There is a dirty little secret that executive recruiters would like you not to discover. It’s one that experienced managers have known for a long time but are apt to ignore: Most newly recruited executives fail to live up to expectations.
Despite the fanfare and high hopes a new executive appointment brings, 30-40 percent of executives joining new companies fail after 18 months. The numbers can be even worse when the hire you are trying to make is a CEO successor to a company founder. A relevant joke circulates among venture capitalists: During the search process for a successor to a founder, you should “find two candidates so that the second is ready when the first one fails.”
That being said, ineffective CEO succession hiring is no joke for any company of any size. The cost of a bad hire is monumental. According to Dr. Bradford Smart, author of the best-selling Topgrading, the cost of having the wrong CEO at the helm, even for just 18 months, can be as high as $50 million. While that figure represents the cost to a large company, the impact on smaller companies can be lower in number but even more devastating, sometimes amounting to almost a quarter of their profitability.
Surprised? Don’t Be
The current practice of hiring executives is flawed. The chance of picking a winner based on a resume, personal interviews, and a reference or two is quite low.
Resumes lie. One survey found that 56 percent of hiring managers have caught candidates lying on their resumes. Executive candidates are not above that.
Interviews can be aced by good performers, but good performers aren’t necessarily good candidates. Google, reflecting on its hiring process, found that candidates’ interview scores had no correlation with their eventual performance on the job when hired. Other studies have shown that unstructured interviews – the kind most commonly used during the hiring process – are the worst choice when it comes to accurately judging a person’s potential performance.
References can be gamed. Making it worse, executives often rely on HR pros or executive recruiters to check references as a means of rubber-stamping a decision already made. Woe to the candidate who doesn’t coach their reference in advance to say exactly the right things!
Few employers avail themselves of what are sometimes called “off-balance sheet” references, or references who were not suggested by the candidate but uncovered during research or through the recruiter’s own network. Some savvy employers turn the reference process upside down by only hiring executives vouched for directly by the employer’s own trusted contacts. Unfortunately, this can only be done by employers who have existing and extensively developed personal networks.
You can’t blame HR, hiring managers, or even the board of directors for their CEO recruiting foibles. It is next to impossible to determine if any candidate will be successful based on a set of artificial process.
The only surefire way to assess a candidate’s skill is to see them in action in real-life situations, which may be why some zealots focus on promoting CEOs from within. The right internal candidate, identified through a thorough vetting process and already tested within the organization, can be a better bet than any outside hire.
Although vetting an internal candidate does give you a leg up, it is not without risk. Often, an internal candidate has spent the majority of their executive career with the same company they are now picked to lead. While such insiders have substantially shorter learning curves, they also tend to perpetuate the same ideas and policies as their predecessors. They end up reliving the past while the future passes by.
Similarly, many internal candidates must cross wide gulfs to get form their current role to that of CEO. As one board member once told me, the gap between a CEO and even the role of VP is the same magnitude as the difference between the mailroom and the VP. Not every executive can be expected to make that leap.
There Is a Better Way to Hire CEOs
Perhaps taking a page from the “hire from within” advocates – but avoiding the hazards of that hiring practice – Starbucks chose Kevin Johnson for the role of CEO in its recent transition.
Having failed twice before in the quest to replace Howard Schultz, Starbucks was more pragmatic this time. Together with his board, Schultz first selected Johnson, a Starbucks board member himself for seven years, to take on the subordinate role of chief operating officer. Johnson earlier learned the ropes of being a CEO at Juniper Networks, a company in a vastly different industry than Starbucks. He brought a new perspective and some already-honed CEO skills to the Starbucks job. Johnson learned to work with Schultz and the board during his time as COO, and he turned out to be the perfect candidate for the CEO transition two years later.
Try Before You Buy
Whether boards seek their candidates from within or recruit externally, the longer the audition runway, the better they will be able to evaluate a given candidate’s competence. Selecting an executive candidate who is willing to tryout for the CEO role for several years while learning the ins and outs of the company – someone like Johnson – gives the board, the founder, and even the candidate themself a good indicator of their future success. A sufficiently long runway also enables the company to recover and perhaps take a mulligan (for you non-golfers, that is an unofficial penalty-free do-over) if the hire turns out not to be an ideal fit.
Hiring, especially for the role of CEO, is a highly error-prone and expensive process. Imposing a try-before-you-buy placement in advance of a CEO transition enables everyone involved in the transition to test their decisions prior to jumping into the deep end. We’ve all hired “can’t miss” executives who turn out to be duds. Testing candidates out in advance of an expensive decision is certainly something that every board, company, and successor should consider.
Les Trachtman is the author of Don’t F**k It Up: How Founders and Their Successors Can Avoid the Clichés That Inhibit Growth and the CEO of The Trachtman Group.