Governance is one of a board’s most important responsibilities. Part of this entails providing oversight regarding the firm’s strategic decisions. So why when it comes to choosing the leaders who will develop and implement these strategies do C-suite executives fail to demand detailed information?
Research by the Center for Executive Succession at the University of South Carolina’s Darla Moore School of Business found that the majority of CHROs reported C-suite succession failure rates from 10% to 50%. In addition, the research reveals that the direct cost of internal promotion failures (i.e. salary, bonus, severance, etc.) ranges between $2 million and $5 million, with the cost of external hire failures reaching more than $20 million. Given that so many C-suite hiring decisions go bad (and when they do they present great costs) it’s important to understand what goes wrong in the executive succession process. To do this we must first understand why C-suite executives fail, and then how to avoid making such succession mistakes.
Our interviews with chief HR officers reveal two main reasons for executives’ failure. Internally promoted candidates fail because generally the skills that enabled them to succeed in their previous jobs are not sufficient for dealing with the increased scale, complexity, and responsibility inherent in their C-suite role. External hires fail to develop relationships with the rest of the executive leadership team. Moreover, our survey of more than 150 CHROs found that the leading cause of failure for both internals and externals was behavioural; their personality (in terms of ego, selfishness, and narcissism) did not fit well with the rest of the executive team.
So what can boards do to avoid making C-suite succession mistakes? The answer revolves around more, better, and more consistent assessment of candidates. Our research reveals ‘performance histories’ as the most prevalent type of information available to boards. Such accounts describe individuals’ level of success in past roles, but may not provide insight into how they behaved while there.
For instance, how can you compare an individual who held a variety of business leadership positions with a candidate who came up through the finance function, and assess both of them alongside an outside applicant? Each may have succeeded greatly over their career, but their challenges and experiences differ too greatly to provide strong information upon which to compare them and come to the right decision. This does not suggest a lack of value in such information, only a lack of completeness.
Our research shows that firms use more formal assessments for external than internal candidates. The most valid measures of candidate characteristics – such as personality testing, structured behavioural interviewing, cognitive ability testing, and assessment centres – are used by fewer (and usually far fewer) than 50% of boards to evaluate those prospective CEO candidates.
Many of these techniques can provide insight into an individual’s leadership or behavioural shortcomings. Adding these assessments to C-suite succession decisions has tremendous potential to minimise the costs incurred from hiring mistakes. They provide more information, better data, and insight that better allows legitimate comparisons to be made among candidates – just as one would want for any other strategic decision.