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How to find a more sustainable CEO

July 2, 2015
How to find a more sustainable CEO
Ken Favaro

The relationship between public boards and their executive management teams has evolved considerably over the past decade. While governance and succession remain primary responsibilities for today’s board directors, they have assumed a much more prominent role in the development and oversight of corporate strategy. The question then becomes: What should these more empowered boards be seeking in their next CEO?

Too often, boards are focused on past track records when considering their next CEO. But what if the business models in place when those track records were achieved have become obsolete and need to be reimagined?  Of course, you cannot ignore past performance, but as financial advisors must point out, “past performance is no guarantee of future performance.”  Instead, Boards should focus more on the three Cs: Capability, Culture and Coach-ability.

The most important capability is the ability to lead strategic innovation. For example, if a business must move from bricks and mortar to omni-channel, has the potential CEO demonstrated the ability to drive that type of change? Can he or she drive such change through the power of influence without having to exercise positional authority? 

Culture:  The bigger the company the less chance there is of changing its culture. But every culture has its best parts and not-so-great parts.  Boards need to understand the company’s culture in this way and then look for a CEO that can accentuate and work with its best aspects while minimizing the rest.  For example, if customer service and cost reduction are deeply embedded in a company’s culture, you don’t want a CEO that has succeeded in a world where product differentiation and premium pricing are paramount.   Neither the company nor the CEO could change their spots quickly enough for their partnership to be an effective one. 

Coach-ability: If boards are to more actively influence a company’s strategic direction, as they increasingly must do, the CEO needs to be able to have a confident and constructive give-and-take relationship with the Board when it comes to making and evolving the fundamental choices that define a company’s strategy. The expectation of such a relationship must be set early, before the new CEO starts and in fact, as part of the interview and selection process.  Anything after that is too late.  

What's true for large, multi-national public corporations is also the case for mid-market private companies. As the competition for executive talent increases, smaller private organizations also need to foster and promote their unique ability to conceive and deliver winning strategies. 

For instance, many senior executives may be attracted to the longer-term planning horizons possible in private business, or to the speed and flexibility that comes with smaller and potentially less bureaucratic or tightly regulated organizations.

This is also important in light of the more the prominent role of private equity investors who are looking for more "professionalization" at the top of companies they buy into. The path of professionalization starts with the board. We often see this happen when private equity takes over a company. The first thing they do is put a professional board in place. This trend is being driven by capital providers looking for growth, as well as the right leadership to replace the generation that’s looking to retirement. 

The benefits of getting it right

The stakes of finding the right CEO are enormous.  In a recent study involving 2,500 of the world's largest public companies, we found that CEOs who come in after a forced succession have shorter median tenures, 4.2 years, compared to 5.6 years for those coming in after a planned turnover of the top job.  Moreover, our results show that forced turnovers cost each company an average of $1.8 billion in foregone shareholder value. If the world’s largest companies were collectively able to reach a place where only 10 per cent of their turnovers each year were forced, we estimate this could help them add some $60 billion in shareholder value each year. 

Finding a sustainable CEO has proven, quantifiable bottom-line benefits.  So it pays big to get the right capabilities, cultural compatibility, and coach-ability in your next CEO.

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