As 2005 came to close, I was astounded at the turnover at the top of Fortune 500 companies where CEO’s decided to either call it quits or were asked to leave. Beyond the numbers, which some estimate the “CEO casualty rate” at 15%, it indicates a much deeper set of issues and challenges from a variety of perspectives.
What’s happened and why.Every year, numerous books are written by so-called experts about leadership, its alchemy and applications. Stories of leaders and their companies, successful or not, are discussed oftentimes in great detail. Authors wouldn’t write, nor would editors publish books, on this subject if there wasn’t a fascination with leadership and the latest thinking and lessons learned from those that apply its trade successfully. Clearly, we are all curious and have a need to keep learning from the best minds and from those that can teach us better ways to tackle today’s business challenges. Best practices are always in vogue.
Yet, with real life examples in hand, with references available, and with business leaders to model, many of whom have been mentored throughout their careers by other successful leaders, sustainable successes by today’s CEO’s are rare. So rare in fact, we estimate that the average tenure of a Fortune 1,000 CEO is currently less than four years. Locally, leadership turnover in the past year at Mirant, Delta, Equifax, AGL Resources and Coca Cola are but a few examples.
Having visited with CEOs regularly for over two decades, I can share with you, dear reader, that there has never been a time when CEO’s have felt so alone and underappreciated in their roles. Many feel that in spite of their title and responsibilities, they have lost the ability to apply their business judgment. Largely, I believe this is due to the need to balance drivers such as shareholder expectations and Wall Street’s quarterly emphasis with corporate leadership’s daily challenges of transforming their company’s business to value…not an easy act…while being under the scrutiny of more active and independent boards of directors. CEO’s clearly feel under pressure to deliver results in an environment which is not necessarily friendly toward making long-term strategic bets. Frankly, most CEO’s know what needs to be done from a strategy and execution point of view (most are well schooled and prepared for their roles), but feel, given the short-term nature of how equities are valued and the impact of activist shareholders, that they, nor their boards, are not in the catbird’s seat of power. The best chief executives are learning how to navigate these waters, however treacherous, by working closely with their boards. However, boards cannot insulate their CEO’s (nor should they), as they themselves are under pressure for the accountability of compliance, governing, and monitoring company performance. In the end, however unfair, results measured in improving market capitalization over a reasonable time frame may be viewed by many boards as the only “true” benchmark of a CEO’s leadership.
Let me be clear.
Because of this market sensitive accountability, if a CEO loses credibility with Wall Street, chances are, even if his/her board believes the company is on sound footing, the board will have a serious discussion about the CEO’s performance against expectations and determine whether their leader stays--under what conditions--or goes.
Should the board decide to make a change or a CEO leaves unexpectedly, how likely is it that the board’s selection of a new CEO will lead their company to the promised land of enhanced market capitalization? Our experience suggests that CEO replacements are often times heralded upon hiring, but fleeting over time. Take Hewlett Packard as an example.It would make sense that CEO evaluation and succession should be center stage for every board every year. Yet, the empirical evidence is that most boards and chief executives have not mastered succession planning as a principal board responsibility. Confrontation with the Chief Executive, or not knowing enough about a company, its strategy, its business challenges, and operating model make independent board members uncomfortable with dealing with this subject. Generally, boards lack knowledge--leading to a lack of confidence and courage to tackle this sensitive matter effectively and with dispatch. And, as a result, most boards I’ve found, rarely plan ahead, avoiding this issue until forced to do so, having no other choice but to confront it. When the crisis of confidence with a CEO arises, they are ill prepared with a pre-agreed game plan and marching orders. The outcome too often is leadership chaos, and in spite of investor relations-oriented press releases to the contrary, this often leads to board confrontations with varying viewpoints leading to protracted board discussions regarding competencies and leadership experience that they seek in their current or future CEO. In short, by not being prepared, boards demonstrate incompetence and are doing the shareholders who they represent, a gross injustice.
The prescription for CEO performance evaluation and succession starts with a willingness by a board to do a “deep dive” on leadership with the necessary preparation to affirm the key elements and attributes upon which a CEO is to be evaluated. Although as mentioned above, Wall Street plays heavily in this equation, I believe we can all agree that Wall Street is fickle. Boards have a responsibility to evaluate the CEOs that run their enterprises in more depth and with an understanding of their company’s complexity within the context of its competitive landscape. This requires the board to be involved and educated. The best boards, like General Electric’s, require preparation time and as a board with one voice, communicate expectations firmly and consistently with corporate leadership.
What is being suggested is a proactive, thoughtful and considered approach to evaluating CEOs currently in place or to be recruited. Boards that assume a laissez faire attitude toward expectations rarely see results. Even with proactive board engagement, there are no guarantees or assurances that CEO’s or their successors will perform well given the quick change of pace and competitive factors in today’s business environment.
A proactive approach, like the succession and evaluation process employed at Acuity Brands and BellSouth, with a commitment to in-depth communication is perhaps the most reasonable way to ameliorate the risk of leadership in transition. Even so, it’s not fool proof even under the best of conditions and needs to be monitored and tailored as conditions evolve. Believe me, current chief executives, given the pressures of their role; view themselves “in play” with their own boards, as well as available for hire by others.
With the notable local exceptions of such companies as UPS and Genuine Parts, we have turned corporate leadership into “guns for hire”. CEO’s are the temporary workers, albeit compensated handsomely, of our decade. It is up to the boards to govern their company’s enterprise leadership with discipline and with a depth of knowledge. Otherwise, I fear, standing naked on Wall Street or Corporate Main Street will not yield very eye catching results.