Many years ago, I brought a project to a senior manager to try and persuade him to take it on. I told him that this was the project was required by the CEO. The senior manager looked at me and said, “Jim, the average tenure of a CEO is 33 months.” I thought much about that line and after two decades, I may be able to start to say I understand the impact of it.
Other than owner-CEOs, most CEOs are on renewable contracts, typically on three-year tenure, especially at large and listed companies. That is why most projects that a CEO seek to implement is two years long. A new CEO normally takes at least six months to work out the situation in the company they have just taken over, including the capabilities and aptitude of the team they have never met. The negotiations to renew the CEO’s contract normally start six months before the end of the contract. That leaves the two years for the project. That is why CEOs often negotiate the project schedule down to 2 years if project managers proposed anything more than that.
This short-term push to accumulate brownie points to justify the renewal of their contract is highly disruptive to the organisation if not managed well. More so when looked at within the context of the hiring process. CEOs of listed companies and regulated entities often involve a nomination committee of the board of directors, most of whom are independent directors. There is normally a conflict of interest if executive directors are called upon to evaluate a replacement for an incumbent director who is not aware that they are being replaced. Executive directors are often deemed too important to be used on the nomination committee, anyway.
The hiring process
Nomination committees therefore meet a prospective candidate in more secretive environments. Where there is a controlling shareholder, the prospective candidate is often their nominee. Otherwise, a head hunter or a LinkedIn search is involved. Independent directors are supposed to augment the networks of the executive and controlling shareholders, which are largely within the same industry, but not all independent directors have that network of suitable candidates. After all, they are not in the business of sourcing CEO candidates. Hence the dependence on outside sources, who often come with their own agenda – higher compensation packages mean higher commissions and shorter tenures mean more work.
Prospective CEOs do not get hired on a promise that they will keep everything the same. Prospective CEOs have to be aggressive in the plans for the company. Very often, they differentiate themselves by pointing out the weaknesses in a company and the opportunities forgone, which their strengths and abilities are well positioned to capitalise on. A hostile replacement often involves the prospective nominee reinforcing the board’s dissatisfaction with the incumbent rather than provide a more reasoned assessment.
Meeting a prospective candidate in secret would often mean that the candidates never get to know the company as it truly is since prospective candidates are very rarely given access to confidential corporate information. Most of the information available to the prospective candidates would therefore be knowledge commonly available in the industry, verified or not. This is supplemented by verbal information given by the nomination committee, based on the limited knowledge they, as non-executive directors, glean from the quarterly board meetings and any other information they could discern beyond the picture painted to them by senior executives.
So, CEOs are often hired on plans based on sketchy information with an agenda for aggressive change. It is only after the contract is signed, that the CEOs would get to verify the information on which they had based their plans for which they were hired. Confirmation bias often kicks in, because all CEOs have a hubris that they are the only person in company who knows what they are doing - not an attribute given to mea culpas. It is virtually unheard of, therefore, for a new CEO to go back to the board to say that they have gotten their assessment wrong and that the board would have to consider a new set of plans. The situation in a company is often interpreted to suit the relevance of those plans for which the CEO was hired.
Team takeover
CEOs also come in with their own suite of assistants, advisors, senior executives. Let's call then the R-suite, R for Replacement. R-suite members would normally not be known to the nomination committee. For starters, the prospective CEO at the point of the interviews would not necessarily have known who they can persuade to join them once they’re hired anyway. This new team presents a new set of dynamics in the company. The incumbent team are often suspicious of the new ones, especially if some of their colleagues were replaced or moved sideways in order to accommodate the new team. The R-suite would be then very dependent on their people skills to break down barriers and most never stay on the departure of their sponsoring CEOs.
Sometimes a hostile them-and-us conflict erupts, especially if the ground is badly laid when the new CEO was introduced to the senior management. Incumbent teams are normally deferential to the unfamiliar new CEO but they often find their way around the R-suite who are there to implement the new plans. As such, absent adequate people skills in both the new CEO and the incoming team, the implementation of these plans would be deprived adequate information and/or senior management support and consequently, the desired satisfactory results to report to the board.
Management due diligence
What is missing is a due diligence on the plans of the prospective candidate before the contract is signed, to test out these plans within the context in which they are to be implemented. First, the due diligence will have to assess whether or not the information on which these plans are based reflects the reality of the situation: this ranges from the problem statement itself all the way to the implementation roadmap.
Secondly, prospective CEOs normally do not have enough information, time or the aptitude to plan an operations implementation roadmap: after all, they are hired for their leadership skills and strategic foresight, not the project implementation abilities in the realm of senior and middle management. But it is difficult to assess the suitability of any implementation plan that is largely broad statements of strategic intent. The due diligence team will therefore have to work out a sketchy assessment of the viability of the implementation of such a plan in the company, second guessing the implementation itself.
More controversially, a due diligence may even need to identify any chemistry problems in the working relationship between the new CEO supported by the R-suite and the existing team. The latter will include any change due to displacement by the R-suite and the impact of such displacement. Controversial, because it is so easy to come to different conclusions, especially if confirmation bias is involved. And confirmation bias will abound if a nomination committee member doesn’t like to be told they made a wrong assessment of a candidate’s plans.
Such a due diligence should be performed by an outside team to preserve confidentiality, but have the unique access to both the inner workings of the company and the prospective candidates plans. The team should perhaps be composed of a mix of former independent-minded senior executives who knows the company well and outside consultants with the ability to make quick assessments of personalities, team dynamics and the impact of operational implementation on strategic plans. It cannot be conducted by auditors who are constrained by their risk-limiting training and processes but by experienced managers who had made a living out of assessing people and the environment in the office. Not an easy mix of people to find, perhaps.
I agree that it will never be easy to conduct such a due diligence and it is something extremely new to industry. I will discuss management due diligence in a separate article. But to reduce the number of one-term CEOs with the disruption that results, we may need to develop the capacity to conduct such due diligences.
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