The secret world of CEO selection

The secret world of CEO selection
Published: 
April 2014

The appointment of a CEO is a landmark event for any company but the selection process is generally shrouded in secrecy.

When National Australia Bank chief executive Cameron Clyne announced he was stepping down earlier this month, the bank was immediately able to name his replacement.

NAB’s succession planning paid off and its share price quickly recovered from the unexpected news.
However events do not always run so smoothly.

In Australia and elsewhere, stock prices rise and fall on the hiring and firing of CEOs. The CEO is the most important appointment in any firm and markets expect boards to get the CEO succession right.

Studies show that disruptive transitions – for example where the board has been unable to agree on a replacement and had to appoint an interim – can result in angry shareholders and the departure of board members.

The fact is that CEO selection takes place behind closed doors and until recently little has been known about it. Now research by UQ Business School is helping to cast light on this often secretive process.

The research project, led by Post-Doctoral Research Fellow Dr Terry Fitzsimmons and Professor Victor Callan, interviewed 30 chairpersons of prominent Australian companies with a combined market capitalisation in excess of $A350 billion and employing over 250,000 people. Between them, these chairs have appointed over 250 CEOs during their careers.

The findings reveal the seven key capabilities they look for in potential CEOs – some of them standard qualities and others less so – and also the underlying motives which guide them in the selection process.

Not surprisingly, leadership was considered the most important capability but according to Dr Fitzsimmons, the word had different meanings for different chairpersons.

“Many related the need for today’s CEO to be empathic and relationship-oriented with their executive team and with employees more broadly,” says Dr Fitzsimmons. “Also, as CEOs are the critical interface between the firm and its customers, the government and other key stakeholders, their interpersonal and communications skills had to be shown beyond the organisation.

“Nearly all chairpersons judged the ability to manage these relationships as a key CEO competency, with a team orientation and a track record of ‘success through others’ considered as essential”.

“Many felt that a command and control or heroic style of leadership were detrimental in most Australian corporate contexts. They were looking for a CEO who could build a team of individuals, not afraid to delegate and who could actively plan for their own succession through the development of others.”

Leadership skills also went hand in hand with strategy – the ability to lead strategic development and set the vision for the company.

Integrity was seen as another key capability. Dr Fitzsimmons adds: “The chairs were seeking assurance in the selection process through frequent meetings, checks with other chairpersons and current CEOs that the CEO candidate was open, honest, frank, authentic and transparent in their dealings with any board.

“Indeed, the ability for the CEO candidate, and their spouse, to relate effectively to the chairperson and their spouse, as well as their familiarity and comfort in social settings, were a significant factor in the appointment process.”

Other capabilities include intelligence; self-efficacy – drive, determination and confidence in their own judgment; and stewardship or the ability to deliver on financial performance. More surprising was the inclusion on the list of candidates’ visibility to the industry and the market.

“Importantly, if the candidate was not visible or ‘on the radar’, chairpersons were very reluctant to consider their appointment,” explains Professor Callan. “The views of their fellow chairpersons about the CEO candidate’s visibility and track record was ‘among the best kinds of evidence’, according to many chairpersons that were interviewed.”

But while these seven key capabilities were regarded as a prerequisite by the vast majority of chairs, their central concern was how candidates combined them in their track record.

According to Dr Fitzsimmons, one of the key findings to come out of the study is the central role that risk mitigation plays in CEO appointments. Chairs view candidates’ track records as a way to reduce risk.

“Chairs viewed their role as primarily managing risks to the firm from a poor CEO fit, as well as the risk of failing to assess the appointment context,” he explains. “For them, track record was the central lens through which they viewed the selection process.

“The recruiter’s role in the process was usually described as being mainly limited to providing a breadth and depth of candidates. They assisted the board in maintaining a structured and credible process.”

Professor Callan says chairs rely heavily on networks to identify candidates for short lists and verify their track records and identify, but there was evidence to suggest that boards have significant cross membership which potentially narrows the scope for viewing candidates.

He says: “For candidates who aspire to a CEO role, our research suggests they should pay attention to building a successful track record within their industry and maintaining a high profile.

“But whether this focus on industry track record is good for business is another matter. The very narrow definition that boards have of track record has significant implications for female managers and board diversity. This is an area that requires more investigation and we are planning further research to assess the true impact.”