Why the process of hiring a CEO is tricky

On February 12, Tata Motors announced Marc Llistosella as its next chief executive and managing director. A month later, the automobile major made a second announcement. This time, it was to declare that Llistosella will not join the company from July 1 as was originally planned.

Besides sending shock waves and being a hot topic of discussion, this appointment that stopped short of materialising must have taught many organisations to not get overexcited about their senior appointments. It was a rare occurrence, but many must have resolved never to reveal the names of high-profile executives before they are actually on board. Yet others may have taken out a policy regarding the exact amount of information pertaining to a high-rank appointment that actually needs to be shared with the public.

Why the hype?

The position of chief executive officer or CEO is the only peerless one in an organisation. As lonely as it sounds, the position comes with a lot of expectations and responsibilities. That is why, a CEO’s chair that is vacant, or about to be filled or has just been filled gets everyone — within the organisation and all associated with it — all excited. After all, a lot in the organisation depends on this main man or woman. One flawed hiring and the whole company pays the price for it. Therefore, there have to be best practices in place to hire this most important person in every organisation.

“Talent can be sourced initially through secondary search and then backed by primary research”

Lalit Kar, SVP & head-HR, Reliance Digital

The functions of this role go beyond the usual — setting up the right team, shaping a culture and ensuring deliverables. The biggest and the oft-sought example of flawed CEO selection is Steve Jobs himself. After founding apple, he quit the Company in 1995, when he was made to feel alienated. John Scully, a CEO Jobs hired himself, was at the other side of this power struggle. He moved on to set up his own startup, Next, along with a bunch of employees who followed him out of Apple. Next flourished, while Apple struggled post his exit. Following this, Apple bought next and got Jobs back, putting the Company back onto the path of success. So yes, whom to hire and how to hire for the CEO post is an important question.

Internal or external?

Many companies prefer internal hiring for a CEO position. This is mainly due to the proven track record within the company and culture fit. However, many a time, companies are forced to look for candidates from outside when they venture into new businesses or when a business has not been delivering to its potential vis-a-vis competition. They also hire externally, when there is a lack of readiness among internal employees or there are many contenders for the role and promoting one from the peer group could lead to multiple resignations from the top ranks. While hiring internally, the readiness of the candidate has to be gauged too. Egon Zehnder, an executive search firm, surveyed CEOs in 2018 and found that an overwhelming 68 per cent admitted in hindsight, that they weren’t fully prepared to take on the CEO role. The report also highlighted that in case of internal hirings, only 27 per cent felt they were adequately prepared for the demands of the CEO’s role.

“A company need not divulge any confidential information to a prospective hire at the time of hiring. rather, we need to gauge the mindset and capability of the individual, particularly how they respond in an adverse situation”

Gajendra Chandel, former HR head, Tata Motors

Gauging readiness

Lalit Kar, senior VP & head-HR, Reliance Digital, elaborates on the best practice of looking for a CEO. “Talent can be sourced initially through secondary search and then backed by primary research,” he says. More emphasis on culture fit and technical competence is a given at that level. The discussion with two or three potential candidates can be around the long-term and medium-term vision of the company. This gives an understanding of the excitement of the candidate to take on the challenges. Compensation should be linked to contribution with emphasis on performance-linked bonus. Also, cash flow with timeline can be charted, such as retention bonus and restricted stock unit or RSU, vesting linked to time. Administrative support for smooth shifting and relocation need to be given, in addition to assistance with school admission, spouse’s career, and so on. “When an expat CEO is hired, a lot of hand holding is required in the beginning, and hence, a senior-level employee — more often the CHRO — can be made his buddy,” suggests Kar.

Confidentiality, assessment, background check

Former HR head, Tata Motors, Gajendra Chandel, who now runs his own outfits, shares that recently, he  hired for three CEO positions for different companies. “A company need not divulge any confidential information to a prospective hire at the time of hiring. Rather, we need to gauge the mindset and capability of the individual, particularly how they respond in an adverse situation,” he says.

It is essential to understand how they lead a company in circumstances which are beyond control, like stock market crashing or even the pandemic,” Chandel adds.

What he suggests is initial two to three-hour meetings with the prospects. However, these limited-time initial discussions may not suffice when making a hiring decision. More detailed, thought-provoking conversations are required to gauge the psyche of the person. Once they are able to zero in on the top prospects from the discussions, they spend two or three full working days with them to understand their responses to different situations. “One is only looking at hidden behavioural traits of individuals that surface when they receive news of unfavourable developments,” he adds. “How a leader manages failures or leads his teams through tough situations has 80 per cent weightage for me at the time of hiring for a CEO,” Chandel asserts. One of the main challenges is maintaining confidentiality till the selected candidate joins.

