09 December 2014

CEO recruitment is broken and no solution in sight

Continuing my search to understand what underlies the decision making mistakes made by boards of large companies, I turned to the Australian Institute of Company Directors (AICD), the preeminent educational body for public, private and not-for-profit company directors in Australia.
I collected a copy of the AICD Professional Development Handbook (July 2014 to June 2015) to see what the program schedule might reveal.
In the handbook’s section for individual professional development as it relates to Board Roles and Responsibilities, Board Operations, Governance, Risk and Strategy, Finance, Management Relations and Board Performance, I counted a total of 52 professional development options covering books, workshops, webinars and events.
There is a 3.5 hour workshop entitled 'The Board’s Role in Mergers and Acquisitions'. The content summary included the bullet points ‘Gain insight into the board’s decision making process for mergers and acquisitions’ and ‘Recognise the questions the board needs to ask advisers/external experts’.
This gave me some optimism that board members are taught the necessary sceptical enquiry skills they need, although I would have preferred content that was a little more blunt, such as ’17 out of 20 acquisitions don’t improve shareholder value – why your board should be rejecting almost all acquisition opportunities’ or ‘Why nearly fifty per cent of acquisitions destroy shareholder value - the warning signs to look for’.
When it came to CEO recruitment, unarguably one of the most important jobs of any board, the pickings were much, much slimmer.
There is a 3.5 hour workshop entitled 'The Board and the CEO' containing this single bullet point in a total of five bullet points:
‘Improve your knowledge of CEO selection and remuneration’.
That’s it?
Out of 52 workshops totaling approximately two hundred hours of professional development for its members, the AICD sees fit to devote (I’m guessing) one whole hour to CEO recruitment.
I find this neglect of recruitment skills astonishing.
It’s even more astonishing when you consider that Australian boards of publicly-listed companies have a poor, and worsening, track record with respect to CEO tenure. Last year, a study of Australia's top 200 companies showed that the average tenure of a local CEO fell from 5.7 years in 2006 to 5 years in 2010 and 4.2 years in 2013, against the historical average of 4.9 years. Globally, the average CEO tenure over the past two years has fallen from 5.4 years to 4.8 years. The obvious conclusion is that many CEOs are not successful and, in most cases, the original hiring decision was poor.
What should board members be learning with respect to the recruitment of CEOs?
Here’s my proposed curriculum summary:
  • Constructing an effective job description and performance profile
  • Understanding the core competencies and motivation required to succeed in the job
  • How to conduct a behavioural based interview
  • How to ask potentially challenging interview questions
  • How to probe candidates' answers to get to the truth
  • How to score candidates' answers and accurately compare candidates
  • How to avoid being seduced by a charismatic or high profile candidate
  • How to conduct effective reference checks and discover relevant information from reluctant referees
  • How to effectively use a search firm/recruitment agency
  • How to negotiate an offer

The reality is that for most board members, especially of publicly-listed companies, it has been many years since they were recruiting regularly (ie at least four hires per year). Many of them would have made more internal promotions than external hires. Many of them would be rusty or too reliant on the ‘old boys network’ for referrals to be genuinely effective at assessing candidates that are largely unknown to them.
Recruitment is a core skill for business leaders, including board members, and especially board members of publicly-listed companies.

I believe the AICD needs to take a look at the reality of their members’ skills in recruitment and allocate far more time to this business-critical area. As a large country of shareholders (particularly via superannuation funds), every Australian has a vested interest in this occurring sooner rather than later.

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  1. Ross, maybe the good news here is that a Board will rarely make a CEO decision without turning to the Recruitment Industry to execute that process for them. And I'd hope that those agencies operating at the CEO level are providing a consultative, trusted service that assists the board to get the process right.

    That said, any recruitment process is going to get better results when the client is educated and experienced.

    I believe a bigger concern for the AICD is that is struggles to provide meaningful engagement for the SME market (the largest business segment in Australia) and much of its course material is targeted at large and/or listed companies.

    1. Thanks for your comment, Rod and my cursory reading of the AICD PD handbook would confirm your observation. I suspect, somewhat in AICD's defence, that their members aren't crying out for more PD on recruitment due to the members assessing their own skills as 'high' and not needing an update. I would hope Myer's well-publicised brush with employing Mr Flanagan earlier this year would demonstrate how easy it is for senior executives to be fooled.

  2. Dr David M Williams AM10/12/14 11:52 AM

    Hi Ross
    Enjoyed your blog.


    Dr David Williams AM
    Interesting article from Ross Clennett. Can I suggest your proposed curriculum for recruitment of CEOs include one very important element - the identification of required leadership capabilities prior to the commencement of the process. The interdependency between role intent (what has to be done), performance outcomes (deliverables) and context (the setting in which the role operates) allows for determination of leadership capabilities for the role. These confirmed capabilities are critical in initiating steps in the process.

    Dr David Williams AM

  3. Hi Ross

    I am enjoying your regular news pieces, as ever. A couple of points re your CEO recruitment article.

    Boards may be engaging a professional recruitment firm to select the short list and do the ‘heavy work’ of assessment, and then join the final panel to ensure rigor at that stage. So the Board may not need to be particularly trained themselves.

    Boards usually elect a selection panel to look after the recruitment exercise, those with recruitment skills would be selected above those without to be on the panel.

    So maybe the AICD does not need to emphasise recruitment training, as Directors with that focus get trained at RCSA and elsewhere. But certainly HR skills should be as highly valued and trained for as finance, marketing, legal, etc.

    The faster turnover of CEOs may not be due to poor hiring decisions but rather a similar trend to other jobs where people want to move every 3-5 years. With companies renewing themselves and adapting to regular change, different style CEOs are needed at different times, so ‘builders’, ‘changers’ and ‘stabilisers’ all come into their own at different times. So 5 years avg may not be a surprise.

    And, CEOs after 5 years may look for a break and time out before taking on the next job. Businesses are OK with people who have a dotted career rather than a linear one, and multiple employers, which supports the regular job moves. (Reference checking becomes more critical of course)

    Cheers Stephen Porter