Successful CEO transitions

Board, not a committee, is accountable for selection of chief executive

After writing my book on lessons from the rise and exit of CEOs (Crash, Penguin, 2019) and after reflecting on my 30 years on boards, I state the obvious: Board must be more accountable for CEO selection. While a nominations/selection committee may run a process and a headhunter may be appointed for the search, they do so on behalf of the board, which is the decision-making authority. Hence di­rectors must engage directly with the headhunter/selection committee to en­gage with their views. They must get comfort with the final recommendation. In my experience this does not happen rigorously enough. With im­portant companies like HDFC Bank, IndusInd Bank and Wipro looking for CEOs, this article may be timely.

An MIT study in 2000 suggested CEOs appointed after 1985 are three ti­mes more likely to be fired than CEOs appointed before. It may well be a sign of the changing times, but directors must reflect on the fuzzy ways of CEO selection. They do apply their mind, but they inadvertently abdicate their re­sponsibility to the selection committee. When a CEO is fired, the board stays, which seems a tad unfair. 

Here are five suggestions for directors to consider:

• In promoter-driven companies and public sector units, promoters, who are not bo­ard members, often communicate with the CEO, whereas they should have the discipline to express their views throu­gh their board nominees. Even though a director may be a promoter-nominee, the director will and should use judgement in accepting or modifying such views expressed. Multiple and contrary views can leave a new CEO quite flustered with contrary instructions.

• The board must collectively agree a clear definition about the leadership skills sought from the CEO at that point of time. Boards most likely omit squ­ishy leadership stuff like moving he­arts, listening attentively and welcoming diversity. Inadequate discussion is devoted to culture fit, though they later realise cultural misfits. A coordinated board is mandate for the CEO is not made explicit to the incoming CEO. CEOs are exhorted in a general way to provide a bold direction and to be their own man. When they do so, discomfort sets in. Consider what happened to Chris Viehbacher at Sanofi or Vikram Pandit at Citicorp, both of which were discussed in Crash.

• Boards should delegate, not abdicate, to the search committee. As­suming an appropriate brief and work plan, they acquiesce, rather than en­gage, in the hiring decision — the search committee recommends, the board engages/approves. Directors are unaware of special conditions for the new CEO selection until much later. Which board accepts responsibility for failure of its judgement if the CEO appointment does not succeed? 

• Leaders are required to have people skills to move human hearts. This is a nebulous and soft subject. So directors look for track record in market capitalisation, product market share or profit growth. Many years ago, iconic Coke CEO Roberto Goizueta was succeeded by his CFO, Doug Ivester. Alas, Ivester was a first-class financial whiz, but emotionally inept. The succession did not work out. The story of Richard Thoman at Xerox has similarities.

• One-man initiatives and overpaying for acquisitions is another factor in CEO firings. In GE, Jack Welch relentlessly drove an enormous finance business under one set of circumstances; Jeff Immelt could not do so in the dramatically-changed market of the new millennium, and he wound it down. To bolster growth, Jeff Immelt acquired Alstom’s power business in 2015 in $10- billion deal. The acquisition not only failed to deliver target results, it resulted in write-offs and marking down of assets by $23 billion. Immelt’s successor, John Flannery, faced the falling knives; he was eased out in less than a year for not dealing with legacy issues. The board stayed, but the CEO was eased out.

The subject of hiring the ‘wrong’ CEO is a very live board issue. Unlike in the US and the UK, a firing in India is a blot. The CEO may not even get an exit package as CEOs do in the US. 

Directors should be far more en­ga­ged because they are collectively ac­countable for successful CEO transitions.

The author is a corporate advisor and distinguished professor of IIT Kharagpur. He was director of Tata Sons and vice- chairman of Hindustan Unilever

rgopal@themindworks.me