Finding the Right CEO: Boards Cannot Just Rely on Their Gut Feel

By Sorayuth Vathanavisuth. Ph.D.

One of the most challenging topics for any CEO is discussing the replacement of key executives with the Board of Directors (BOD).  While most organizations identify successors from inside the organization, sometimes organizations are forced to go “outside” and sometimes they decide to go “outside” to bring in “new blood”. In either case, it is always a difficult decision as the new person will have to fit with the culture and values of the organization and the requirements of the position. This challenge is even greater when it is the CEO who is being replaced. 

Different organizations handle these situations differently. In 2001, GE took over 6 years to replace Jack Welch (the former CEO) with Jeff Immelt, an internal candidate. In 1993, IBM took only three months to replace John Akers with an outsider, Lou Gestner. Both of these choices were carefully considered and well thought out. In Gestner’s case, he came from outside the tech world (he was at RJR Nabbisco before) and knew little about the industry. In Immelt’s case, he had successfully run a huge division of GE and was one of Jack Welch’s deputies.  Both of these selection decisions were successful but plenty are not.   John Sculley replacing Steve Jobs at Apple is an example.  To avoid these disruptive executive replacements, organizations should take care to make sure the process of selection is robust and results in a successful transition. Shareholders, employees and customers all have a lot at stake in executive transitions.

The solid foundation

To find the right person to do the work is always not an easy task but especially important in executive selection.  Normally we should really know who that person is first in order to effectively predict what they will behave in the future. We need to know if their behavior will enhance corporate performance, just keep organization going or result in its decline. In this regard, we have to thoroughly know his (or her) personality trait. 

Most executive selection failures are not a result of lack of experience at an executive level.  It is more a result of their communication, influencing, leadership styles and how they fit with the organization’s culture and values.   We call these personality traits that the individual brings with them to the assignment.  In the past, we may run an assessment to find out of the individual’s personality traits with paper and pencil.  However, thanks to great strides in modern selection techniques and the availability of internet, we can run a highly reliable assessment on-line and get the results right away.

There are numbers of personality assessment available out there. However, I would recommend to adopt psychometric assessment as the basic ground to move forward to another evaluations.

As a rule of thumb, we should use the test that is well recognized by highly reputable authority. In Europe and North America there are testing standards that place guidelines for assessment tools that are recognized for their use and application in selection. These testing standards specify that such tests should be built on the BIG 5 or Five Factor Model (FFM) of Personality which are; Extraversion, Agreeableness, Openness to Experience, Conscientiousness, and Emotional Stability. Emotional Stability is closely associated with what is referred to as EQ or Emotional Intelligence.  

Another concern about self-report data questionnaires is the inclusion of “response fidelity” measures to identify candidate response distortion or applicant faking.  

Behavioral growth potential

There are a few good tests in the market but the one that I have found that is outstanding has some strong key characteristics such as;

• 3 types of “Reliability”.  First is item reliability, second is Big 5 reliability and third is test re-test reliability. Any test used in selection should have research showing that their reliabilities for all three should be above 0.75, which means that 75% of the time, the items measure what it says they say they measure, that the Big 5 are routinely identified and that the results are reproducible in a candidate re-test.  These are extremely important for any assessment used selection as it is designed to predict the future and if the results of a candidate change in re-test, the results are not predictive.    

• Measures “Validity”.  Validity is the amount of predictive power this instrument has related to a criterion like “job performance”.  There are many contributing factors to job success, including mental ability, previous experience education, personality, etc.  A good measure validity is 0.40 and above, meaning that this one selection element explains 40% in the difference in performance. In a selection process that uses interviews, the typical interview validity is about 0.31 so we can see that adding a quality personality assessment can more than double the validity (predictive power) of the process.

• Measures “behavioral growth potential” which demonstrates potential for professional growth and career advancement.  Aspects of this are; consistently growing the breadth of one’s career-related capabilities, taking on higher-level responsibilities, showing motivation for advancing into future roles with increased responsibilities, showing commitment to life-long growth and learning, comfort with change, achievement orientation and leadership. 

