Consider this: In November 2010, HP hired Leo Apotheker as CEO. During his 10-month tenure he received $13 million in compensation, shares worth $3.56 million and a performance bonus of $2.4 million, while the company’s share price fell 40%. Including severance of $7.2 million, HP paid him $26 million to develop and implement strategies that lost $30 billion for shareholders.
In 2013 Yahoo lured Henrique de Castro from Google as chief operating officer to grow its advertising revenues. A year later he exited with compensation estimated at $42 million for overseeing a drop in ad revenue share to 5.8% from 6.8% while rivals Google and Facebook grew theirs.
These examples are not unusual. They exemplify why the Institute for Corporate Productivity’s (i4cp) recent Critical Human Capital Issues survey of nearly 1,400 executives revealed that succession planning ranked second overall, and first among HR respondents and people working for high-performing organisations.
A few years ago I was speaking with a CHRO who had a PhD in industrial and organisational psychology. She was explaining the underlying cause of many poor outside hires: a lack of data. She noted that many executives at this level virtually refuse to take any formal tests, so the hiring company has no rigorous data on their personality or intellectual capabilities.
Most of these recruiting processes are confidential so no one from the prospective hire’s organisation can be contacted to find out about that individual’s leadership style, interpersonal skills and collegiality. The only way these can be assessed is during the day-long interview, when the candidate certainly displays best behaviour.
In addition, it is common for organisational decision-makers to ignore valid information that is publicly available. For instance, Apotheker was appointed co-CEO at SAP in April 2008, but in September 2010 SAP’s board decided not to renew his contract.
Due to the risk of litigation, no one from SAP would have offered an explanation to HP, so he could have told a story that put him in positive light. However, many outside wondered why a company with HP’s vaunted history would hire a seemingly failed executive from a smaller firm.
In my recent HR@Moore Survey of Chief HR Officers, I asked more than 150 CHROs about the challenges of CEO succession. One compelling theme concerned how easily CEOs and board members can be swayed by characteristics unrelated to the profile requirements upon which they had agreed. Candidates that presented well at board meetings, golfed with them, or just had special connections often emerged as an individual’s favourite, and the CHROs saw part of their role as trying to keep those decision-makers focused on the objective characteristics.
Given the risk of huge financial losses due to C-suite hiring mistakes, it seems that one of the great contributions CHROs could make is to push for good selection processes. As the CHRO I mentioned above said: “It’s like everything we know about good selection practices is thrown out the window when hiring senior executives.”
So when the CEO or board members resist, perhaps a reminder about Yahoo and HP might be timely.
Patrick Wright is Thomas C Vandiver Bicentennial chair in the Darla Moore School of Business, University of South Carolina. He is ranked number 14 on HR magazine’s Most Influential International Thinkers list