The Boards’ Sacred Task: Selecting the right CEO (7/10)

In a previous post, I described ideas for evolving your advisory board into a fiduciary board or other kind of board structure. And if you make that journey, you might reach a point at which you want to potentially move out of the CEO slot. Family companies tend to make that shift around generation three or four. Entrepreneurs tend to be a bit slower in moving out of the C-suite, so this decision might be a little ahead of you.

For publicly traded enterprises that have been going for some years, if not decades, then selecting the CEO is the sacred task of the board, one that you must get right. If you hire the wrong CEO, then pretty much everything is going to be destroyed. You’re going to lose your top talent, you’re going to lose your sales, you’re going to lose your community support. In short, it’s going to be a nightmare. In addition, you’re probably going to attract a few activist investors who want to throw you out of your job as a board chair or director. In the activist investor world, there is no room for sympathy; if you’re lagging behind your peer group, you are going to be attacked. 

In 2021, Engine No.1 — a small investment firm — led a successful activist proxy battle against the giant Exxon Mobil. It was a real David vs Goliath contest.

I spoke to Chris James, the CEO of Engine No.1, and asked, “Tell me, Chris, why did you pick on Exxon?” There were a number of reasons, but one of them was terrible performance in a relative peer group. Exxon was the worst of the major oil companies by a considerable margin. 

If you’re not blessed with a good CEO, your margins are shrinking and you’re drifting down the peer evaluation list, then you can be absolutely confident that somebody’s going to be on your case. They may well show up and they may well win a proxy battle that puts you out on your rear end. Last year, there were over 800 proxy battles around the world in publicly traded companies — over 500 of them in the United States alone.

So, if you’re out there as a director in a publicly traded company and either your management’s underperforming or your management has performed well but needs to retire, then you’re going to have to find a new CEO. And that decision is your board’s sacred responsibility. In most other jobs of the board, you’re working together with the management team. In this case, though, you and your colleagues on the board are alone to select the next leader of the organization. 

To start this exercise, I’ve always asked myself, “what’s different about this CEO job?” Suppose you were just the head of sales and now you’re CEO — are you still head of sales? No. Or if you moved from CFO to CEO, are you now CFO and CEO? No.

As CEO, you are the unique sole depository of all the investment decisions that are going to be made. You have a unique new job of working with the board and your stakeholders — which you’ve never done before — and is sort of upwards. And then downward, you’ve got capital allocation, both human and financial. And outwardly, you stand for the company; you are kind of the person who embodies the corporation. These are very different characteristics. A.G Lafley was the former CEO and Chair of Procter & Gamble. When speaking about corporate leadership, he shared these (paraphrased) perspectives: 

“Most people would say that CEO stands for Chief Executive Officer. But in my case, I’ve got 16 executives who run multibillion dollar global businesses. I’m not really all that likely to be able to help them running those 16 businesses. 

I define my role as CEO as being  Chief External Officer. 

I’m the one that’s out there looking at the horizon and finding what incoming missiles could possibly transform or destroy our businesses. Then, I have to determine what it is we might do in order to deal with those challenges or to get in front of them or to ignore them. And then I have to decide how to do it all from inside.”

Those are good perspectives for thinking about the attributes of a CEO. You need someone who has a passionate curiosity and who has a huge capability of working in an uncertain fuzzy world of multi-dimensional forces and pressures. 

Every executive I’ve interviewed who became a CEO — I must have interviewed a dozen of them — has said to me, “It’s a completely different job, David. It’s different than anything I’ve ever done before.” 

So, for a board director hiring a CEO, your first task is to understand what is different about the job and then to understand the attributes that go with that difference. Everybody you hire ought to be able to cope with the new responsibilities that they’ve never been exposed to before. 

The second thing you need to consider: where do you want to go with this company? I’ve got some examples. GlaxoSmithKline, the pharma company, hired a CEO with a background primarily in cosmetics products, to help take them more into consumer goods and less in science. Around the same time, Nestlé was going exactly the opposite way, looking outside the consumer goods products industry and hiring someone to help them with the science. 

So as a board, you need to understand two things:

  1. The CEO’s job is a different job and you need to understand which attributes are required. 
  2. You need to identify what you are trying to do strategically with your company. Nestlé wanted to get more scientific; GlaxoSmithKline wanted to get more focused on consumer goods. So, your decision must reflect a combination of those two things. 

Another piece of advice: if you rely only on interviews around the boardroom table, you’re going to make a mistake. Warren Buffett says the biggest mistake of any board of directors is relying on an interview to select the CEO. It may be a necessary condition that a candidate really blows you off your seat, but it’s not a sufficient condition. Therefore, you have to look externally for validation of that person’s track record. For example, did they file their tax receipts? Have they filed them for five years? What are the references from previous employers or other employees? How well do you know them as a director? 

So, it’s a whole combination of things and you need to work it, work it, work it, work it, work it — because if you get it wrong, nothing’s going to go right. And my hero on this point is a Greek philosopher named Euripides; he was the one who said, “leave no stone unturned.” This is your sacred task as a board. If you’re in the position of trying to find a new CEO, work it and work it to death. 

One more thing: the work done by the Harvard Business Review showed pretty dramatically that the most successful global CEOs are those that are promoted from within. Every year, HBR picks the top 100 CEOs from over 12,000 publicly traded companies. They use a whole bunch of criteria, and let’s just assume for a moment that their evaluations are correct. Over the last five years, 85% of the world’s most successful CEOs are promoted from within. Hiring from within doesn’t guarantee your success, of course, but it certainly improves your odds of success.

Dominic Barton, the former Global Managing Director of McKinsey, made it his job to talk to a CEO every week — for eight years. Fifty weeks times eight is 400 CEOs that he talked to. He co-wrote the book “Talent Wins”, which offers the hypothesis that you should never have a strategy plan without a people plan. 

You’ve got to work hard a detailed management development training. And that’s not just a tick-the-box exercise; it’s a really in-depth piece of work for every director and for every HR committee for every high potential executive.

So, if you have to find a new CEO, the selection will require a huge amount of work. The odds are that you’ll make a better decision if you promote somebody from inside. But either way, you’re going to have to work this one to death. Make sure your sacred task of selecting the CEO is done effectively, efficiently and successfully.

David Beatty is an adjunct professor and Conway chair of the Clarkson Centre for Business Ethics and Board Effectiveness at the Rotman School of Management. Over his career, he has served on more than 39 boards of directors and been chair of nine publicly traded companies. He was the founding managing director of the Canadian Coalition for Good Governance (2003 to 2008). A version of this article will also appear in the Winter 2017 edition of Rotman Management, published by the University of Toronto’s Rotman School of Management.