As mentioned above, the last “behavioral growth potential” will provide us with an understanding of how this person degree of achievement, leadership orientation, emotional stability and conscientiousness. These along with certain cognitive abilities will help organizations predict high potentials. This early identification based on objective factors is a solid foundation for talent management. There are also caution areas identified such as over commitment, starting tasks too quickly without approval, focusing on personal success at the expense of others, not always listening to feedback that is perceived as negativity from others.

Power of the brain

While psychometric assessment is important to provide very first indication of successful executives, it is advisable to reconfirm potential ability by going through cognitive assessment.

This so-called applied reasoning test is an ability test that measures a potential successor’s ability to reason, solve problems, learn new concepts and understand complex relationships.  The test will involve evaluation of left and right brain from three distinctive tests which are Verbal, Numerical and Abstract reasoning.

Verbal Reasoning reflects ability of candidate to quickly identify nuanced or subtle written concepts often missed by others and also effectively interpret, understand and make correct inferences from complex and/or abstract written material. Verbal reasoning is also aligned with learning agility.

Numerical Reasoning demonstrates the candidate’s ability to analyze complex numerical data and provide insightful conclusions that not all managers would identify. It also shows how quick the candidate can interpret tables, graphs or charts that require analysis compared to executive level abilities.

The last but not least is the Abstract Reasoning. This index will reveal how good this potential candidate is at recognizing structure and patterns within situations not previously experienced; and also, how good they are at analyzing and solving abstract or conceptual problems.

The result of these three assessments can be summarized into one cognitive ability index.  When we combine behavioral growth potential, and cognitive ability, we will then have the final indication for “Leadership potential”.  Using this process identifies key talent and focuses the talent management process on certain people and certain capabilities to develop or leverage.

Final says on the Board’s responsibility in the selection of key executives

While the traditional approach has worked in some organizations, most organizations should be making sure now that their selection and talent management processes are measuring what they should be measuring and using assessment tools and processes to make sure that the executive cream rises to the top.  If it becomes necessary through the talent management (internal assessment) process to go outside, the organization will have a much better idea of what to look for in an external candidate. 

The general rule is that as the organization grows and becomes more exposed to international competition, the previous methods of succession planning will come under more pressure. Now is the time to look into how organizations identify and develop talent.  There are modern tools and processes that really do improve the predictive power of selection processes.  When it comes to executive selection and succession, the cost of getting that wrong is significant.  Some estimate that the cost of putting the wrong person in the job at executive levels is 150-200% of their annual salary.  For an executive making 300,000 to 500,000 Baht per month, that can run over 15 million Baht. The tools and techniques that I have described cost less than 1% of that. 

Boards that are not already doing so will probably want to look carefully into the Talent Management and Selection processes within their organizations.  They can ask the senior leadership to present its plan and processes for objectively assessing, developing and selecting people for key positions. They can ask the CEO to show the organization’s process for assessing and identifying key talent and report annually on the organization’s Talent Management plan.  Key talent should not be added and subtracted from these lists of high potentials annually with no discourse. 

An organization’s key talents are the human capital of the organization.  If the financial capital of the organization disappeared every year, the CEO and CFO would be called in to explain.  The CEO and CPO (Chief People Officer) should present the Talent Management plan (human capital) annually to the BOD.  The board should take an active interest in the Talent Management process of the organization. It is the life blood of the organization and has a lot to do with the long-term success of the organization which is one of the board’s key responsibilities.  

If the BOD has governance in place for managing key talent, the Nominating Committee of the board cannot appoint anyone according to the preference or gut feel of the major shareholder or the CEO and objectivity, shareholder value, customer and employee engagement are enhanced.

Disclaimer: This article is written for educational purpose only.

Sorayuth Vathanavisuth, Ph.D., a DCP 3 & CDC10 - Graduate Member and former facilitator of DCP’s Strategic HR section, can be reached at sorayuth@sealeadership.com.