The Sad State of CEO Replacement: Scapegoating and Savior Chasing
On November 9, the CEO of the Innovation Group, a $200 million U.K. insurance software company, was unexpectedly fired by his board, who also announced they'd retained an executive search firm to find his outside successor. The company had consistently increased sales, cash, its average deal size, and its reputation in the marketplace even during the economic meltdown, but the lure of finding an outside superstar proved irresistible. The company's stock price had languished, and naturally the CEO got the blame. Just like managers of sports teams, CEOs are hired to be fired. As reported in the annual surveys by consulting firm Booz, Allen, over the past decade CEO turnover is up 59 percent, while involuntary dismissals have tripled.
The truth is, outside successors seldom succeed, and blaming people for things over which they have little control, which includes stock price, isn't helpful. Harvard Business School professor Rakesh Khurana's book Searching for a Corporate Savior details the faulty rationale and the dismal record of hiring outside CEOs. Yet it's easy to see how and why so many boards do the wrong thing.
People have affairs for the same reason that boards love outsiders: the person you know extremely well seldom looks as good as the ones you don't know as closely. The inside candidates seem more available-and the social psychology of scarcity shows that we mostly want what we can't have (case in point: Stanford Business School. If everyone could get in, no one would want to go; because almost no one can get in, everyone wants to go). Second, we know less about the outsiders, only their image and reputation. Insiders' flaws are evident from our close contact with them, so they look less like superheroes.
Most executive search firms-whose economic interests, let's be clear, are in getting and completing searches, not necessarily in completing searches where the person hired actually is successful and stays for a long time-have little ability or interest in piercing the outsider's mystique. Doing adequate due diligence on an outside senior management candidate is almost impossible. It's in nobody's interest to say bad things about someone who can then learn about the negative comments and possibly be in a position to retaliate. And learning about people's real abilities requires spending way more time with them than is possible. Decades of research show that interviews are notoriously unreliable as selection devices. In any event, by the time someone reaches senior management, the one skill that person has definitely mastered is being able to present a good public image in an interview.
There's one more problem. Filling senior-level positions from outside sends a clear message to the current executive team-sorry, you're just not good enough. And since outside CEO succession almost invariably results in turnover in top management as the new person brings in his or her own team, the current senior-level managers get disheartened. They naturally begin thinking about how to find a new job instead of concentrating on improving results at their current company.
Of course there are outside successions that work, and there may be times when going outside is the only way to improve performance in a place where there is insufficient senior management talent. But companies need to recognize the very real risks and temptations in searching outside for the miracle worker who will turn things around. After all, if the incoming CEO is so great, why would that person join a company having difficulty? Boards need to recognize the very real risks and cognitive biases that bedevil the outside search.
Meanwhile, outside CEO succession creates great opportunities to poach talent from inside the company and even to profit through the performance difficulties created by the transition. So pay attention to the announcement of the outside search-even if the company doing it may lose out, you and your organization could benefit from the turmoil.