“Directly hiring from a competitor doesn’t always work out. Size of the role is equally important. after all, one will always want to hire someone who has handled a slightly bigger setup than the organisation scouting for a CEO”

Ranjith Menon, SVP HR, Hinduja Global Solutions

Then balancing the expectations with internal pay bands is important and a thorough background check is a must, through a specialised agency and through other sources. Kar believes that blind trust on media reports can go wrong. Each candidate has to be thoroughly assessed. Media reports or interviews should not be considered as the only credentials. Any conflict between the personal needs/expectations vis-a-vis the company’s expectations should be addressed threadbare before making the final offer. Leakage of news about certain candidatures — if it happens during the process — may lead to candidates dropping out.

Past performance

Ranjith Menon, SVP HR, Hinduja Global Solutions, who has been a part of the CEO-selection process in one of his past organisations, feels that probing the past performance of the candidates extensively is one way to assess them, not just in terms of sales numbers. The kind of teams the candidates have had before, the industries they have been exposed to, the kind of capital that was invested in the business and so on, can be gauged.

Were there any changes in the market or industry which propelled the growth they claim credit for, beyond a certain point, is a must knowledge to gather before making any decision. How did the competitors fare during that time is also essential to find out for a qualitative analysis. “Successes of the potential CEO candidates and how they achieved those successes are amongst the factors that people miss out at times,” Menon opines.

Size of the role

Menon believes the size of the role is equally significant. Directly hiring from a competitor doesn’t always work out. One will always want to hire someone who has handled a slightly bigger setup than the organisation scouting for a CEO. If the size parameter is not adhered to, during the selection process, many often face problems adjusting to the demands of the new role.

Personality and traits

What also matters is the personality, attitude, motivation and leadership qualities. “One doesn’t want a quiet person as a CEO. After all, it is a market-facing role,” points out Menon. Also, many a time, just by appointing one person and firing another, one may see a great change in the stock market. “There have been instances where senior-level entries and exits from organisations have impacted the stocks,” Menon explains.

“High-profile appointments get reported, especially if it’s a listed company. Therefore, if such an appointment does not materialise as expected, the person running the show in the interim can be the backup”

Rajeev Singh, CHRO, Solara Active Pharma Sciences

Ethics

Menon adds here that an ideal CEO is one who realises that all results are his/ her responsibility, be it good or bad. “Therefore, probe the candidate more about the past and ask about the failures of their lives, where they took ownership for the same. On the other hand, in case of achievements or commendable feats, find out whether the person took credit for them alone or gave credit where it is due. Cultural fit becomes more critical for this role, and ethics matter as well. I would not select people if their ethics are questionable, even if they seem great at their job.”

Expertise

Delivery and governance expertise play an important role too. In order to succeed, there has to be an absolute fit with the organisation, in terms of ideologies and principles. Even if candidates have a good experience of turning things around, an ideological difference can lead to them being misfits. It will make it difficult for the CEO to deliver on promises. Rajeev Singh, CHRO, Solara Active Pharma Sciences, strongly believes that alignment of ideologies between the CEO candidate and the organisation is highly essential. The board has to take the call and make sure that the assessment is done perfectly. Often, CEOs fail not because of delivery but because of governance and ideological differences. Internal candidates will be compared with the external candidates, based on the same parameters. “The only advantage that internal candidates have is the awareness of their ideological fit with the organisation,” says Singh .

But what happens if someone drops out even after accepting the offer? Singh believes that such instances are rare, because there are reputational risks involved for both the company and the candidate. “High-profile appointments get reported, especially if it’s a listed company. Therefore, if such an appointment does not materialise as expected, the person running the show in the interim can be the backup,” suggests Singh.

No doubt, a robust selection system is required to fill a vacancy as critical as that of CEO. The system should take into account all aspects of a candidate.

Expectations

Sriram V, CHRO, BankBazaar.com, rightly points out that a CEO who has led an organisation to a certain height doesn’t automatically become a benchmark for the successor. Assuming so would be a grave mistake. Comparing the past CEO with the present or a potential incumbent is a fundamental flaw. Past is not a binding. CEO selection should be future looking and not past looking. But yes, the new CEO has to be linked to the past in terms of culture. The person has to be compatible to the culture of the new organisation.

“A CEO who has led an organisation to a certain height doesn’t automatically become a benchmark for the successor”

Sriram V, CHRO, BankBazaar.com

Apple messed up and lost precious years. It had no choice but to get Jobs back who turned around the company’s fortunes once again. Clearly, what organisations need are CEOs with a vision, not administrative compliance officers.

Organisations should look out for a person who has a vision and is not tied to the past. Sriram recalls a company called Housing.com, whose CEO, Rahul Yadav, was brilliant. Housing.com suddenly took over 99 acres and other pioneers in the real-estate market. It conquered maximum market share, and all because of the CEO. However, since he was not compatible with investors and promoters, he was asked to go, and had to leave overnight. Ever since, the company has not been in good shape.

Thus, in this case, while the CEO had the vision and all the attributes, he wasn’t culturally compatible with the promoters or founders.