Executive Search

Turnover at the top dipped slightly last year, according to management consultant’s Booz & Co. annual study of CEO succession. The survey of CEO changes at the world’s 2,500 top publicly-listed companies revealed that the overall rate of turnover – which includes planned successions, dismissals and merger-related departures - fell by 0.5 percent to 13.8 percent in 2007.

However, it is interesting to note that annual CEO dismissal rates moved up half a percent to 4.2% in 2007, a figure that nevertheless remains considerably higher than the 1-2 percent rates of the 1990s. Yet this increase in forced departures is largely attributed to board disputes and power struggles, rather than any targeted filtering out of underperformers.

These figures undoubtedly show that CEOs are under growing pressure due to a number of factors including intensifying competition in the global marketplace, stricter governance regulations and shorter product cycles.

Overall, however, the survey’s surprising findings seem to contradict the widespread belief that top leaders are under pressure to adopt a short-term vision in order to produce better quarterly earnings. Indeed, with average CEO tenure remaining statistically stable at around 6 years, the likelihood of a CEO being fired for poor financial results in a given year is estimated at just 2.1%.

More importantly, the study also seems to suggest that many corporate boards are reluctant to get rid of poor executive performers due to the difficulty of finding a replacement. It can be argued that boards often see a lack of leadership talent in the pipeline and are therefore slow to react. Yet our experience shows that many boards tend to overlook and consequently fail to develop their internal leadership bench. The results of this study seem to indicate that companies should overhaul their succession planning and embrace systematic Talent Management processes if they wish to retain a competitive edge.

Regional differences are nevertheless marked, with a far higher overall succession rate for European CEOs (17.6 percent in 2007) than for their North American counterparts, for example. However, this discrepancy can be partly explained by a planned succession rate of 8.3 percent in Europe.

Against this background, what can boards and CEOs do to improve their performance and approach their duties in a more professional way?

Advice for boards: define future strategy before identifying key competences

Boards need to decide whether a potential leader has the key skills to help them build competitive advantage in today’s rapidly-changing global market. But to ensure that they appoint a leader who satisfies their requirements, boards first need to focus on defining future company strategy, not on finding the right person. Once this strategy has been established, boards can then move on to identify the competences required of a leader and draw up a list of valid recruitment criteria.

However, a survey of 515 top managers by Egon Zehnder International revealed that certain selection criteria are often overrated in the CEO recruitment process. Companies tend to accord excessive importance to high IQ levels and professional expertise, for example, while undervaluing emotional intelligence, a quality possessed by 74% of successful CEOs.

Companies should also seek potential candidates with a large set of transferable skills. These include expertise in cost-cutting, driving growth and manoeuvring in cyclical markets. Company-specific skills such as knowledge of routines and procedures, on the other hand, are less valuable attributes.

Firms that consistently attract top leaders tend to follow a disciplined recruitment process involving the entire board. Their talent management agenda forms a fixed and fully integrated aspect of their business strategy, which, in turn, is based on a simple, transparent success model.

These companies rigorously evaluate and develop leadership talent and employ proactive risk management tactics when promoting internally or recruiting externally. They also perform comprehensive benchmarking in order to assess their own progress in talent management.

Lessons for top leaders: focus on selecting a strong team first

In our experience, top performers tend to focus on choosing the right team to support them first, and leave strategy until later. As author Jim Collins points out in his best-selling book From Good to Great: “The old adage, ‘People are your most important asset’ turns out to be wrong. People are not your most important asset. The right people are.”

Apart from getting the right people into key positions, research also shows that insider CEOs tend to be successful when they manage to create a network of performance-enhancing relationships to complement their company-specific knowledge. Outsiders, on the other hand, often implement changes fast, but become less productive if they cannot form a strong team and manage talent effectively.

Overall, today’s CEOs face two major developments: rapidly evolving global markets calling for constant strategic changes of direction and much higher standards of Corporate Governance accompanied by closer board supervision of their actions. In other words, the days of the imperial CEO are over, while demand for leaders who build strong teams and foster consensus is on the rise.

What other skills do top leaders require? On a personal level, the qualities that characterise successful CEOs are professional determination and modesty, while the ability to implement systematic talent management is another key competence.

Change is the new norm and may even provide an opportunity to improve leadership quality if combined with a disciplined recruitment process and more rigorous talent management.