board selects the wrong person for the job, conse- quences abound. All too often, these failures can be traced to inadequate due diligence on part of the board when vetting candidates. Take Yahoo!, which by 2012, had appointed six CEOs in 11 years, leading hedge fund activist Daniel Loeb, manager of the $9 billion Third Point fund, to mount a proxy challenge to the Yahoo! board. Loeb argued that the company’s directors did not have the talent to help the firm grow its revenue from advertising or even really to understand the market challenges faced by management.

While performing its due diligence on Yahoo!, Third Point discovered, shockingly, that the current CEO, Scott Thompson, had claimed two college degrees from Stonehill College, when in fact, he had only earned one. To make matters worse, it was revealed that the director who led that CEO search, Patti Hart, had herself incorrectly stated college credentials. In the wake of that news, Thompson resigned and Hart announced that she would not stand for reelection. Yahoo! agreed to bring three Third Point director nominees onto the board and two months later, that board recruited Marissa Mayer, a former Google star. By March 2014, it was reported that the stock price of Yahoo! had doubled over the 14 months since Mayer’s appointment.

College degree verification is one of the most basic of due diligence requirements—yet Yahoo!’s board missed it. Preventing human capital shortfall by ensuring the selection of the right CEO—one whose capabilities and skills properly align with the job to be done—is among the board’s most fundamental risk-management responsibilities. Nothing can fully make up for the choice of the wrong CEO. Boards that lead in making this important judgment are careful not to over-rely on their search partner, as the HP board seems to have done in hiring Louis Apotheker, who was then replaced by Meg Whitman, one of their own directors.

In some cases, the board simply fails to match the right person to the job. That was clearly evident when Sandy Weill and the Citigroup board chose to hand the CEO baton to Charles Prince, passing over the more experienced operations manager, Robert Willumstad, who was given the role of COO. But the plan only worked as long as Willumstad stayed. When he left less than two years later, and Prince assumed the COO responsibilities in addition to his role as CEO, it soon became clear that the CEO did not bring the entire range of capabilities required to fully lead the complex firm on both the inside and the outside in a more unpredictable climate and volatile markets. After surprisingly poor company performance, the board forced Prince out in 2007.


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