THE COSTLIEST MISTAKE ALMOST ALL BUSINESSES MAKE, including Jack Welch.
Poor selection outcomes indicate businesses are measuring the wrong attributes.
Many studies have shown that 30 % of Fortune 500 CEOs have lasted less than three years, with two out of five new CEOs failing in their first eighteen months.
50% of all C-suite hires fail within 18 Months. Annual C-suite turnover is 25%, but half of the outside hires fail, representing one or two mis-hires annually.
A Harvard Business Review article states that CEOs surveyed ranked only 25% of their newly hired direct reports as contributing after 18 months.
The NFL draft is even less successful. Despite an extremely rigorous selection process, over a ten-year period, 70% of first-round draft picks were considered useless or saw very little playing time. Twenty percent were considered marginal.
Contrarily, Tom Brady was drafted at 199 in the sixth round. The six quarterbacks drafted before Brady combined to start 191 games and threw 258 touchdowns. Brady WON 286 games in his career, including seven Super Bowls, and threw 737 touchdowns in the regular season and playoffs combined.
The vetting process for hiring a CEO of a Fortune 500 Company includes in-depth interviews with each member of the Board of Directors, formal and informal reference checks, and certainly personality assessments. Yet, the process has proven to be somewhat unsuccessful.
Consider the selection process used by General Electric to replace Jack Welch. Over a six-year search for his successor, Welch narrowed the race down to three handpicked finalists: Jeff Immelt, James McNerney, and Robert Nardelli. As Welch considered himself a master talent evaluator and developer, he did not even consider an outside candidate.
When Welch selected Immelt for the CEO job, the succession process was heralded as a success, and the details were shared widely for every company to emulate. But, through the lens of hindsight, the results were disastrous. GE lost $150B in market value during Immelt’s tenure. After seven years at Home Depot, Nardelli failed to move the stagnant share price and abruptly resigned in 2007.
Conversely, James McNerney had a very successful eleven-year tenure as Chairman of the Boeing Company.
Several studies indicate mis-hires in the C-suite can cost millions. Tony Hsieh, CEO of Zappos, reported that bad hires cost Zappos over $100 million.
What can we do to improve our selection process?
We can start with a fresh perspective and fewer decision-makers.
New data recently published in Harvard Business Review details an interesting finding: rookie CEOs perform better than their more experienced counterparts. Based on research from executive recruiting firm Spencer Stuart, the report provides insights that are probably counterintuitive to what you would otherwise assume.
The firm conducted a decades long study of 855 top executives who held their positions in companies listed on the S&P 500. The results were clear: more experienced CEOs underperformed those with less experience over the medium- and long-term time frame.
Executives who held the role for the first time achieved a higher market-adjusted return for their company’s shareholders compared to more experienced ones. Further, the stock prices of their companies experienced less volatility.
Because of financial markets and compliance issues, Boards of publicly traded companies are risk averse. Per a KPMG study, the average age of an S&P 500 Board Member is 62.4 years. The average age of a private equity board member is 45 years. The average S&P 500 board comprises eleven members, while the average private equity board has six members.
Over 70% of private equity-backed companies hire new CEOs when they acquire a company. More than 75% of the new CEOs are external hires, with 67% being complete outsiders who bring a fresh perspective and have less of a bias of leaning on the company’s past history. Over the past decade, private equity investments have outperformed the S&P 500 with 70% to 100% higher average returns.
SUCCESSFUL CANDIDATE IDENTIFICATION IS ONLY THE BEGINING
Beware of psychological assessments. Almost all pre-employment assessments measure external behavior. Yet very few of these assessments are based on sound psychometrics.
The success of organizational change increasingly depends on employees taking personal responsibility for change through effective adaptation to changing conditions and proactive anticipation of new challenges. Adaptive or socialized behaviors are important, but these behaviors can also be an illusion.
Very few assessments measure an individual’s needs. Many studies have also confirmed that behavioral responses may be determined by underlying genetic predisposition. To predict outcomes more accurately in our selection process, we have found measuring these internal factors are necessary. One of the pre-employment assessment tools we consistently use is the Birkman Leadership Assessment, which measures many of these internal characteristics.
Finally, a solid pre-employment assessment process must include a deep interview into the conditions of one’s family of origin, which shapes many of our behaviors. By cross-referencing the information from assessing behaviors, needs or internal motivators, and family of origin influences, we can raise the probability of successful outcomes in our selections.
Watch our fun video on assessments and how to improve your selection process.