CEO recruitment is broken and no solution in sight

Continuing my search to
understand what underlies the decision making mistakes made by boards of
large companies, I turned to the Australian Institute of Company
Directors (AICD), the preeminent educational body for public, private
and not-for-profit company directors in Australia.

 

I collected a copy of the
AICD Professional Development Handbook (July 2014 to June 2015) to
see what the program schedule might reveal.

 

In the handbook’s section
for individual professional development as it relates to Board Roles and
Responsibilities, Board Operations, Governance, Risk and Strategy,
Finance, Management Relations and Board Performance, I counted a total
of 52 professional development options covering books, workshops,
webinars and events.

 

There is a 3.5 hour
workshop entitled ‘The Board’s Role in Mergers and Acquisitions’.  
The content summary included the bullet points ‘Gain insight into the
board’s decision making process for mergers and acquisitions’
and
‘Recognise the questions the board needs to ask advisers/external
experts’
.

 

This gave me some optimism
that board members are taught the necessary sceptical enquiry skills
they need, although I would have preferred content that was a little
more blunt, such as ’17 out of 20 acquisitions don’t improve
shareholder value – why your board should be rejecting almost all
acquisition opportunities’
or ‘Why nearly fifty per cent of
acquisitions destroy shareholder value – the warning signs to look for’
.

 

When it came to CEO
recruitment, unarguably one of the most important jobs of any board, the
pickings were much, much slimmer.

 

There is a 3.5 hour
workshop entitled ‘The Board and the CEO’  containing this single
bullet point in a total of five bullet points:

 

‘Improve your knowledge
of CEO selection and remuneration’.

   

Huh?

 

That’s it?

 

Out of 52 workshops
totaling approximately two hundred hours of professional development for
its members, the AICD sees fit to devote (I’m guessing) one whole
hour to CEO recruitment  .

 

I find this neglect of
recruitment skills astonishing.

 

It’s even more astonishing
when you consider that Australian boards of publicly-listed companies
have a poor, and worsening, track record with respect to CEO tenure.
Last year, a
study of Australia’s top 200 companies showed that the average tenure of a local CEO fell from
5.7 years in 2006 to 5 years in 2010 and 4.2 years in 2013, against the
historical average of 4.9 years. Globally, the average CEO tenure over
the past two years has fallen from 5.4 years to 4.8 years. The obvious
conclusion is that many CEOs are not successful and, in most cases, the
original hiring decision was poor.

 

What should board members
be learning with respect to the recruitment of CEOs?

 

Here’s my proposed
curriculum summary:

 

  • Constructing an effective job
    description and performance profile
  • Understanding the core
    competencies and motivation required to succeed in the job
  • How to conduct a behavioural
    based interview
  • How to ask potentially
    challenging interview questions
  • How to probe candidates’
    answers to get to the truth
  • How to score candidates’
    answers and accurately compare candidates
  • How to avoid being seduced by
    a charismatic or high profile candidate
  • How to conduct effective
    reference checks and discover relevant information from reluctant
    referees
  • How to effectively use a
    search firm/recruitment agency
  • How to negotiate an offer
 

The reality is that for
most board members, especially of publicly-listed companies, it has been
many years since they were recruiting regularly (ie at least four hires
per year). Many of them would have made more internal promotions than
external hires. Many of them would be rusty or too reliant on the ‘old
boys network’ for referrals to be genuinely effective at assessing
candidates that are largely unknown to them.

 

Recruitment is a core skill
for business leaders, including board members, and especially board
members of publicly-listed companies.

 
 

I believe the AICD needs to
take a look at the reality of their members’ skills in recruitment and
allocate far more time to this business-critical area. As a large
country of shareholders (particularly via superannuation funds), every
Australian has a vested interest in this occurring sooner rather than
later.

4 Comments

  1. Rod Hore on 09/12/2014 at 8:36 pm

    Ross, maybe the good news here is that a Board will rarely make a CEO decision without turning to the Recruitment Industry to execute that process for them. And I'd hope that those agencies operating at the CEO level are providing a consultative, trusted service that assists the board to get the process right.

    That said, any recruitment process is going to get better results when the client is educated and experienced.

    I believe a bigger concern for the AICD is that is struggles to provide meaningful engagement for the SME market (the largest business segment in Australia) and much of its course material is targeted at large and/or listed companies.

    • Ross Clennett on 09/12/2014 at 11:17 pm

      Thanks for your comment, Rod and my cursory reading of the AICD PD handbook would confirm your observation. I suspect, somewhat in AICD's defence, that their members aren't crying out for more PD on recruitment due to the members assessing their own skills as 'high' and not needing an update. I would hope Myer's well-publicised brush with employing Mr Flanagan earlier this year would demonstrate how easy it is for senior executives to be fooled.

  2. Dr David M Williams AM on 10/12/2014 at 12:52 am

    Hi Ross
    Enjoyed your blog.

    Delete

    Dr David Williams AM
    Interesting article from Ross Clennett. Can I suggest your proposed curriculum for recruitment of CEOs include one very important element – the identification of required leadership capabilities prior to the commencement of the process. The interdependency between role intent (what has to be done), performance outcomes (deliverables) and context (the setting in which the role operates) allows for determination of leadership capabilities for the role. These confirmed capabilities are critical in initiating steps in the process.

    Dr David Williams AM

  3. Stephen Porter on 10/12/2014 at 5:08 am

    Hi Ross

    I am enjoying your regular news pieces, as ever. A couple of points re your CEO recruitment article.

    Boards may be engaging a professional recruitment firm to select the short list and do the ‘heavy work’ of assessment, and then join the final panel to ensure rigor at that stage. So the Board may not need to be particularly trained themselves.

    Boards usually elect a selection panel to look after the recruitment exercise, those with recruitment skills would be selected above those without to be on the panel.

    So maybe the AICD does not need to emphasise recruitment training, as Directors with that focus get trained at RCSA and elsewhere. But certainly HR skills should be as highly valued and trained for as finance, marketing, legal, etc.

    The faster turnover of CEOs may not be due to poor hiring decisions but rather a similar trend to other jobs where people want to move every 3-5 years. With companies renewing themselves and adapting to regular change, different style CEOs are needed at different times, so ‘builders’, ‘changers’ and ‘stabilisers’ all come into their own at different times. So 5 years avg may not be a surprise.

    And, CEOs after 5 years may look for a break and time out before taking on the next job. Businesses are OK with people who have a dotted career rather than a linear one, and multiple employers, which supports the regular job moves. (Reference checking becomes more critical of course)

    Cheers Stephen Porter

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