Why is it so Hard to Predict CEO Performance?
Separating Fool’s Gold from the real thing in succession decisions
The goal of CEO and senior executive succession is simple; “Pick a person who will succeed in the job”. I could add, “Pick the best person…” but that would be icing on the cake. Most boards would be thrilled if they knew for certain they had selected a winner. Apparently, doing so is harder than it seems.
Recent resignations by Brian Cornell at Target, Wendy McMahon at CBS and Andrew Witty at United Health Group headline many others during a period which Russel Reynolds and Challenger, Gray & Christmas say set a record for CEO departures. The disruption caused by unplanned CEO departures can be costly in terms of lost strategic momentum, exits by other key talents and effects on morale. What’s more, Korn Ferry reported that replacement CEOs underperformed their predecessors nearly half of the time, so mistakes are often compounded. Getting succession right the first time is important.
During the gold rush, Fool’s Gold, or pyrite, was frequently discovered close to the real thing. For those who have never tried their luck with panning for gold, one characteristic that is used to test whether a nugget is Fool’s Gold or the genuine article is how brittle it is. Gold is soft and pliable, whereas pyrite is hard and brittle. There is a reason that in those old movies, miners were always biting down on the shiny objects in their pans to see what they were.
These days, there are a lot of tools that purport to help boards assess whether a CEO will be a good fit for the job; the equivalent of the biting down test. However, if research and history tell us anything, it’s that choosing the right CEO or senior executive isn’t that easy. No single test can provide certainty, and even the best combination of approaches only reduces risk rather than eliminating it completely. Board members know this but they may not have thought about why it is the case and therefore what can be done about it.
The University of Pennsylvania’s Don Hambrick has researched CEOs for longer than anyone. In explaining the impact that CEOs have on organizational performance, Hambrick’s work shows that while individual traits matter, the context in which a CEO leads matters even more. In some industries, like utilities, opportunities for CEOs to make a huge difference in performance are few and far between. There are the occasional consolidations and choices about how much to invest in renewables, but otherwise regulatory oversight and investor expectations of a steady return tend to keep performance on the level. I experienced this as I was just beginning to work with a forward-thinking CEO of a major utility on his succession who had steered his company toward greater investments in renewables. Conservative board members were uncomfortable with the effects of these investments on total returns and removed the CEO before he could choose a like-minded successor. Instead, the board appointed a new CEO with a financial background who (yikes!) directed investments back into coal-fired power generation.
Contrast the utility industry with the wild west that is tech and particularly the incredible bets being made on AI. You can have strong feelings one way or the other about where Sam Altman is taking us but you can’t deny he is having an impact on OpenAI and the world. Would someone with a utilities industry background do just as well in his role? Not likely.
“CEO performance” has to be measured by different yardsticks in these two industries, which is why there is no single standard that a CEO candidate must meet to be considered for the role. The same is true for other senior executive positions. A CFO will be dealing with very different decisions, as will the CHRO, in utilities versus tech. Baseline knowledge and experience is important, but fine tuning to the situation matters.
Beyond the broad context set by the industry, each organization is a different point in its history, facing challenges that are a part of being a startup, in the midst of scaling for growth, or reaching maturity and needing to shift business models. Then there are competitive pressures and other external challenges that a Michael Porter-type of analysis of competitive advantage would reveal. Even closer to home, there are personalities on the board to be accommodated and challenges to building an effective leadership team or organizational culture that may influence how successful the CEO will be.
What this means is that there can’t be an “ideal CEO” profile for all situations. Each situation is unique. Moreover, regardless of who is selected, there will be factors beyond the person’s control that determine how effective they can be. A group of scholars known as “resource dependency” theorists argue that in many situations, the rules of the game are set before the new CEO takes control and there is relatively little that the person in charge can do to change them. If you take the annual budget as an example, how much of next year’s spending can be re-directed to totally new endeavors? How much of the labor force can be replaced with new talent? How many major customers can be dropped so that new ones can be added? How many board members can be replaced with people who are willing to take greater risks? In the end, how much can a new CEO really change?
Even the definition of CEO success is up for debate. Is the goal to maximize short-term returns or long-term gains? Is financial success the only measure that matters or is maintaining the company’s reputation of equal or greater importance? Should the CEO be loved or feared by employees? Is the personal behavior of the CEO a matter of concern or does the board choose to look the other way? Chances are, members of the board differ on their views of what matters and the CEO will be asked to meet every expectation, which is clearly impossible. As the board discusses CEO performance, what the board focuses on and who has the most clout in the conversation may have as much to do with the length of the CEO’s tenure as anything else.
On the one hand, you could make a strong argument that trying to predict a candidate’s performance through assessments and a review of their track record is a waste of effort. History doesn’t predict the future. Only time will tell if they are up for the challenges they will encounter. On the other hand, you could take the position that knowing as much as you can about a candidate eliminates at least some of the risk. I don’t know of any boards that are comfortable with choosing successors by throwing darts, so the leaning is definitely toward the latter argument. The issue is that some boards become overly confident in what they learn about the candidates in the selection process and therefore neglect their role in shaping and supporting the CEO’s ongoing success. Or, they trust in the successor for too long despite evidence to the contrary. They accept that what the assessments tell them is true rather than continuing to question if the output is actually Fool’s Gold. As this view reveals, despite whatever tools are used, selection of the best candidate available is not a guarantee of future organizational success. This doesn’t mean that the selection process is unimportant, just that it’s the beginning rather than the end of the board’s work.
Post-selection, the board needs to continue to ask two important questions. First, does the board have confidence that in running day to day operations, the CEO knows what they are doing? When deviations from expectations occur, does the CEO know why and have a plan to course-correct? Are the corrective actions effective?
Second, because any CEO will run into the unexpected and need to reposition the organization for the future that is rather than the future that was imagined, does the CEO demonstrate the capacity to assess the situation and recommend appropriate strategies? Are these strategies effective? Since this second set of questions involves entering into new territory, does the CEO take advantage of the board as a thought partner and demonstrate openness to learning and experimentation? Does the board trust the person’s thought process?
These questions should be shared with potential successors before they take on the role. Then, there should be continued discussion between the CEO and board to clarify what the board is seeing and how the board can help. An effective partnership is one in which there are no surprises for either party and each is trying their best to help the other find real gold.