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 prefer to ignore. Most newly recruited executives fail to live up to their expectations. Despite the fanfare, high hopes (and cost) a new executive appointment brings, half fail entirely during the first eighteen months. More than three quarters are never considered an unequivocal success.
In a survey of two hundred CEOs, only 21% felt they received the value they paid for their executive searches. Yet, the headhunter business continues to thrive. A joke that has circulated amongst venture capitalists is that during the search process for a successor CEO for a founder: “Recruit two candidates, so that the second is ready when the first one fails.” Ineffective executive succession hiring is no joke for any size company.
The cost of a bad hire is monumental. According to Dr. Bradford Smart, author of the best-selling book, Topgrading, the cost of having the wrong CEO at the helm, even for just 18 months, can be as high as $50 million. And while the $50 million number represents the cost to a large company, the impact on smaller companies although lesser dollars, can be 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 chances of picking a winner based upon a resume, personal interviews, and a reference or three, is quite low.
Resumes lie. A survey from CareerBuilder of more than 2,500 hiring managers found that 56% have caught job candidates lying on their resumes, including those of CEOs. And, those are just the ones that are caught!
Interviews are little more than staged performances. Interviews are usually aced by good performers, not necessarily good candidates, and often have little relevance to future job success. Google, which unsurprisingly carefully grades hiring interviews, found that interview scores had no correlation with performance of those who got hired. Barry Deutsch, an executive recruiter himself, notes that in his 30 years of executive search encompassing 250,000 interviews, he could not find a single correlation that links how someone interviews and their on-the-job performance. Other studies since the early 1980s have shown that, when compared with other types of tests, unstructured interviews, the ones we commonly use during the hiring process, are the worst choice for accurately judging how well a particular person will do at a particular job.
Personal references are gamed. Making it worse, executives often rely upon HR or sometimes even the executive recruiter herself to check out a candidate’s references as a rubber stamp for a decision already made. Woe to the candidate who doesn’t prepare a reference in advance to say exactly what the candidate prefers. Few employers avail themselves of what is sometimes called an “off balance sheet” reference or references who were not suggested by the candidate themselves but instead were developed during research or through the recruiter’s own network. There are some savvy employers who turn the reference process upside down by only hiring executives that someone they trust knows directly and can vouch for — unfortunately something that can only be done with a prior extensively developed personal network.
Assessments may help. More companies are moving to pre-employment assessments. Selected correctly and implemented objectively, these tests can provide an important indication of the potential success of a candidate. However, at the executive level they can be viewed as offensive by qualified candidates. Erica Klein, Ph.D. states in her book: Employment Tests: Get the Edge, even though testing is a science, the design of some tests and the practice of administering tests demand scrutiny. Some seem to make no sense in the context of the job and don’t measure the right things.
Don't Blame HR. You can’t blame HR, hiring managers or even the board of directors for their executive recruiting foibles. It is next to impossible to really determine if any candidate will be successful just from a set of artificial process. The only real way to assess a candidate’s skill is to see them act in real life situations — especially when it comes to a CEO replacement.
Promoting from Within. Perhaps that’s why there are zealots who focus only on promoting executives from within. They know that with the right internal candidate identified in a thorough vetting process, someone already tested within their organization can be a good bet. And although vetting an internal candidate does give you a leg up, there are two important considerations that if missed can sink the wrong internal candidate’s prospects and dissuade those advocates set on promoting from within. Many internal candidates have spent the majority of their executive career with the same company they are now picked to lead. And while an insider has a substantially shorter learning curve, long time insiders tend to perpetuate the same ideas and policies as their predecessor — leading to reliving the past while the future passes them by. The other forewarning is the width of the gulf they have to cross from whatever their current role to that of Chief Executive. 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 VP. Not every executive can be expected to make that broad leap.
When it comes to hiring Executives, there has to be a better way. Perhaps taking a page from the “hire from within” advocates, Starbucks in their recent founder transition chose Kevin Johnson for the role. Having failed twice before in their quest to find a CEO to replace Howard Schultz, they instead were more pragmatic this time. Together with his Board, Schultz plucked Johnson, a Starbucks board member himself for seven years, to deliberately take on a subordinate role of Chief Operating Officer. Johnson, earlier learned the ropes of being a CEO at Juniper Networks, at 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 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 an external contender, the longer the audition runway the better they will be able to evaluate that candidate’s competence — watching them perform some of the actual responsibilities associated with the CEO role. Selecting an executive candidate who is willing to tryout for the CEO role for several years, like Kevin Johnson, while he or she learns the ins and outs of the company, gives the board, the founder, and even the candidate herself as good an indicator as any as to her future success. And a sufficiently long runway 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 top role, 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 of the pool. We’ve all hired “can’t miss” executives who turn out to be duds. Being able to try out for this new part in advance of an expensive decision is certainly something that every Board, company and successor should consider.
Hubris is a Buzz Killer
Whether it is the founder’s face on the cover of a magazine or attainment of a unicorn valuation, founders would do well to keep their egos checked at the door. Nothing can kill a successful company quicker than when the founder or her executive team starts to believe they are invincible.