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Hiring A CEO

With CEO churn higher than ever before, recruiting for the top job is adifficult challenge. People Matters brings you the definitive roadmap for Boards facing the daunting task of selecting their next leader.

By Vikram Choudhury

Over 44% of Indian companies hire CEOs who are externalto their organisation. This is the highest in the world. CEOturnover in India (and other BRICs countries) has steadilyincreased year on year from 10 per cent in 2010, to 13.8% in 2011to 15% in 2012 according to Booz & Company’s annual study onCEO succession.

So when is the ideal time to start looking for a CEO and what are the signs that Boards should look for?

5 warning signs Boards should watch out for

•Consistent performance issues: If the CEO’s performance shows a steady decline over months, the Board should investigate the key reasons behind it. An unsatisfactory explanation qualifies as a cause for worry.•Risk aversion: When the CEO becomes uncharacteristically risk averse, it may indicate a short-term focus and lack of commitment.•Ethical slips: When the CEO shows signs of ethical slips, the Board should take up the matter even if the slips appear to be harmless water cooler conversations.•Excessive “action” focus: Often, when the CEO loses vision from the bigger picture and starts focusing excessively on action and processes, it indicates a lack of clarity and purpose.•Lack of follow through: A disengaged or demotivated CEO may stop following initiatives through their completion. It is important for the Board to periodically discuss the stage of completion of the severalinitiatives of a CEO.

Once you decide that it is time to hire a CEO, how do you ensure that the search is focused and aligned to the organisational goals?

Seven questions your external advisor should have answers to

•Do you understand the cultural nuances within the organisation?•Do you understand the context of hiring and its background?•Do you understand the present and future business position of the organisation?•Do you have a fair idea of the future business goals of the organisation?•What are the relevant criteria for shortlisting candidates?•Do you understand the purpose of why the organisation is hiring the CEO?•Do you understand the unique context of hiring the leader?

Pitfalls to avoid when hiring a CEO

Star Power Seduction: Hiring a star performer may not necessarily work for the company. The value that a candidate brings to the organisation and his her or her alignment to the organisational context is a more critical metric to look out for.

The Principal Agent Problem: In order to ensure good client relations, the consultant may refrain from providing objective assessments and the right judgement about individual candidates or put forward realistic timelines.

Cost of hiring the wrong CEO

•Fixed costs: The CEO hiring process is lengthy and elaborate, often requiring the Board members to travel to different locations. •Compensation costs: The CEO is among the highest paid employees of the business and most of the compensation costs for the initial months come without returns. •Buying costs: On many occasions, the Board has to take tough decisions about paying out career transition costs of a new CEO while bringing him on board from another organisation.•Cost of litigation: If the CEO leaves on a sour note, the Board also needs to factor in the likely costs of litigation.•Cost of losing other leaders: The most impactful blow to an oragnisation with hiring the wrong CEO is the cost of losing other important and valuable leaders in the organisation.

Six components of a fair CEO hiring process

•Document: Irrespective of whether there are any disclosure issues, document every stage of the hiring process.•Appoint a separate hiring committee: Chairman of the Board and Chairman of the hiring committee have to be different. •Identify process owners: Every component of the process should have dedicated owners carefully selected and documented as part of the process.•Assign individual roles and responsibilities: Make every member of the selection committee responsible for specific outcomes.•Lack of follow through: A disengaged or demotivated CEO may stop following initiatives through their completion. It is important for the Board to periodically discuss the stage of completion of the several initiatives of a CEO.•Be bold: Ask difficult questions on the organisation culture and discuss them honestly.

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